How Will Coronavirus Impact Property Investors?

Posted by Ed McKnight on 19/03/20
Coronavirus The Impact on Property Investors 001
The Key Points

The 3 Main Takeaways From This Article

  • Interest rates have decreased making it cheaper to become a landlord
  • Most new properties will now be positively-geared and won't require the investor to 'top-up the mortgage'
  • Investor's mortgage repayments could be $4,750 lower than what they were 12 months ago
The Impact on Property

How the Property Market Will Be Impacted By Coronavirus

The negative economic impacts of Coronavirus will reach many New Zealand industries – tourism, airlines and hospitality. But, there will also be some industries that will do very well out of this.

Property is likely to be one of them.

Let me explain my thinking, so you can determine for yourself whether you think I'm right or not.

Interest Rate Cuts

The Interest Rate Cuts Will Make Property Investment More Affordable

Earlier this month the Reserve Bank cut the official cash rate from 1.0%, down to 0.25%.

And just yesterday (at the time of writing) ANZ bank cut their 1-year fixed interest rate from 3.45%, down to 3.05%.

These cuts will make it cheaper to become a landlord, compared to 12 months ago. Let's look at the numbers.

The Picture 12 Months Ago

What a Cashflow Analysis Looked Like 12 Months Ago

12 months ago, I would recommend an investment property to a client, and the cashflow would look something like this:

Screen Shot 2020 03 19 at 11 25 33 AM

The property might cost $500,000 and earn rent of $495 a week.

There would be $10,442.83 of operational expenses:

  • 3 weeks of vacancy (not having a tenant)
  • $3,000 for rates
  • $1,800 for insurance
  • 6.95% + gst for professional property management
  • a week's rent + gst as a letting fee
  • $1,150 for the accountant
  • and $500 for maintenance

And the interest costs on an interest-only mortgage would total $20,000.

The property would make a cash loss each year of $4,703 ($90 a week), and the investor would pay that $90 a week into the rental property bank account to 'top-up the mortgage.'

That made sense for the investor, if the property goes up in value at 5% a year, then the investor would put in $4,703 of cash, but make $25,000 as an example in the first year.

Screen Shot 2020 03 19 at 11 31 21 AM

Bear in mind that this is a relatively conservative estimate, given that the median New Zealand house price has actually increased at 5.9% a year over the last decade.

The Picture Now

What a Cashflow Analysis Looks Like Now

With the fall in interest rates, this is what the same property looks like now:

Screen Shot 2020 03 19 at 11 34 00 AM

All of the operational costs remain the same – $10,442.83.

But the mortgage repayments have fallen by $4,750, down to $15,250 a year.

That means that instead of having a cash loss of $4,703 and putting in $90 a week, this investor would make a small $47 cash profit each year and take out almost $1 a week from the property.

That $1 a week isn't why property is going to do well. Instead, it's the fact that regular people can invest in property without needing to 'top-up the mortgage' or put money in the rental account each week.

What the means is that Kiwi investors can get the long term capital growth that comes with property ownership, and not pay any cash for it.

Screen Shot 2020 03 19 at 11 34 22 AM
How Will Investors React?

How Will the Market React?

We're expecting that more property investors will enter the property market because of this, and take advantage of record low interest rates while they are available.

How will this impact the property market? After the initial shock of Coronavirus, we're expecting heat to come into the market due to the lack of alternative investment options.