Life as a Landlord

[Bob Kane]

Paying market rent plus insurance, rates, carpets, fixtures and fittings and then having to rip it all out and repaint at the end? I can't see many renters jumping at the idea.

I'd be surprised if it worked like that.
I would expect the rent to be reduced by quite a margin as the landlord doesn't have all those expenses - if 10k per year then the rent would be $200 pw less.
Perhaps some tenants might like that?

[johnnyandtina]

Wheeler wants debt to income ratio tools in reserve

UPDATED 3.05pm The Reserve Bank is asking the Government for permission to use a new tool to combat house price inflation.

Oh well, I would see Different banks use different DTIs and different loan programs use different DTIs, moreover, there will be millions of idea how to lower a debt to income ratio is to make more money.

By the end of the day, there is no magic way to reduce your DTI, it usually takes making more money or lowering your monthly debt payments.

[Nick G]

http://www.interest.co.nz/opinion/84849/forget-new-smartphone-latest-six-burner-bbq-or-swanky-set-outdoor-furniture-theres

[flyernzl]

Asking the unaswerable question - do DTIs actually work?

Is there any proof that they have restrained property price inflation in any jurisdiction where they have been applied?

[Bobsyouruncle]

The only market I know that has it is the USA and it has little effect on the market overall as their structure is quite different. FHA loans are DTI approved so it's like a government guarantee on the mortgage.
Their rules are 31% for housing-related debt, and 43% for total debt.

[flyernzl]

Reserve bank Governor Graham Wheeler has been working for some time to reduce the risk that he sees in the New Zealand banking system, mainly centred on house price inflation and low dairy product returns. Now that the milk market has turned up again, property prices and the related mortgage lending seem to be his main target.

He has already attempted to restrain the demand for housing by introducing restrictions in investor loan-to-value ratios, thus limiting the amount that the main trading banks can lend to those who are buying property.

Although these restrictions have resulted in some, mainly short term, reduction in demand the rate of increase in housing prices in most areas of the country seems to be largely unrestrained.

Another weapon that is available to the Bank would be the introduction of a debt to income ratio for borrowers. A debt income ratio (often abbreviated DTI) is the percentage of a consumer's income that goes toward paying debts. As house prices rise so has the debt within households in relation to their income – i.e. the debt-to-income ratios. A DTI limit is said to have the potential slow this trend and reduce the consequential financial instability.

Wheeler has already stated that “We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.” Of course Finance Minister Bill English, acutely aware of a possible voter back-lash, is rather cagier. He is reported as saying that he wants to wait and see the impact of the recently introduced tax changes on the housing market before committing to any further changes. Read that as ‘stall anything nasty until after the 2017 election’.

Debt-to-income restrictions are already used in the United Kingdom, where most owner-occupier buyers cannot get a mortgage higher than 4.5 times their annual earnings. However, it is not widely appreciated and seldom mentioned that these restrictions do not apply to buy-to-let investors (i.e. rental property investors) under the current UK scheme. If you do want to control property prices then this actually makes sense – first home buyers, driven by emotion, tend to bid prices up while investors, seeking a bargain and with one eye on their calculators, tend to hold prices down.

There seems to be the intention that, if implemented in New Zealand, because most lending that is high debt-to-income is to investors, it would apply to all lending and hence impact investors more than owner-occupiers. The same medicine is being prescribed in the hope of creating two different outcomes.

Others disagree. Labour politicians don't think these limits should be used here. "We have concerns that blanket debt to income ratios will exclude even more first home buyers from getting into a home," finance spokesman Grant Robertson has said. "More than a third of lending to owner-occupiers in the year to May was at a debt-to-income ratio of five or more."

And they are right to point out that there are disadvantages to implementing a debt-to-income limit.

The proposal would appear to advantage overseas buyers who either have ready cash available or who could arrange access to loans outside the New Zealand banking system, as it would reduce competition from local buyers who would be affected by the restrictions.

Limiting households’ opportunities to borrow would also slow consumption and economic activity.

A debt-to-income limit entails that some households are forced to borrow less than what they consider to be optimal. This means that the households’ ability to smooth their consumption over the life cycle is limited, which in turn leads to the households achieving a lower welfare than if they were able to borrow more.

For example, young-person households in general have lower salaries at the beginning of their professional lives, but often very good salary potential. By applying a debt-to-income limit, the banks’ possibilities of assessing the households’ potential payment capacity disappear to some extent since it is current income that forms the basis for the credit assessment even though a mortgage has a term of many years. A debt-to-income limit can thus make it difficult for young households with good creditworthiness to enter the housing market. A debt-to-income limit is also more limiting for households in the higher income groups than, for example, limits to discretionary income.

By limiting how much households may borrow, a debt-to-income limit also entails a decrease in both consumption and GDP, at least in the short term.

Like many interventions, the introduction of a debt to income rule will have an impact initially but there are likely to be side-effects too. There will be some people that want to buy a home and can afford the repayments but may not be able to fit the income criteria required.

The key question surely is not ‘Can We Do It’ but ‘Does It Work?’

The UK limits were imposed in June 2014. House prices across the UK rose 6 per cent in 2015. In May 2016 estate agents Stirling Ackroyd announced that most of London's property market has seen values rise by 8.2 per cent during the past year. Of course it could be argued that without the DTI these price rises would have been greater, but no-one could prove that either way.

Whilst a DTI could slow down the local market, it is still seen as a band-aid solution to a bigger problem. The fact is there is an imbalance between supply and demand of property, particularly in Auckland where mortgages tend to be the largest in New Zealand. If you have 100 people who want to buy but only 99 houses available, then increasing supply rather than artificially throttling demand is the only sensible long-term solution.

