CGT tipped to usher in rent rises, price falls

A capital gains tax, as proposed by the Tax Working Group, would probably lead to higher rents and lower house prices, economists say.

In its final report, the group said a capital gains tax (CGT) should be applied to investment assets when gains were realised, at the investor’s marginal tax rate.

That would mean someone earning $75,000 who sold an investment property with a $100,000 capital gain would pay $33,000 in tax.

If introduced, the tax would only apply to gains made from the time the policy was introduced.

Westpac chief economist Dominick Stephens said a CGT would have a ‘‘strong’’ impact on house prices – ‘‘either a slower increase than otherwise, or a decrease’’.

He said it would make home ownership more affordable and would contribute to an increase in the number of owner-occupiers.

‘‘Property investors will find that their investments no longer stack up at today’s prices, and will lower what they are offering at auction. This will likely lead to lower prices, and auctions will be won be aspiring owner-occupiers more often.’’

But Peter Wilson, principal economist at the New Zealand Institute of Economic Research (NZIER), said that if owners of rental properties could pass on the tax to tenants via increased rents, the effect on house prices would be less severe.

‘‘If they can’t, then I would expect to see some landlords quitting the sector and seeking higher returns elsewhere. This would put downwards pressure on the parts of the housing market where rental properties are common,’’ Wilson said.

Infometrics chief forecaster Gareth Kiernan said a CGT would mean investors had to create a larger proportion of their total returns from rental income.

‘‘Given that landlords are likely to try to maximise their rental returns by charging the highest rent they can while still tenanting the property, the initial response is likely to be a drop in prices, with fewer people likely to enter the market as investors,’’ Kiernan said.

‘‘Over time, a reduced supply of property available to rent is likely to push rents up until the overall return from rental property is sufficiently attractive to draw more investors back into the market.

‘‘Thus the final outcome is likely to be some combination of higher rents and lower property prices.’’

He said the impact would be moderated if, as the Tax Working Group has suggested, the tax is applied to other investment classes, not just residential property.

Andrew King, executive officer of the New Zealand Property Investors Federation, said the extent of rent rises would be limited by tenants’ ability to pay.

‘‘There’s only so far you can put up rents before they can’t afford it.’’

Real Estate Institute chief executive Bindi Norwell took the opposite view to the economists.

She said that while a CGT might lead to a short-term dip in prices, that would not last.

‘‘Long term, it’s likely to push house prices up as people look to invest more money in the family home. This will also have a flow-on effect for the rental market, with fewer rental properties available for tenants.’’