Mom-and-pop landlords struggle as higher rates and regulations bite
BUYING a rental house has long been a popular way for regular people to build wealth. But for landlords in two countries on opposite sides of the globe, the math isn’t working anymore.
With higher borrowing costs cooling real estate markets globally, a change in government policy is an added burden for mom-and-pop landlords in the UK and New Zealand.
Both countries, seeking to help first-time buyers afford properties, have curtailed a tax break that allowed mortgage interest to be deducted from rental income before owners pay tax on it.
As the tax change collides with higher mortgage rates, landlords are scaling back, or even liquidating, their real estate investments. Nest eggs meant for retirement have turned into liabilities, with properties running at a loss as rent payments fail to cover mortgage costs, maintenance and taxes. Some are deferring repairs, and many are raising the rents, adding to a housing-cost crisis that has battered families.
David Joseph, 46, paid about £270,000 (S$450,000) for a two-bedroom house two years ago in Milton Keynes, a city about 80 km north-west of London. Since then, tighter regulations and faster inflation have made the investment much less attractive. He collects £1,290 a month in rent, but now spends about as much on his mortgage, bills, insurance and renovations.
“I don’t know what I’m going to do,” said Joseph. “This was supposed to be my pension pot.”
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The model many investors follow is straightforward: Buy a property, use rent payments to cover mortgage costs and expenses, deduct the mortgage interest to reduce taxes, hold the property as its value increases and either leverage it to buy more real estate or sell for a profit.
During the pandemic, low interest rates and rising property values made investing in a home that could be rented out alluring in many countries, including the US. But as home prices surged, landlords faced backlash as first-time homebuyers struggled to enter the market.
While several countries, including the US, Canada and Australia, still allow mortgage interest to be deducted on investment properties, higher rates have curtailed investor appetite sharply. A big difference in the US is that most mortgages are fixed for 30 years, meaning landlords should be in decent shape if they locked in their purchase before the recent surge in borrowing costs.
In the UK, more than a third of fixed-rate mortgages on rental properties – known as buy-to-let – are due to end in the next two years, leaving landlords vulnerable to the highest interest rates since 2008. That’s pushed the yields on rental properties to record lows and owners will be losing money on more than 180,000 homes by the end of 2023, according to consultant Capital Economics. The firm said total returns on rentals will fall 5 per cent this year, after averaging 9 per cent gains over the past decade.
In New Zealand, most buyers fix their mortgages for less than three years, and the nation’s central bank estimates about half the stock of fixed-rate home loans are due to reprice in the next 12 months. Many landlords face a jump in interest rates to 6.5 per cent or higher from historically low levels of 3 per cent or less.
With the tax changes making it even harder to turn a profit, mortgaged investors in New Zealand made up just 20.6 per cent of overall home sales in the first quarter, a record low, according to data from property consultancy CoreLogic New Zealand.
In the UK, landlords have been selling their properties. The number of buy-to-let or second homes sold hit a record 47,000 in the three months to the end of November, a 21 per cent increase from the same period in 2021, according to real estate agent Savills.
The tax changes were driven by political pressure to address imbalances in the housing market. The UK announced the new policy in 2015. For New Zealand, it came in the middle of the pandemic-induced real estate bubble – which saw house prices climb almost 30 per cent in 2021.
Both countries slowly phased out the deduction and allowed some exemptions, such as on newly built properties in New Zealand. Landlords in the UK, meanwhile, now receive a tax credit.
In New Zealand, landlord Tim Horsbrugh has found himself in a predicament he hadn’t foreseen: After more than 20 years of investing in property, he needs to sell two of his 11 rental properties to keep his portfolio viable. Horsbrugh said mortgage interest is now his biggest expense. He has about NZ$1.2 million (S$1 million) of mortgage debt that is affected by the new rules, on which he pays about NZ$66,000 in interest costs per year.
Horsbrugh is frustrated that landlords are now being taxed on income rather than profit, but he also feels lucky that he can reduce his debt by selling a couple of properties.
“We are paying tax on money we haven’t made. That really hurts,” he said. “Some of the younger, new investors – they might have to sell everything.” BLOOMBERG
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