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Rising interest rates and the spectre of a capital gains tax on property investments make Auckland landlord Karen Farrell shudder.
"It's all rather horrendous," says the residential investor, who provides housing accommodation for more than 20 tenants. "It's actually quite frightening."
This story starts about 10 years ago, when she and her husband, former All Black Colin Farrell, realised their children could never afford a house.
"So we began investing to give our kids a head-start. That was the first three houses. Then I realised I'd need one for our retirement."
So it went on.
The couple bought properties around the Te Atatu South area where they live, but have since branched out: a Henderson site drew them for its river appeal, so they had the house removed and plan to build two rental houses there.
They have also bought land further north at Mangawhai. They hope to carve up the existing four-section lot into eight lots and develop houses.
Already, they have a substantial investment portfolio: seven houses and the sections.
But like many landlords, Karen Farrell is beginning to feel the heat. Reserve Bank Governor Alan Bollard's official cash-rate rises are biting hard into her wallet.
Her biggest worry is a $500,000 mortgage she took out at an interest rate of 6.25 per cent in 2003.
She fixed it for five years and has enjoyed the benefits of repayments below the floating market rates since.
Soon, all that could change. The loan used to buy houses could well cost her double in interest payments when she has to renew next year.
"I've heard forecasts interest rates will be 12 per cent next year," she said.
That means a debt costing about $30,000 to service could cost her nearer $60,000 by this time next year.
Add to that the spectre of a capital gains tax and the loss of tax deductions and Karen Farrell and her ilk are being hit in the pocket.
This is precisely where the Reserve Bank, the Treasury and Finance Minister Michael Cullen are aiming.
Investors are their target in the war to dampen the superheated housing market. Landlords are being widely blamed for ramping up the sector and driving first-home buyers out.
The banks have acknowledged the influence of landlords.
ASB said this year that lending to existing homeowners had risen by a third in the past three years. Baby boomers aged 40 to 60 already have a family house and are buying "renters" as a means of saving for retirement.
They load that second property up with 100 per cent finance to claim the maximum tax deductions against their wages or salaries, clawing back large chunks of money.
Even with a mortgage at 10 per cent interest, the payback is huge: they reap the rental income plus the unrealised capital gain and can sell in a couple of years with a good profit - just as long as the market keeps rising.
But people are beginning to question this, saying a landlord bail-out from the sector could swamp the market with properties and force prices down.
Karen Farrell is planning to avoid that scenario. She wants to pass interest-rate rises on to her tenants, just as she has passed rates rises on. And she reckons she has prepared for this scenario already.
"I keep my rents just below par because I like long-term tenants." She hopes the deliberate strategy of under-renting will give her flexibility to push up rents if her costs rise fast.
But if push comes to shove, she admits, she might have to cash up. "That's the last resort. I hate selling. We're always acquiring more. We only sell as long as it allows us to do more, like subdivide."
Long-term property investors like Olly Newland - author of Climbing the Property Ladder and The Day the Bubble Bursts which predicts the demise of real estate's good fortunes - says he and others have accumulated vulture funds for landlords and others forced to sell. They are planning to pick up cheap houses in a crash that they feel certain is just around the corner.
Mike Pero, founder and a director of Mike Pero Mortgages, predicted this month that rising interest rates could force home owners - not just landlords - to sell because they would be unable to afford the price of borrowing.
Landlords are a somewhat unloved bunch.
A study by consultants DTZ for the Centre for Housing Research two years ago reached dim conclusions: a fifth were in the business a year or less; they expected significant capital gains but made little use of business structures to own or manage properties; they rarely used systematic property management systems and discriminated against some people in favour of others.
Andrew King, Property Investor Federation vice-president, was in Wellington this week to meet politicians and put the landlords' case.
He fears a capital gains tax (recommended in a Reserve Bank paper prepared for the parliamentary commerce committee's inquiry into housing affordability) and axing landlord tax breaks - which was suggested by Cullen on Tuesday - could damage his sector and push up rents by 40 per cent over two years.
"This would make a huge difference," King says. "People would sell. Definitely. It's already hard to make property work because the yields are so low."
Landlords would quit medium- to high-priced houses rather than cheaper places, he predicts.
Cheaper properties often have a higher return, allowing landlords to almost cover debt and costs.
But houses in the $300,000 to $500,000 band would be more likely to go on the market, King says. Landlords borrow so much to buy these places that any changes are more likely to force sales.
Tax breaks have helped landlords to cover their expenses, King says. He cites the example of a wage-earner getting $70,000 a year and entering the 39 per cent tax bracket. Buying a rental property and incurring a $10,000 annual loss (the difference between mortgage payments and rental income) could reduce that person's taxable income to $60,000, giving a $3900 tax break.
"But they're still making a loss of $6100, and it's costing them."
King says landlords are making little money because rents are so low.
Economists do not believe harder times with rising interest rates will cause any major fallout. Most landlords won't sell up and instead will push rents up first. Rents have been historically low and far beneath house prices rises, economists say.
Darren Gibbs, Deutsche Bank's chief economist, doubts a swag of landlords would stage any "wholesale bailout". Instead, they would be far more likely to hike rents, in turn fuelling inflation, having precisely the reverse effect to that intended.
Cameron Bagrie, ANZ economist, is picking rents to rise and thinks this will put pressure on households already hit by high petrol, electricity, rates and food bills.
"A lot of this economic cycle is built on debt and is unsustainable so there will be some pain," he said.
As for Karen Farrell, she's counting on the general population appreciating landlords a little more and wants the political blow-torch taken away from the sector's head.
Her final point: "Where would people be without us?"
