Housing crisis: Landlords' threats to hike rents or sell are likely empty - expert

Landlords' threats to sell up or massively hike rents are probably unfounded, experts say, with their new costs dwarfed by the capital gains they're making.

The Government last month said it would phase out a "loophole" which allowed landlords' to use interest costs to reduce their tax liabilities, something owner-occupiers can't do. 

In response, landlords said they'd have to increase rents or sell their properties, in either case potentially forcing tenants to find somewhere else to live. A Property Investors Federation (PIF) survey of its members this week found 77 percent were planning to hike rents and 22 percent sell. President Andrew King said the average extra cost for landlords would be $3140 per property. 

But economists at housing market analysts CoreLogic are sceptical. 

"We're thinking that actually the effects over the next year or two years might actually be pretty limited," senior property economist Kelvin Davidson told Newshub.

"The increase in tax, it gears up, it ratches up over a number of years - so the extra tax cost over the next one or two years is actually relatively small, and certainly small in relation to the possible bright-line liability."

The change in tax rules will be phased in over four years. Despite some landlords publicly saying  they've got no choice but to put rents up right away, Davidson said the added costs will actually be quite small compared to the tax bill they could get if they sell. 

"It's going to be cheaper for people to just hold on and pay the extra tax through the loss of interest deductibility. It comes down to a relative cost argument - what's the cheapest option? 

"For a lot of people, provided they can find the extra cash to pay the tax, the cheapest option is going to be continue to hold the property because the bright-line could be more expensive."

The UK made similar tax moves about four years ago and rents didn't go up. 

In the past year, CoreLogic data shows there have been 21,000 properties sold to investors with a mortgage. The average price was about $820,000, and the deposit 30 percent. On those figures, the extra cost for landlords in the first year will be "about $700" - and lower for investors who've held their properties for longer, having already made a dent in the principle and paying less in interest anyway.

In the past year, the average capital gain on each property is about $98,000 - 140 times more than the extra tax they'll be responsible for in the first year, and 31 times bigger than the annual cost calculated by the PIF.

"That gain is on paper of course, and the tax bill is real cash," said Davidson, "but if you weigh up a possible increase in tax bill of $700 versus the capital gain on paper of almost $100,000, you can see that the tax bill is quite insignificant. So that's just another reason to think people will be hanging on - probably they're going to see continued capital gains. 

"It'll be slower, certainly slower than it has been lately, but probably prices will continue to increase a bit." 

As for rents, Davidson said - like Finance Minister Grant Roberston - all the evidence suggests they're constrained by what people can actually pay. 

"We've seen historically in the data that rents tend to be anchored by incomes and income growth is relatively modest, so we really don't think landlords have a huge amount of pricing power."

Rents have gone up consistently 3 to 5 percent each year since the global financial crisis.

"In the same vein, there's no clear evidence here that previous changes to the regulations (eg Healthy Homes) or cost of ownership (eg removal of depreciation, ring-fencing of tax losses) have directly caused rents to rise in aggregate," said Davidson. 

Landlords have also claimed rents will go up because they'll sell their rentals, reducing supply. Davidson said that wasn't likely.

"We're pretty cautious about that sort of argument. Firstly, we don't think the existing ownership of rental properties will change too much - there's not going to be a massive selloff... and also we've seen historically in the data that rents tend to be anchored by incomes and income growth is relatively modest, so we really don't think landlords have a huge amount of pricing power."

The reason is the housing market, even if it grows more slowly than it has in the past year, is still a very attractive investment

"The low returns from other assets (eg. term deposits) raise the question of what would sellers do with their released equity anyway?" said Davidson.

The exact structure of the changes won't be decided until later this year.