Stop the misleading talk around property

I couldn't have put it better myself.
A well written and balanced piece of blogging.
I wrote a short blog myself on the subject earlier this week. You can read it here if you are interested...
http://voices.realestate.co.nz/northwellington/2009/09/11/i-sense-a-growing-disturbance-in-the-property-force/#comment-596

Excellent response. One thing we need to ask all the critical reviewers of those who own property is:

If we wish to stop New Zealander's investing in property:

- Who do they think should invest in the rental housing that 30% of our population live in? Perhaps they want overseas investment? Or Government? Or local Councils?

Investors DO NOT cause property bubbles (they gain from them certainly) - it is the short term speculators who cause these. Many of these are our next door neighbour who buys a section, builds, live in for 3 months, sells and then buy another section etc. These people are no different to the speculators who appear during a share market boom. IRD should be able to act against them under the present rules.

It shouldn't come as any surprise to read Martin Evans self serving comments as president of the NZ property investor’s federation on the topic of CGT. While I actually agree that a CGT by itself is not the magic bullet required to solve New Zealand’s economic problems, I disagree that there are not any tax advantages to investing in rental property, and that indeed, rental property is an attractive investment class driven mainly by tax considerations. If it was not, how do you explain the disproportionately high percentage of property investors in NZ relative to other asset class investment and also relative with other OECD countries? NZ has one of the highest ratios of average household values to average household income, and one of the highest household debt to house price ratios.

I also contend that investing in passive residential property is not productive and that the over generous tax treatment of property investment has been one of the main drivers behind why NZ has slipped in the economic growth stakes over the last 20 years or so.

Attracting investment capital into rental property has a significant cost to the economy. Firstly, investment capital is put to non productive use and it contributes to house price inflation, which results in higher interest rates. The higher interest rates combined with a strict anti inflation monetary policy attracts speculative capital to New Zealand. This drives the currency higher. The current policy hits the exporters in three ways; diverting capital away from them, higher interest rates and a higher currency. Secondly, as property prices increases, more household disposable income is directed into mortgage servicing rather than being spent on goods and services. This in turn restricts the productive sector and ultimately slows economic growth.

Macroeconomic policies should be constructed in a way that insures investment capital is directed to productive use. The tax policy needs to be simple and fair. If there are any tax incentives provided it must be towards the productive sector of the economy, preferably the export sector. It should not be towards an unproductive asset class like rental property that has serious detrimental effects to the economy and society.

Before continuing, let me put a slightly different perspective on Martin Evans comments re CGT above.

1.Robin Olivers comments related to property traders. We all know that if you are in the business of buying and selling property or property purchases are made with the “intention” of making a profit, then the capital profit made is taxable. The problem is intention is hard to prove. By far the majority of property investors in NZ invest for the long term and are therefore not caught under these provisions, however if necessary should a property be “flicked on” at a profit in the short term, then it’s a matter for the law to determine intention and that is never easy. All property investors know this.

2.“Many businesses make a loss during the first few years while getting established and rental property is no different.”...yes, but can business losses ever be deducted against other PAYE income while being set up. A person entering into business full time does not have this luxury, its investment capital at risk with no particular guaranteed income to offset losses. The risk/return ratio favours passive investment into property where losses are supported by a rental income. This begs the question, why even try when there are more lucrative less risky investments in passive property that can be made with a similar amount of investment capital. Again, less productivity, less employment opportunities, less growth in the economy.

3.“If anything, a CGT will increase property prices as vendors demand higher prices to offset the tax”...Vendors could apply anything they like to the price of a property, but the market determines what it will pay, not the vendor. The price is driven by macro economic and fiscal considerations, not by the purchase price, or any other cost recovery factors.

4.“Rental property owners house around a third of New Zealand’s workers. Without access to decent housing, these workers would be considerably less productive”....Where is the proof that landlords provide decent housing? Is there actually a correlation between productivity and housing? The point of the discussion, I would have thought, is to make housing more affordable to working class families (and no, I am not a socialist) by bringing the cost of housing down, and this can be achieved by making property investment less attractive. In doing this you wouldn’t have 30% of the population renting because houses would be more affordable, also no one is suggesting that landlords do not provide a service, it’s just a matter of ensuring that incentives are not higher in investment property than more productive investment areas.

5.“Rental property owners also contribute to the general economy through supporting banks, local councils, trades people, professionals, hardware stores, insurance companies and a host of other businesses”....So do home owners, in fact more so.

In my view there is only one effective and efficient way of limiting price rises in property and that is to ring fence deductibility of property losses against income that has absolutely nothing to do with such losses. Most people invest for the purposes of reducing personal income tax liability and the capital gain is just a bonus. It has also become a favoured investment vehicle for the wealthy on the highest tax bracket because it is possible to keep adding to property investment portfolios to increase debt and maintain a lower tax rate while earning. By holding property investments over a longer period once retirement is reached, selling a few to pay down debt and receive a positive rental return on the remaining properties at the lower tax rate is hardly going to bring them into an IRD investigation as a property trader.

The ring fencing view has been floated before under Michael Cullen but was soon dropped, for what reason I am not sure. I do not see any reason why such tax losses could not be accrued say within a LAQC and then set against future rental streams. As losses abate with mortgages being repaid over time, this method would still allow an effective tax free income while tax credits were being used. It would also not create a wholesale abandonment of investment property as an investment option either as advantages still exist, just not as much as before. At the moment having the ability to deduct losses from investment property losses against PAYE income from another source, and then sell a property for at a tax free capital gain on the other is not a level playing field nor as much as a productive use of capital as investing in business to increase economic growth.

Phil Harris
Rutherford Rede (ChCh) Ltd
Investment Advisers and Financial Planners

I don't see the big stink to be honest. Investors have been luck so far and they just need to factor CGT into the numbers as traders do. It is a business we are in and therefore it should be taxed like a business. Although home owners being a families place of residence should not have capital gains taxes. Although I am not to bothered about all of this I still don't believe it will curb growth. In fact I was reading something the other day about it increasing growth in other countries like Australia. Something about people deciding to to sell their properties to save on tax and therefore creating a shortage of property and increasing values.

Barking up the wrong tree if you ask me...

Imputed rental value of owner occupied housing (net of mortgage interest) should be taxed as income. This was the case in the UK until the 1960's. It's explained on the internet - just Google it. No great mystery. The policymakers are undoubtedly quite aware of it but they choose to overlook it because it is politically very contentious. Clearly, failure to tax it amounts to a subsidy to owner occupiers effectively capitalised into higher house prices. Also it is inequitable that rent payers effectively do pay tax at income tax rates on the rental value of the property they occupy (they have to find a gross amount of income and pay tax on that before having a net amount of income with which to pay rent). Introduction, would broaden the tax base, remove a subsidy capitalised into higher house prices and remove a gross inequity.