An older style home
Residential Property | Tax Haven | Capital Gains Tax | Rental Properties
Investing in New Zealand Residential Property
In the years leading up to the credit crunch, residential property investors did well in New Zealand.
New Zealand’s favourable tax regime led to property investment becoming the preferred method for many people attempting to build wealth.
New Zealand as a Property Investor’s Tax Haven
One major incentive for property investors is that New Zealand has no capital gains tax. There is no tax to pay when you sell one or more investment properties for a profit.
If the tax authorities believe you are trading in property (buying and selling frequently for a profit) your profits will taxed as part of your income.
Caution: New Zealand’s lack of capital gains tax is unusual in the developed world. It would be imprudent to make investment decisions based solely on the fact that there is currently no such tax. It is possible a capital gains tax could be introduced in the future.
How Property Investing Can Rapidly Increase Investors’ Wealth
The basic method of building wealth using the property market is to borrow money to buy a house, have someone else (the tenants) pay the interest, and pocket the capital gain. Most banks in New Zealand are happy to provide mortgages to buy investment properties.
For example, you could buy a $300,000 house using $30,000 of your own money and $270,000 of borrowed money. If the house value increases to $350,000, your initial investment of $30,000 will have grown to a value of $80,000 – an attractive gain. The gain is all the more attractive in New Zealand because it is not taxable.
If, on the other hand, the house you bought decreased in value to $250,000 and you had to sell it, you would lose all of your $30,000 and owe the bank another $20,000. Provided your tenants keep paying the rent to finance the mortgage, however, you should not have to sell. You should be able to ride out the slump until the market turns around.
Where to Buy Investment Properties in New Zealand
The easiest places to find tenants are in New Zealand’s cities. A combination of students, immigrants and workers moving with their families from other locations results in a steady stream of potential renters.
In the last few years there was been a boom in the construction of blocks of small apartments in central Auckland. As a result of the large numbers of apartments built and falling numbers of potential tenants, rents fell and apartments became harder to sell.
Many of the apartments were built with the intention of renting them to English language students from Asia. The rising New Zealand dollar stifled the language student market. The number of English language students fell from a peak of 70,500 in 2003 to a trough of around 35,000 in 2007. The number of enrolments rose again to 39,500 in 2008 and 42,000 in 2010. (StatsNZ stopped publishing these numbers in 2010, but we’ve included them to give you some feel for numbers over the years.)
The total number of foreign students enrolled in New Zealand’s different education sectors fell from a peak of 127,000 in 2002 to 91,000 in 2007. By 2010 numbers had risen again to almost 100,000.
The student rental market is largest in Auckland, Christchurch, Dunedin, Palmerston North and Wellington.
Auckland, Wellington and Christchurch are the destinations chosen by the majority of New Zealand’s migrants and these cities have the most active rental markets. Many of New Zealand’s provincial towns and cities, such as Hamilton, Napier, Nelson and Tauranga also take significant numbers of migrants and have a steady stream of people seeking houses to rent.
Most New Zealand houses are rented unfurnished and many migrants are disappointed with the shortage of furnished properties they encounter in New Zealand. Another source of disappointment is the generally poor quality of the rental properties available. As a result of the generally low quality of the rental housing stock, good quality houses in well-regarded city suburbs are usually easy to let – presenting would-be landlords with a market opportunity – but there are no guarantees. You need to do your own research into any specific location to confirm local market conditions.
External Influences in the Rental Market
Although you can influence the amount of rent your investment property will command in the market somewhat – by such simple things as ensuring it is spotlessly clean and the garden is easily cared for – there are a number of external influences beyond your control. These include:
1. Migration numbers – High migration numbers lead to higher rents in most of the locations mentioned above. Low migration numbers can cause the market to slacken.
2. New Zealand’s economy – Provided employment and wages are rising, there will be upward pressure on rents.
3. A large employer closing down – You should consider the risks of buying a rental property in a town dominated by a single employer. If the employer runs into trouble, it’s likely you will too.
4. Interest rate changes – If you do not take a fixed-interest rate mortgage, month-to-month interest rate changes will affect the profitability of your rental-property.
5. Upcoming Areas – Buying a property in an area that is being developed, with the introduction of supermarkets and sporting facilities, is often profitable. The new facilities usually make the area more attractive to potential tenants and rents are pushed higher.