YIJU Focus · Data: Will rents surge 30%? / Only 29% of small businesses report growth

Giving silent numbers a voice, backed by evidence and sound reasoning, is what makes them convincing.

The founding purpose of YIJU New Zealand’s ‘YIJU Focus · Data’ column is to bring together professionals from construction, property, banking and investment to break down the figures for you and explain the stories behind them in clear, accessible terms. 

{ad}

30％

On 23 March, the Government announced a package of new property market measures. Among them, tax changes closing the interest deductibility loophole removed investors’ ability to offset mortgage interest against rental income.

ASB economist Mark Smith predicted that investors might raise rents by 30% to achieve the same returns as before the rule changes. Finance Minister Grant Robertson responded that the effect of the tax changes on rents was complex and uncertain, and any estimates at this stage were purely speculative. If investors raised rents to offset the tax changes, the Government would ‘take action if necessary’. 

Tony Su comments:

Baicheng Chartered Accountants was established in 2009. Its founder, Tony Su, is a fully licensed member of Chartered Accountants Australia and New Zealand (CAANZ), CPA Australia and the UK’s Association of Chartered Certified Accountants (ACCA). Tony has specialist knowledge and extensive experience in taxation, tax audits, business planning and business advisory services.

This question concerns how tax policy affects residential rents and, more broadly, regulation of the entire market. Economists hold differing views, with no firm consensus. Almost anything could happen, and the direction of developments is difficult to predict.

Personally, I think a 30% surge in rents is unlikely. However, the impact of the policy changes on landlords will ultimately be passed on to tenants gradually, without a sharp increase. There is a precedent in the rental market: 

From 12 December 2018, the New Zealand Government formally abolished letting fees charged to tenants. Under the rules, once a new tenancy agreement took effect, property managers could no longer charge tenants a letting fee, usually one week’s rent plus GST. The ban aimed to save tenants money and reduce the cost of moving into a new rental home.

In practice, however, as soon as the Government abolished letting fees, agents invented a ‘tenancy fee’, charged to landlords rather than tenants. This meant landlords could only pass the cost on indirectly by raising rents. The Ministry of Business, Innovation and Employment (MBIE) researched the legislative change and concluded that it was unclear whether costs would be passed on. It also noted that, if the fee were passed on through higher rents, at the current national average weekly rent of NZ$452, the agency charge for a year-long tenancy would equate to NZ$9.99 per week. 

More than two years have now passed. Rents have risen steadily, without a sharp increase. I believe a similar situation will follow these tax changes.

 

Franklyn Young comments:

A University of Auckland graduate with a Bachelor of Property, he went on to manage residential property, commercial property and bodies corporate at several major property companies. He is currently a business development and project manager at Crockers Property Group.

The Government’s new policy preventing landlords from using interest expenses to offset taxable income is a major blow to investors, particularly those who invest in property alongside their main occupation. In cities with high house prices, such as Auckland, many small investors are negatively geared or have negative cash flow.

Landlords’ costs will certainly fall on tenants, but will rents rise 30% over the next few years? I think that is unlikely.

1. Since August last year, rent increases have been limited to once every 12 months. This longer interval reduces short-term rental fluctuations. Many landlords who have recently raised rents, or entered into or renewed tenancy agreements, will be unable to adjust rents again in the short term. Market rents will therefore not surge over a short period in the way house prices have.
2. Most rental homes are owned by small-scale landlords. Property has long been New Zealanders’ preferred investment outside savings. The vast majority of landlords are wage and salary earners with a main occupation who own 1–3 rental homes. There is no single large provider with enough influence over the rental market to drive a sharp short-term increase in rents, so the market must ultimately follow the natural forces of supply and demand.
3. The new policies restrict existing housing stock, but also use the bright-line test to encourage investors into new builds to increase supply. Many new homes will enter Auckland’s market over the next three years. More supply may help balance the market, provided it keeps pace with demand. Since the border closed, apart from properties primarily catering to international students or people from overseas, New Zealand’s rental market has continued to face undersupply, with many people applying for each rental home.
4. The Government will intervene in rents. The Finance Minister has indicated that rent controls will be introduced if increases get out of hand. However, the United States provides an example of how this can affect or restrict supply, making it far from an ideal solution. 

The removal of interest deductibility will be phased in over the next four years. For investors who already own rental homes, the greatest impact will come in the next few years rather than now. This means investors need to review their investment plans soon, including whether to restructure their loans or sell.

 

29％

According to CPA Australia’s Asia-Pacific Small Business Survey, only 29% of New Zealand small businesses reported growth, down from 49% a year earlier. The Asia-Pacific average for the same year was 46.2% of businesses reporting growth, compared with 65% in 2019.

The survey also found that New Zealand ranked last for profits from online sales. The report said COVID had affected New Zealand small businesses far more severely than the global financial crisis of 2008, partly because of the country’s lag in online spending. 

CPA Australia’s New Zealand head, Rick Jones, said: ‘A lack of participation in the digital economy has left New Zealand businesses highly vulnerable to the pandemic’s impact.’ 

Jimmy Wu comments:

Founder and CEO of Parcelport. Established in 2013, Parcelport is a New Zealand courier booking platform that Deloitte has ranked among the Asia-Pacific region’s five hundred fastest-growing technology companies for several consecutive years. It works with multiple courier companies, offering a cloud-based system and monthly billing, with no need to buy courier tickets in advance. It integrates with major online sales platforms such as Shopify, TradeMe and WooCommerce, saving labour and meeting the full range of courier needs for small and medium-sized businesses.

Data from e-commerce courier platform Parcelport.co.nz shows that online sales grew noticeably during Alert Level 3 and Alert Level 2 lockdowns. We believe lockdowns merely delayed demand rather than truly affecting it. The main impact came from the supply side: for example, the Government’s ban on sales of non-essential goods early in the pandemic, followed by global supply chain disruption later on. Factory shutdowns worldwide and grounded flights also pushed excessive volumes onto sea freight, driving up transport costs. Shipping delays and container shortages left many products in short supply or out of stock. Demand existed, but supply did not, making growth appear less pronounced. 

Many New Zealand businesses have long relied primarily on physical shops without establishing effective online operations. This prevented them from switching quickly to online sales when the pandemic struck, directly affecting economic growth. Successive lockdowns hit the bricks-and-mortar economy hard, with widespread shop closures providing the clearest evidence.

Parcelport general manager Jack Niu, who has a background in sales, believes every New Zealand business should have an online sales strategy ready. Online selling is a major trend, and the pandemic has simply accelerated it. For businesses still operating, the most obvious pressure is rising operating costs, compounded by the Government’s latest increase in the minimum wage. The best way to save costs is to move into online sales and use business tools such as Parcelport to reduce dispatch labour costs and optimise delivery options, improving customer experience and competitiveness. New Zealand’s comparatively low courier costs, relative to other countries and regions, are a particular advantage that will help online spending remain resilient under the pandemic’s impact. Overall, using multiple sales channels and making sensible use of efficient business tools is the best way to keep the economy growing normally through the pandemic.