Steve Hart: Dark clouds gathering

Dark clouds are slowly moving in on property investors. Photo / Supplied

Dark clouds are slowly moving in on property investors, particularly recent entrants who bought during the past two years hoping to make some quick cash with capital gains.

The fact is that rental income is rarely enough to cover the cost of buying and maintaining a rental property, so capital gain was the only game in town.

Unfortunately, too many people were still dancing after the music ended.

As prices, particularly in some pockets of Auckland, are starting to slip, so any capital gains made are at risk, and losses on rentals may not always be able to be set against other income as the future of negative gearing is questionable.

There are fewer buyers in the market, and there are two key reasons for this. A road block has been put on foreign investors and net migration is expected to drop from its current 68,000 a year to about 40,000 by 2020 (100,000 migrants arrived last year).

On top of that, many landlords will have to spend thousands of dollars making their properties healthier for their tenants — or risk being fined next year. Landlords found to have rentals that aren't insulated might be prevented from letting them.

All this could lead to some investors reconsidering their options and putting their rentals up for sale come summer, leading to a glut of properties for sale at the lower end of the market — particularly if mortgage interest rates start to rise.

Interest rates
Are we about to see mortgage interest rates climb higher? I see that the 90-day bank bill — the interest rate banks pay each other — has risen. Up from 1.88 per cent in January to 2.01 per cent today.

Historically the official cash rate (OCR) has changed in tandem with the 90-day rate so, all things being equal, the Reserve Bank could increase the OCR, and it follows that floating mortgage rates will rise.

In the back of the Reserve Bank Governor's mind will be its revised mandate from the Government to avoid unnecessary volatility in employment.

The Reserve Bank, fearing a rate rise at a time when wage growth is next to non-existent, means Reserve Bank Governor Adrian Orr will need to tread carefully.

Fixed rates
If you are on a floating rate it may be time to think about fixing. ASB's best three-year deal is 4.89 per cent, Kiwibank is doing a special 4.85 per cent for three years and, if you want to hedge your bets, SBS Bank is offering 4.29 per cent for one year. If your fixed rate is about to expire, start weighing up your options.