[investorak]

Is the reserve bank asking to implement the DTI or just to have it in their toolbox to use when they wish?

[Wayne]

Is the reserve bank asking to implement the DTI or just to have it in their toolbox to use when they wish?

Have it in their toolbox

[Perry]

The UK limits were imposed in June 2014. House prices across the UK rose 6 per cent in 2015. In May 2016 estate agents Stirling Ackroyd announced that most of London's property market has seen values rise by 8.2 per cent during the past year. Of course it could be argued that without the DTI these price rises would have been greater, but no-one could prove that either way.

The key question surely is not ‘Can We Do It’ but ‘Does It Work?’

It likely wont, but, as the saying goes, never let the facts (gleaned for o'seas experience) get in the way of a good political spin, in NZ.

[Beano]

Why?
If the dog craps on the carpet you won't care - it's the tenants carpet.
If the cat scratches the wallpaper you won't care - it's the tenants wallpaper.

If the tenant has paid good coin to fit the place out with their own fixtures and fittings then they have a stake in the place and are much less likely to abandon it.

I'm not suggesting that this option replaces anything we can already offer, just that it is another option we could offer if we so chose.

This sounds very much like leasehold title...the freeholder (lessor) just looks after the land

[flyernzl]

So that’s 2016 complete, ticked off and packed away. A year that saw a lot of changes both nationally and internationally, changes that were both expected and unexpected. For many people it has been a rough old year that will gladly be consigned to the dustbin of history.

The property market has shown the first signs of the long anticipated and frequently predicted slowdown Our financial backers have now pulled in their horns and are no longer always willing to unquestionly fund both the grizzled old veteran investors and the spunky young upstarts. This is a cycle that we have come through in the past and that will probably cull out some of the overextended, the inexperienced and the foolish. Winter always follows summer and the world will not end.

For me, it is time to pause and consider life, the universe and everything. We are all mortal, and for every one of us the grave awaits. It is just a matter of when. My mother died just six weeks ago at the advanced age of 101. A sad event, obviously, but at her age hardly unexpected. Two weeks later we travelled south for the day to meet up with a friend. She had not been feeling well recently, and had just undergone an array of tests. While we were talking over lunch her mobile rang. Waikato hospital on the line. She has been diagnosed with an advanced brain tumour and they had arranged for her to go into hospital in two days’ time. An operation would be necessary. It was a sad blow to an otherwise pleasant occasion, and tears were shed.

To cut the story short, she underwent the operation on Boxing Day. It is still a bit early to tell, but so far the prognosis is positive. The Grim Reaper may have to wait a few years yet.

All this does make you think about the future. The emphasis around here, and in the property world generally, is on ‘getting wealthy’. Little is said about how you live once that golden goal is attained, and even less about how you get rid of the stuff when you go. There are no pockets in a shroud, so what are you going to do with it all?

The traditional answer has been to leave it all to the kids, making sure that they get a good start in life. That may have been the right thing to do in the days when most people died in their 50s and left it all to their children who would usually by then be in their 20s, but times have changed. Barring accidents, we are all living longer. Right now, if you are normally healthy at 70 then you probably have another twenty to twenty-five years of quite active living to go, and that figure is still increasing. That means that your offspring are highly likely to be collecting their old age pension before they make their way to your funeral. Hardly the right time in their life to fund them into their first home or set them up in business. If they do happen to have problems in their 60s, those problems are probably not going to be solved just by you leaving them money or other assets.

So what alternatives are there? I have every intention of living life to the fullest between now and when I head to the pearly gates, and that should chew up some of my own money-pile. Hopefully there will be something left over, so yes part of that will go to my family but the residue will go both to a charity who I think does good work and to an organization that will continue my major spare-time interest. Neither of these groups know that I have arranged this, so it should come as a welcome surprise rather than something that they could spend up in anticipation.

So that has been my planning for the past year. Not quite what you’d expect, but someone has to make these decisions, and given that life prospects seems to be evenly balanced between an early and unexpected departure and a long slow dotage it seemed to be the right time to make them. I suggest that you too think about it.

We all know (or should know) that the landlording world in 2016 has been dominated by the methaptamine residue problem and the negation of tenant liability for accidental damage. I have been quite extensively involved in the efforts to achieve sensible and acceptable outcomes on both of these matters, and I think that we will achieve reasonable outcomes in 2017. This work has quite costly in my time and effort, and I confess to neglecting some of the work that I should have been doing on my own properties. If you read these columns on a regular basis, you will have seen that they have also reflected this trend away from practical landlording into some musings of a more theoretical nature. I have been pulled up on this change in focus by some of my readers, and I apologise. However, thinking these things through to some sort of conclusion has been quite helpful to me on those occasions when that unexpected call from a radio station comes through and they want two minutes of discussion on some aspect of rental property – right now.

So there you have it on 2016. I do plan some property renovation activity this year, and it will be good to get back to hands-on again. In the meantime, go well into the future and may your property dreams come true.

[PTILoveYou]

Sorry to hear about your loss Flynz, and thank you for your contributions on behalf of us as landlords, and thank you for your on going efforts with the Auckland Property Investors Association.

I agree whole heartily with your sage advice and wisdom about health and life. I too experienced a bit of a shock (not as big as yours), as one of my close aunty had discovered cancer but had a successful operation just a month ago. Just shows how life can change in an instant.

[flyernzl]

Golly gosh, Life as a Landlord has gone mainstream!

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11780444

[eri]

^

thought that might be you

[Don't believe the Hype]

great work telling the other side of the story. About time there was some balance from the media on property investors/landlords.