Low rents deter home buyers

Last updated 05:00 02/03/2014

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Low rents are discouraging people from buying their own homes, according to the New Zealand Property Investors Federation (NZPIF).

NZPIF executive officer Andrew King said the cost of owning an average home was about $138 a week more than the cost of renting a similar property.

"A lot of people will say they can save that $138 by renting, that's cash in their hand right now, so most will think that's a good thing to do," he said.

An NZPIF comparison of the costs a landlord, owner-occupier, or tenant would face for the same property, showed there was significant scope for rents to rise, he said.

The NZPIF estimated and compared the likely costs of owning or renting a house that cost $425,000 to buy, which was just under the REINZ's national median selling price of $427,000 at the end of last year.

The rent was estimated at $450 a week, which means a tenant would pay $23,400 a year to live in it.

The mortgage calculations assumed an owner-occupier would buy the house with a 20 per cent deposit and a 25 year mortgage at 5.75 per cent interest, which would cost them $25,655 a year in mortgage payments.

King said it was likely that an investor buying the house would have equity in other properties that could be used as security, so they would probably only need to pay a 10 per cent deposit and the mortgage would likely be interest only.

"Because it's not a great cash flow business, most investors would go interest only," he said.

"Then as rent goes up and you start making money you might switch to principal and interest and get rid of the debt over time."

That would mean a landlord would be paying $21,975 a year in mortgage payments.

On top of that, a landlord and owner-occupier would both face additional costs such as rates, insurance and maintenance, which a tenant would not need to pay.

That would take the owner-occupier's total costs to $30,593 a year, which means they would be paying $7193 a year ($138 a week) more than a tenant.

Allowing for two weeks' vacancy a year and the cost of using a property manager, the landlord's cash outgoings would be $6402 a year more than the rental income, so the investment would be loss making. That would mean the landlord would need to fund the shortfall from other income.

But being able to claim depreciation on the home's chattels would boost the tax refund the landlord would receive, reducing the net cash costs of the property to the landlord to $3448 a year (about $66 a week).

King said a similar exercise undertaken by NZPIF in July last year showed the difference in costs faced by owner-occupiers and tenants was $108 a week, so the gap was widening. That suggests mortgage payments and other costs faced by property owners were rising faster than rents.

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King said while it was normal for renting a property to cost less than owning it, the current gap between renting and ownership costs was quite large.

One reason could be that the low interest rate environment had improved many landlords' cash flows, putting them under less pressure to increase rents. But that could change as expected higher mortgage interest rates started to kick in.

"At this point in the property cycle you would have thought that the cost of owning above renting wouldn't be nearly as big as it is," King said.

"So it possibly suggests that there's quite a bit of room for rents to increase.

"With things like rising interest rates, it's much easier for any costs that affect the owners to be added to rents."

King estimated that, using the NZPIF's cost example, the rent would need to rise 10 per cent to $495 a week to provide a satisfactory return.

Landlords should be looking at prevailing rents in the areas in which they owned properties to see if they needed to increase their rents, King said.

"It may be easier to make smaller increases now than larger increases in future when trying to keep up with cost increases," he said.

- Sunday Star Times

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