Tax angst blamed on bad property tactics
Property investors who are worried about the prospect of a capital gains tax may have only themselves to blame.
The Tax Working Group has recommended a broad capital gains tax be introduced from 2021, on most investment assets.
While the Government hasn’t committed to the policy, it has some property investors worried.
In many parts of the country, rents are low compared with property prices. In Auckland, it’s common for property investors to get yields of 3 per cent on money invested in housing. That’s before expenses are deducted.
For 116,000 investors around the country, the cost of owning property is more than the income earned. Many are left relying on capital gains to make the investment pay – and so the prospect of 33 per cent in tax on profits is hard for some to swallow.
Economist Shamubeel Eaqub said if they had instead looked for properties that provided better cashflow, a capital gains tax would be easier to accept.
One investor, Graeme Fowler, agreed. He said he would guess at least 70 per cent of investors were chasing capital gains and relied on prices going up to get ahead.
‘‘Investing for capital gains is more like speculating. The investor buys a rental property with the hope that it will increase in value. If that does happen, they will often refinance the property and buy another one with the exact same intention.’’
He said many investors, particularly in Auckland, did not think about what the property would generate in rent when they bought. Some were left with only enough weekly rent to cover the interest on the bank loan, ‘‘plus hopefully a little left over for rates and insurance’’.
‘‘Often there’s nothing over for any maintenance.
‘‘If interest rates went up 1 per cent or 2 per cent from the low where they are at now, these investors would have negative cashflow,’’ Fowler said.
‘‘The problem with this strategy is that because they choose to use interest-only mortgages, the debt against the property will left always remain the same. Their only hope is that prices increase so that at least on paper they appear to be better off. Their focus is often on looking for small parts of the city they think will go up in value more than others.’’
He said most of the investors taking this approach ended up selling earlier than they should.
‘‘Already I’m hearing of investors wanting to sell now, especially in the likes of Auckland and Queenstown. They are afraid that prices may drop and are also afraid of the potential capital gains tax.
‘‘Capital gains investors overall tend to sell at very random times without any real thought or logic. These include when prices start to go down when cashflow investors like to buy more, interest rates go up, change of government policies, and also if prices have gone up – they like to sell and take the profit.
‘‘Other investors like myself, we invest for cashflow and whether house prices go up or down is of no importance.’’
Eaqub said the impact of a tax was being overstated.
‘‘People are making a big thing of it. If you hold a property for, say, 30 years then the impact of a capital gains tax even at, say, 30 per cent tax rate would only be 3 per cent on current price.
‘‘There’s far too much teethgnashing on something that will only affect future capital gains.’’