What happens to Airbnb properties when tourism grinds to a complete stop overnight? With international travel off the menu for at least a few months and probably longer, and even internal travel currently banned, owners of short-term rental properties have had that income completely cut off.

There’s been a lot of speculation as to how this could impact the property market. Will the owners of short-term rentals decide to sell? Will they switch the properties across to the traditional long-term rental market? And will that mean higher levels of supply leading to lower prices and rents?

Holiday Houses Sitting Empty

So far, with the country in lockdown, our property market has been at a standstill. Right before the lockdown began, Otago PIA President Kathryn Seque says a flood of properties hit the Dunedin rental market. But there was only a two-day window before the country went to level four: “People saw that sooner or later there would be no tourists, but not a lot managed to rent in two days!”

She believes the Queenstown market will be hit hard: “There are a lot of holiday homes empty, I’m hearing that it’s a ghost town up there. There’s normally a massive shortage of accommodation, but this could be a positive for New Zealanders who live in Queenstown if they no longer have to overpay. Most places in New Zealand have a rental shortage, so it can’t hurt to have another 40 or 50 rental and if they can get good long-term tenants, they will stay rentals.”

There’s no option right now for property investors to buy, sell or rent – and making a move with the Residential Tenancies Amendment (RTA) Bill underway could be risky. The possibility of the lockdown being extended until the RTA Bill passes alarms Seque, who says it should be enough to make Airbnb investors think twice about switching to long-term renting.

“If you just bought an Airbnb and now you put [long-term] tenants in it, you might be stuck with them for some time – until the lockdown rules are lifted, they could be stuck there. Then you might not be able to get rid of them. I think people will say, ‘Might as well keep the house empty’.”

In Northland, Lisa Struneski, Mike Pero agent and an investor in both short and long-term rentals, also thinks the majority of Airbnb hosts will let their homes sit empty. As winter approaches, this is the quiet time for bookings – most owners will have earned strong money over summer and be prepared for a downturn.

“They might be tempted to sell if the market is still good – and I think it will be. We had our busiest January-February- March ever. I think owners will leave them empty; most of them really don’t want tenants.”

Data from AirDNA confirms that so far the global supply for short-term rentals on the Airbnb platform has remained steady: “No huge drop-offs, and no massive push to remove properties from the marketplace.” Both demand and prices are well down, with urban markets suffering the most compared to leisure destinations.

Domestic Travel Likely To Rise

In Auckland, Stefan Nikolic runs a specialist Airbnb management company and invests in his own short-term rental apartments. April, he says, was “a very bad month”, with a 70% to 80% drop in revenue. Nikolic has used the opportunity to expand into long-term rental management, and says some of his owners are already making the switch: “Even in lockdown we have had a few tenants apply and they’ve gone ahead and signed up without seeing the property.”

For the properties which remain in the short-term rental pool, including his own, Nikolic has reduced the nightly rates below the normal low-season price floor, and reduced prices to low-season rates for after the lockdown. He thinks some owners may be forced to sell if they’re overleveraged and the property won’t work in the traditional rental market. Overall, though, he’s feeling positive for the long term.

“As for Airbnb itself, I don’t think it’s the end of the industry, it will just take some time to recover. I don’t think it’s doom and gloom, although that sells newspapers. In Auckland, on average 50% of visitors are New Zealanders anyway. I think some people will rent them for six months with longer-term tenants, then have them ready for Airbnb by the time high season kicks in again.”

‘I don’t think it’s doom and gloom, although that sells newspapers. In Auckland, on average 50% of visitors are New Zealanders anyway’ STEFAN NIKOLIC

With limited opportunities to leave the country, New Zealanders will be taking holidays at home. Struneski is planning a road trip to the Marlborough Sounds, and Seque admits she can’t see herself staying in Mosgiel for the next 12 months, so she’s considering a trip to the West Coast. Domestic tourism won’t come anywhere close to the money provided by international travellers, but it will provide limited demand for short-term rentals once lockdown restrictions ease.

“People who still have jobs and money will be booking domestic trips,” says Debbie Van Den Broek, a Rotorua property investor who has extensive experience in the short-term rental market. “A lot of Airbnbs are in someone’s house, so they’re not going to flood the market. If you own a bach at a lake, you’ll still want to use it for your holidays so you’re not going to take a long-term tenant. Some marginal Airbnbs might be listed for sale. But I think talk of ‘flooding the market’ is a bit of an over-dramatisation.”

Potential Tax Pitfalls For Swapping Use

Those making serious money from Airbnb might also face some tax hurdles if they decide to switch the use of their properties. The two-year bright-line test will apply if you bought the property after July 31, 2016, while the five-year test applies if you settled after September 30, 2018, says Geoff Hamilton, CA and director of SME Financial. Although, he adds, this will only be relevant if you sell at a profit, which may be less likely if the market takes a dip and your property is in a holiday hotspot.

For owners switching from short-term to long-term rental, provided they are not making more than $60,000 a year on their Airbnb and are therefore not GST registered, there are unlikely to be any major tax implications, says Hamilton. However, if you are GST registered and you move your property from commercial to residential use, you’ll become deregistered, which could trigger a GST payment.

“If you bought a $1 million property and you’re earning $80,000 a year on it, and you bought it zero-rated for GST, when you switched to residential you’d have roughly $130,000 to pay back to Inland Revenue,” he explains. “Obviously that’s unlikely to be a good move. You need to be extremely careful and seek advice from your accountant before you do anything.”

Optimism For Long-Term Prospects

Without the $17 billion brought into New Zealand by international tourism each year, it’s clear that Airbnb hosts will be feeling the pain in 2020. Economic uncertainty, higher unemployment rates and businesses closing down all put downward pressure on both rents and prices.

However, there are still plenty of reasons not to despair. Seque points out that a large number of New Zealanders have returned home from overseas and will be looking to rent and buy, which will boost total demand for properties. Struneski believes the housing market will rebound quickly, in part because many are using the lockdown break to make plans for recovery and growth – “There’s so much happening industry-wide. People are planning so they can ramp up quickly when things get going again.”

For Nikolic, Australia’s success at keeping coronavirus numbers low means hopefully it won’t be long before trans-Tasman travel opens back up. With Australia one of our major tourist markets that will help kickstart short-term rentals again: “Hopefully people are tired of sitting inside and they’re planning trips!”

Van Den Broek thinks New Zealand’s response to coronavirus will help to improve the country’s brand even further, not only in terms of travel but also as an investment destination: “If New Zealand gets through this relatively unscathed, I think property here will be even more desirable. In the long term, New Zealand is going to be stellar. I’m a contrarian investor, so I love recessions of any sort – if you have the cash, it’s so exciting.”