Is the property passion dead or just mellowing?

Hard core property investors prefer bricks and mortar to less tangible investments. Photo / Herald on Sunday

Like any love affair, New Zealanders' penchant for investment property may be maturing following last month's Budget.

Since May 20 it has been the multi-million dollar question: will the initiatives targeting property investment cool New Zealanders' overwhelming desire to be landlords?

The indicators conflict on whether the impending end to claiming tax deductions on depreciation of buildings, among other changes, will force investors to sell up.

A survey by landlords.co.nz says no. Investors might not be happy about the new rules but few have been put off their stride. Of the 636 who responded just 1.7 per cent said they were definitely leaving the property investment market as a result of the Budget.

Accountants, not real estate agents, have been the biggest winners so far, landlords.co.nz editor Philip Macalister says.

The changes to the rules around LAQCs (loss attributing qualifying companies), the structure half of survey respondents use to hold their investment properties, are having a greater impact, the survey shows. A total of 70 per cent say they will amend their investment structures.

"In the feedback in the survey, the overriding theme was, 'I'm off to see my accountant'," Macalister says.

But in Christchurch real estate agency Bayleys is tapping into a different trend. On June 30 the agency will hold the Grand Investment Realisation Auction, a sale of 20 properties held by "a flood" of owners wanting to quit the city's residential investment market.

Agent Phil Hayes says vendors and purchasers had been waiting to see what the Budget would bring and are now acting.

His sellers are not big time investors but people who were led to believe the returns would be greater than they are, he says.

"They may have been perhaps ill-advised as to why they should be buying a rental property. We have several vendors who have paid more than what they will sell for."

The vendors' reasons for selling vary. One, Ian Robertson, told the Herald on Sunday he had decided to sell before the market hit speed bumps last year.

Anthony Conning, an accountant, is selling because he is going overseas. His philosophy is depreciation is not worth claiming because when the property is sold it must be repaid.

Hayes concedes the Christchurch auction may be a marketing concept.

"We probably have a couple of people who saw this campaign as one that would attract some interest and they're being opportunistic."

But talking round the traps, it is clear the removal of the depreciation tax benefit is affecting some.

Film industry professional Mike Cahill has a clutch of Auckland residential properties, including one in Ponsonby, two in Kingsland and several in the western suburbs.

Three of them have been leaky buildings. He has to come up with a body corporate levy of $70,000 and has tried to sell one of the repaired leaky homes to cover it, with no joy.

"I've had to put one of my best properties on the market. I have to move quickly because I'm paying penalty interest and I'm hurting right now."

Ideally he'd rather not sell anything because he believes there are good signs in the residential investment property market, but needs must.

"The depreciation does have an impact as far as being able to write off the extra costs, the maintenance costs, the vacancies. It helps for your other income to be able to get something back."

Statistically it is too early to call the effects of the Budget as there hasn't been a clear month of figures yet, Alistair Helm, chief executive of website realestate.co.nz, says.

However the first two weeks of this month saw a slip. Last month the average asking price dropped from $423,000 to $407,000, due to lower-priced investment properties and the more realistic expectations of sellers generally, Helm believes.

So far this month it has dipped again to $405,000.

"To my mind it's certainly saying there's pressure in the market."

Experienced Auckland investor Barry Bridgman has properties in blue-chip Auckland suburbs such as Mt Eden and Mt Albert with low loan-to-value ratios. He has not seen a post-Budget rush of owners putting their properties on the market.

However he believes the removal of depreciation will bite those who are stretched.

He tells of a relatively new Hamilton investor with 29 properties who ran into difficulties in late 2007/early 2008.

"With the change of market and values dropping he went into an urgent sale programme. He indicated to me the other day that if the timing had been different for the depreciation allowance it would have wiped him out."

He says some new investors followed property education programmes such as Richmastery and bought in low socio-economic areas and small towns. During a boom market it was easy to present these properties as high-yielding.

"But when the economy tightens up the real truth of those locations shows.

"Any changes to the tax system that aided those people with investments in poor locations pushes it just that bit further over the edge."

The Property Investors Federation is conducting a survey of investors from which vice-president Andrew King hopes to be able to quantify the effects of the removal of depreciation and LAQC changes on landlords, and the variation from region to region. In this way landlords can be forewarned, he says.

At this stage the federation estimates the depreciation change will cost 4.5 per cent to 6.5 per cent of rental income, and it is inevitable rents will rise. Those who are claiming a loss on their properties may now not be getting enough back.

"A lot of people who are less experienced in investing don't plan for adverse events - not just changes in legislation, but it could be interest rate rises or rental prices might drop.

"If you're really stretched anything like interest rate rises will cause real harm and definitely make people have to sell."

But Government tinkering won't change hard core investors' thinking, Macalister says.

"A lot of these people just don't want to invest in shares and finance companies, bonds and those sorts of things.

"In fact they're actually very negative on those sorts of investments. They want something that is much more the old bricks and mortar they can touch, see and feel."

Removal of deductions a bonus says one investor

Rotorua investor Debbie Van Den Broek is looking to buy more properties.

She and her husband have a number of investment properties in the city, and have no problem with the April 1 removal of tax deductions on depreciation.

"I think it's a great thing," she says. "You gain a small tax credit each year from depreciation but when you come to sell the house you'd have to pay it back.

"If you're good and put it on your mortgage that's great. But if you're really bad like normal folk it adds up to be a huge bill and it really puts you off selling or getting rid of non-performing properties.

"It helps with future planning. You don't have a dollar today which wasn't actually yours anyway."

She believes some investors have taken depreciation into account when doing their calculations for holding a rental property, particularly in expensive places such as urban centres.

"The property market's had a lot of hyper-activity from people who didn't quite know what they were doing."

She believes the Budget changes will result in a bit of a cleanout "which is great".