Gains to be made from rejection
If you can endure the challenges . . . and hang on in the market for a bit longer, your patience will be rewarded.
Now that the proposal to introduce a capital gains tax (CGT) has been firmly rejected, what’s likely to happen next? Obviously, I can’t anticipate every detail of this Government’s future approach to property, but I can reasonably confidently fill in some broad strokes:
CGT is dead
Jacinda Ardern’s commitment not to introduce a CGT while she is Prime Minister is clear. Admittedly, that might only be for another 18 months, but the Nats are even less likely to entertain the idea so, regardless of who is in government, the concept of a capital gains tax is probably off the table for at least nine years and possibly as long as 20 years.
Other tax changes
Yes, the CGT is gone, but the Government is still committed to ring fencing tax losses on investment properties, which is arguably even more damaging to investors since it affects their annual cashflow.
The legislation formalising this has yet to become law but Finance Minister Grant Robertson has made it clear that it will be backdated, so expect it to apply to the 2019-20 tax year and beyond. National has also been suspiciously silent on this matter, which suggests that it won’t reverse the legislation when it is back in office.
Increased costs
The Government’s Healthy Homes legislation becomes operative, for investors, on July 1, 2021 and will set minimum standards for heating, insulation, ventilation, moisture control and draught-stopping in rental accommodation.
To be fair, most of these minimum requirements are reasonable and overdue, and while it’s possible that a future government may extend the requirements to cover all homes at some point in the future, for now, the new rules affect only investors and rental properties.
Undeveloped land
At the same time as she made her announcement to dump CGT, Ardern alluded to “other things” which the Government could do to “improve the fairness of the tax system”.
She specifically singled out land speculation and indicated that the Government was also working on ways to counter land banking. Putting aside the fact that this, again, demonstrates government confusion over the difference between making the tax system “fairer” and using it as a tool to address a political issue, her concern is well founded in bigger cities such as Auckland, but less relevant in other areas where land supply isn’t a problem.
It’s also difficult to know what the Government could do, in practice. Any measure that introduced a tax penalty, on the sale of undeveloped land, would constitute a form of capital gains tax — something Ardern has explicitly ruled out. And there’s an argument that such a tax could amplify land banking rather than eliminate it because it would act as an incentive to hold on to land rather than sell it.
The simplest solution to land banking would be to apply punitive annual differential rates to undeveloped land, with those rates increasing for land that was close to major centres, but this would be a measure for a council, not the Government, so again the steps which could be taken are limited.
Rent increases
Even without a CGT, rents can be expected to continue increasing because of the imposition of the other costs which I’ve outlined, in particular, the ringfencing of tax losses that will represent an ongoing cost to landlords, will force many investors to seek to recoup losses through increased rent.
House prices flat
On top of all of this, Auckland prices will continue to be relatively flat for a few more years, and may even decline in some areas. Parts of the country where house price growth is still strong will also come off the boil over the next 18 months.
Good news
If you can endure the challenges above, and hang on in the market for a bit longer, your patience will be rewarded. The next cycle can be expected to start, slowly, probably between 2021 and 2022, with house prices increasing more rapidly until the peak of the next cycle which will be in around 2026/27.
If the experience of the previous four cycles is a guide, house prices can be expected to increase by between 75 to 100 per cent over that time and your faith in your property, whether it be your home or an investment, will continue to prove to be well founded.