The drop in mortgaged investors’ share of property buys over the past few years has been driven by the smaller players, including those who might otherwise have bought their first rental property.

It has been difficult over the past two years, since the RBNZ started hiking the OCR, to get the sums to stack up on a standard existing rental property buy, with gross yields low and mortgage rates high, deposit requirements sitting at 35 per cent, and no deductibility of mortgage interest.

CoreLogic’s latest Buyer Classification data shows the negative gap between yields and mortgage rates sits at its highest or worst level in about 15 years – meaning large cash top-ups from other income sources are typically required. “It’s not hard to run examples where top-ups would be $350-$400 a week,” says Kelvin Davidson, CoreLogic’s chief property economist.

Now there is a National-led government in waiting and it promised to pull the bright-line test back from 10 years to two years and phase tax deductibility back in during its election campaign, the smaller investors could start to perk up the most.

“They may already have some cash in the bank, a bit of equity in their own house, and less to lose from a possible debt-to-income (DTI) ratio system that might be introduced by the RBNZ next year.”

Quiet time

Buyer Classification data shows investors have been relatively quiet for some time, accounting for just 21 per cent of property buys in the third quarter of this year versus the average of 25 per cent.

Breaking down that figure by size, Davidson says it’s been investors who own two properties after their latest buy, e.g. the house they live in and their first investment – or it could be their second rental, and they also rent themselves – and those who own three or four properties that have sat on the fence and their buying activity has dropped the most.

From a peak share of 9 per cent in early 2021, investors now account for about 6 per cent of buys, while investors with three or four properties are down from 7 per cent to less than 5 per cent. By contrast, the share for investors with 10-plus properties has been fairly steady at 3-4 per cent.

“In other words, it’s the cliched mum and dad investors, perhaps those buying their first or second rental property, who have pulled back the most – either by choice, such as opting for a term deposit instead, or having it forced upon them by changed lending criteria around minimum deposits or serviceability requirements.”

Change on the way

“In fact, when you compare investors with two properties and those with three or four properties to their own troughs in 2018, it’s actually the latter group that has been a bit weaker still.”

However, Davidson says some of this is set to change. In particular, the political shift to the Centre-Right, and looming changes to property tax rules – namely a shorter bright-line test for all properties/owners, and the phased reinstatement of mortgage interest deductibility for new and existing landlords, and for older properties.

“On the back of these changes, it seems likely that some investors will begin to grow their portfolios again, while of course existing owners will enjoy lower tax bills too,” he says.

Will there be a flood of new property investment purchases? On that question, there have to be some doubts, at least for the next year or two, given that a lower tax bill will still leave the top-ups at pretty significant levels on many properties – on the back of continued low rental yields and “higher for longer” mortgage rates, Davidson says.

Migration boom

More positively for property investors, the migration boom now seems to be showing through in terms of faster rental growth, especially in the main centres, including Auckland. With rental vacancy rates tight, further growth in income streams appears likely.

Another thing to consider, Davidson says, is the possibility that caps on debt-to-income (DTI) ratios for mortgage lending are imposed by the Reserve Bank next year. This could impact mid-range investors the most (investors with three or four properties) who have already used the equity in their own house and acquired large debt – even if those properties don’t require much in the way of top-ups.

“Overall, a full-scale comeback by investors may not be on the cards in the near term. If anything, however, it’s the smaller mum and dad investors who may lead the market.” Even then, the combination of low gross rental yields and high mortgage rates for the foreseeable future will remain a significant hurdle.