Shelter is for people, not tax
Labour’s plan could trim property prices
Poor old landlords. More than 90,000 of them have invested in businesses that are running at a loss. And now the Labour Party proposes to ring-fence those losses, denying landlords the normal ability to offset them against other taxable income.
A chorus of indignation and scorn has greeted Andrew Little’s policy announcement on negative gearing last Sunday.
The Property Institute predicts a rapid reduction in properties for rent. But fewer houses for rent — even if that is the effect — does not mean fewer houses; it just alters the ownership split between owneroccupiers and investors.
By removing one of the tax benefits of property investment, it ought to reduce the price it is rational for an investor to pay for a property, and which a would-be owner occupier has to outbid.
Prime Minister Bill English says “taxing housing” would mean fewer houses when we need more houses. He must know that the number of chippies, brickies and sparkies thrown out of work by such a measure would be zero.
And the Taxpayers Union says rents would rise, inviting us to believe that landlords don’t already charge what the market can bear, as determined by tenants’ incomes, and over $1 billion in taxpayer subsidy from the accommodation supplement.
Yet shorn of its emotive language about speculators and loopholes, what Little was saying is essentially that rental properties should provide physical shelter to the people who live in them — not a tax shelter on their owners’ other income.
Labour would use the revenue gained from ending negative gearing to fund grants for home insulation and heating, he said. “Homeowners and landlords will be able to get up to $2000 per dwelling to pay for up to 50 per cent of the cost of insulation upgrades and double glazing that meet or exceed the current building code, or of the cost to install a clean, fixed form of heating.”
Labour estimates that once the policy is fully phased in, over five years, it will yield about $150 million in revenue.
This appears to be based on the average tax foregone from rental losses over the five years from 2011 to 2015 inclusive, according to figures elicited from Inland Revenue by parliamentary questions from finance spokesman Grant Robertson late last year.
The figures make arresting reading. Over those five years, an average of 91,400 taxpayers a year claimed an average $562m a year of rental losses, generating $150m in tax losses available to offset tax on other income.
That compares with $1.2 billion a
Labour’s plan
Stop investors from claiming losses on rental properties as tax deductions against other income Use tax savings to subsidise heating and insulation Extend the bright-line test, to automatically tax capital gains on most properties that investors sell within five years of purchase year of rental profits declared by the other property investors, yielding $285m in tax.
The net tax yield of $135m a year is not much to garner from landlords’ share of the national total of more than $750b of housing assets.
Labour does not propose to disallow the losses on rental properties — just to ring-fence them. That would push back the point at which a property investment starts generating a taxable profit, but because of the time value of money, that is a worse deal for investors. The effect should be to reduce the price it is rational for the investor to pay for the property.
The clear message from the tax system as it stands is this: if you want to provide for your old age, don’t save money; borrow money and use it to bid up the price of housing.
Owner-occupiers pay no tax on imputed rents and capital gains.
Investors are treated as having gone into business. They can deduct all their costs, and if those costs exceed rental income, the difference can be applied to reducing their taxable income from other sources.
They can enjoy all the benefits of leverage in a rising market until they are ready to sell and collect their taxfree capital gain.
On that point, Labour also proposes to extend the current brightline test from two to five years, effectively imposing a capital gains tax on investors who sell within five years of purchase. Current exemptions will continue to apply.
Measures like this offend purists who value consistency in the tax laws. Income is income, they say, and it should all be taxed the same, after netting out all the gains and losses over the course of the year.
In practice, there are glaring inconsistencies, especially in the taxation of capital income.
The contrast between the tax treatment of investing in housing, on the one hand, and saving through bank deposits or managed funds, on the other, is stark.
It helps explain why we have extraordinarily stretched house prices, and household debt levels, relative to income; why the Reserve Bank reckons households collectively spend more than their income; and why banks have to import about 28c in every dollar they lend.
Debate about the housing crisis is bedevilled by a kind of sterile and reductive competition.
“That’s not the problem, this is the problem,” people say. “That won’t fix it, we have to do this other thing.” As if we were allowed only one problem and one solution.
The fundamental problem is, of course, an imbalance between the supply of and demand for housing. That is, the number of dwellings on the one hand and the number of people needing somewhere to live on the other.
That excess demand is going to persist for years, and while it does, it will exert upward pressure on house prices and rents.
But the question is how far they have to rise to frustrate the excess demand and clear the market.
In that context, the supply side is not how many dwellings there are, but how many are put up for sale or rent. And the demand side is not the number of people in need of housing, but how much they are able and willing to pay.
That depends on several factors, including what is happening to incomes, interest rates and Reserve Bank restrictions on access to credit. It also depends on the tax rules.
We can’t afford to be too conceptually pure and punctilious about changing tax laws in a way that might reduce the upward pressure from investors on house prices. The risks in the status quo are just too high.