‘Speculator’ attack would backfire
First-home buyers Labour claims to be protecting among casualties of Little’s plan to curb claiming of losses
In a Herald article on Friday, Andrew Little said: “Last weekend, I announced . . . our plan to tackle speculators and let home buyers have a fair go . . . We’ll close a loophole that lets speculators avoid $150m of tax each year.”
Labour plans to remove the ability of rental property owners to claim losses against other income.
This is not a loophole but a standard tax policy available to all businesses and investments. Calling it a loophole is misleading.
Labour says its plan is to stop speculators, people who turn over property quickly, but it is squarely aimed at rental property providers. Calling them speculators is emotive and misleading.
Little added, “This policy is about the big speculators . . . Under the proposed change so-called “mum-and-dad” investors . . . would not be affected as most of them did not use the loophole”. Over 90 per cent of rental property owners in New Zealand own one or two properties. It is wrong to suggest Labour’s policy isn’t aimed at these “mum-and-dad” investors.
It is misleading to suggest a rental property buyer can use tax deductions to save thousands of dollars outbidding firsthome buyers. People believe that if an investor offers, say, $10,000 more for a property, that this will only cost them $6700 after tax. This isn’t correct as the $10,000 is not tax deductible, only the interest on the borrowed money is.
Consider two people bidding for a property. If either of them offers $10,000 more for the property, then at a 5 per cent interest rate this bid would cost an extra $500 a year on their mortgage. An investor in the highest tax bracket could claim $165 of this as a tax deduction. Clearly this is not significant enough to Claiming losses is not a loophole but a standard tax policy available to all investments. justify the higher risk of borrowing an extra $10,000 or paying too much for a property.
The costs of buying and providing the average New Zealand home as a rental is currently $6184 in the first year, including a tax refund. Under Labour’s plan, this would increase by more than $4000, a real cost that will have to be found from somewhere and some of it will be through higher rental prices.
Little says this is scaremongering, but does anyone truly believe such a large cost increase won’t, at least partly, find its way to tenants?
Little says, “We heard the same scaremongering about rents when depreciation was removed and when insulation standards were established. It’s really just standover tactics and hollow threats.”
For the record, the New Zealand Property Investors’ Federation fully supported the introduction of compulsory insulation and was promoting this to members long before it was compulsory. We said that rental prices would increase if depreciation was removed and this happened.
Rental prices increased by 0.3 per cent in the year before depreciation was changed and 4 per cent the year it changed.
Rental prices have increased faster than general inflation every year since, not due to higher profits but because of higher costs in providing rental property and increased regulation.
Little believes,“If a speculator sells their houses and people buy them, then there’s no change in the balance of supply and demand.” Actually, the number of occupants per rental property is higher than the number of occupants per owneroccupied property.
Because of this there is usually a change in supply and demand if a tenant buys a property from a rental owner.
For example, if one of two couples flatting together buys the rental to start a family, the other couple needs a new place to rent so demand has outgrown supply.
Little also says, “speculators don’t really add to the supply of housing”.
Even when they don’t physically build a new property, rental owners are part of the system for increasing supply. In order to build and move into their new home, homeowners usually need to sell their old one, typically to first-home buyers and investors. Without them the previous owner could not build their new home.
It appears that Labour is using spin to demonise rental property providers and sell a tax that they hope will get them elected. Unfortunately it will actually hurt the first-home buyers they claim to be looking out for.