CGT for property investors would create interesting possibilities

Fund manager Harbour Asset Management has waded into the debate on a capital gains tax for property investors.

Thursday, April 16th 2015, 6:45PM

by Harbour Asset Management

We’ve been here before.

For two decades the Reserve Bank has raised its concerns about the risks New Zealand faces from the housing market. The perceived issues, all reasonable and valid, have included poor allocation of investment capital and the threat of economic and financial sector instability. Aggravating the problem is the banking sectors’ need to fund mortgage lending from offshore markets.

The recent surge in house prices, almost entirely an Auckland phenomenon, is well understood. Strong net immigration into Auckland, low interest rates, building supply constraints and renewed investor appetite have created a potent mix. In September 2014, the medium Auckland house sale was 8.2 times the medium household income, compared to a median global ratio of 3.8 times for large metropolitan areas. Prices have risen since then.

It seems the renewed investor appetite, despite LVR restrictions, is almost feverish and is creating considerable angst at the Reserve Bank.

Reserve Bank Deputy Governor Grant Spencer spoke out about the current situation and the policy choices the RBNZ, local and central government have. Notably, they chose to raise the idea of a capital gains tax for investors. This has been a politically unsavoury idea for years. So what are the prospects for a change now and what might it mean for the economy and financial markets?

Our sense is that the political desire to introduce a capital gains tax is pretty low and we have to give a fairly low probability to it happening in the near term. The RBNZ probably figure this to be the case, but they argue that with both credit growth and the CPI quite low, additional LVR-type measures or rate hikes are not the right policy tools. That puts the onus on the government, not the Reserve Bank, to come up with a solution.

However if a capital gains tax was introduced, we’d see a few interesting economic and market possibilities arising.

Firstly, the current dynamics of migration growth and supply challenges would not immediately change, so aspects of support for house prices would remain.

Secondly, the timing and implementation of a tax would matter. It could be a mistake to trigger widespread liquidation of property investments. There are ways to mitigate but perhaps not completely eliminate that risk.

Thirdly, to the extent the froth was taken out of the market, or with perhaps a modest correction in prices, economic activity could weaken somewhat. A cut in the Official Cash Rate would become more likely and the New Zealand Dollar could fall, becoming less overvalued.
Ultimately, investors might reduce their bias towards housing investments in favour of a less concentrated mix.

The chances of a change may be low, but this is certainly an issue to keep an eye on.

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Tags: CGT Harbour Asset Management property investment tax