Rent rises no sure fix for landlords

Residential landlords hoping to offset the cost of likely changes to tax rules by increasing rents may be disappointed.

Although there was widespread relief among landlords last week when Prime Minister John Key announced the government was dumping the wackier suggestions in the Tax Working Group's report on tax reform, such as introducing a land tax or a flat tax on the equity portion of investment properties, that was tempered by the knowledge that they will probably lose the ability to claim depreciation as an expense, and possibly also face some tinkering with their ability to offset investment property losses against other income.

Whatever form the changes eventually take, they are likely to focus attention on something that is an inconvenient truth for many investors who embraced residential property so wholeheartedly during the boom – that in the absence of significant capital gains, many of the properties they purchased were simply bad investments.

Over the last few years, capital gains have been the holy grail for many property investors and, in their pursuit of it, many paid too much for properties relative to the income they provided, compounding that by borrowing too much of the money needed to fund the deals.

Faced with the imminent demise of the tax breaks that allowed such investors to keep their heads above the financial waters, some are pinning their hopes on being able to raise rents to make up for any loss of tax benefits.

But is that realistic or just wishful thinking?

It's a safe bet that landlords, especially those whose financial situation is precarious, will always be looking to achieve the highest rent they can on their properties. And, over the last year, the rental property stars have been favourably aligned for pushing up rents.

To get a better indication of what happened to rents last year, the Sunday Star-Times took the REINZ's median rents for November and December 2008, averaged them, and compared them with the figures for November and December last year.

This showed that nationally, rents for one-bedroom dwellings increased by 4.3% over the year, two-bedroom dwellings went up 0.7%, three-bedroom homes were up 1.5%, while rents on four-bedroom properties declined by 1.2% (refer graphic).

So although there was some upward movement, it was marginal. And when you factor in that the Consumer Price Index increased by 2% over the same period, it is likely that the balance of rents tipped slightly in many tenants' favour during the year, while those landlords who didn't at least manage to increase rents in line with inflation would be going backwards.

To get an idea of how rental levels fared in different parts of the country, the Sunday Star-Times made the same comparisons for the 99 suburbs and towns separately identified in the REINZ data, covering the country from Whangarei to Invercargill.

We used the rental figures for the predominant type of rental property in each area. So the figures for Auckland's CBD, which is dominated by smaller apartments, were based on rents for one-bedroom units.

In some suburbs where there are a lot of home units and many older homes have been converted into flats, two-bedroom properties predominated.

But, in most suburbs and towns, three-bedroom homes are still the norm.

The full table, giving the figures for all 99 locations, can be viewed as a PDF document on the internet (http://multimedia.stuff .co.nz/sstimes/rents.pdf).

While some locations showed strong gains (rent for two-bedroom homes in the Wellington suburbs of Karori and Khandallah were up 13.5%), others showed no change at all and some showed declines (three-bedroom homes in Blenheim: -5.7%).

Overall, rents in 50 of the 99 locations increased by more than 2%, which put them ahead of the inflation benchmark. Five locations showed no change and 35 locations posted declines.

Fairly typical of the major centres were the rental figures for Christchurch, where seven of its 13 precincts posted rental gains and six posted declines.

The precincts with the strongest rental growth were Sydenham/Woolston (up 9.9%) and Addington/Hoon Hay (up 5.3%). The biggest declines were in Burwood/New Brighton and Riccarton, both down 4.2%.

Kate Gibson, a valuer at leading Christchurch real estate and property management agency Simes, said the Sydenham and Addington areas where rent increases had been greatest, were lower-priced parts of the city, where many homes were owned by investors, who pulled down old homes and replaced them with townhouses and units. The newer homes commanded higher rents than the old homes they replaced, this trend probably the main driver of rising median rents in the area, she said.

Gibson did not think there was a shortage of homes to rent in the city, which could push up rents.

One of the best performing areas for landlords were the central North Island regions of Taranaki, Wanganui and Manawatu, where all areas posted rental gains, ranging from 1.5% in New Plymouth to 10.2% in central Palmerston North.

David Faulkner, the rental division manager for Property Brokers, the area's largest residential property management company, has seen a similar trend to that in Christchurch.

"We've seen a better quality of property for rent coming on to the market, and they will command a higher rent," he said. "We are also seeing tenants becoming a bit choosier and more picky, so the lower end properties are not moving and I think that is what is pushing up rents. The great driver of rents has always been how much people can afford."

- © Fairfax NZ News