An ex­o­dus of land­lords?

The Northland Age - - Opinion -

PROP­ERTY In­sti­tute of New Zealand chief ex­ec­u­tive Ash­ley Church is warn­ing of “an ex­o­dus” of land­lords from the prop­erty mar­ket in the wake of gov­ern­ment pro­pos­als to change the tax treat­ment of prop­erty in­vest­ment, and warns that plans to ring fence prop­erty tax losses will have a dis­as­trous im­pact on the mar­ket, sig­nif­i­cantly wors­en­ing the large city short­age of rental ac­com­mo­da­tion.

Mr Church’s com­ments fol­low the re­lease of an is­sues pa­per out­lin­ing a pro­posal to change the rules around the tax de­ductibil­ity of losses as­so­ci­ated with the own­er­ship of rental prop­er­ties. The ef­fect of those changes would be that the costs as­so­ci­ated with own­ing a rental prop­erty (in­ter­est, rates, in­sur­ance, main­te­nance etc) could no longer be off­set against other in­come, as has been the case for many decades.

In­stead, those losses would be ring fenced, and could only be ap­plied to prof­its made on the prop­erty against which the costs were in­curred.

The gov­ern­ment is claim­ing that the moves are “an ef­fort to level the play­ing field be­tween spec­u­la­tors, in­vestors and home buy­ers,” but Mr Church says that is non­sense, and shows a con­tin­u­ing mis­un­der­stand­ing of the dif­fer­ence be­tween spec­u­la­tion and prop­erty in­vest­ment.

“This gov­ern­ment con­tin­ues to have a blind spot when defin­ing th­ese terms. Spec­u­la­tors are peo­ple who are in and out of the mar­ket very quickly, some­times within just a few weeks or months, and who seek to make money through ren­o­va­tions or quick cap­i­tal gain. In­vestors are land­lords, peo­ple who are of­ten in the mar­ket for decades, and who per­form an im­por­tant so­cial ser­vice by pro­vid­ing ac­com­mo­da­tion over long pe­ri­ods of time,” he says.

Mr Church says treat­ing the two in the same way demon­strates an un­ac­cept­able ig­no­rance of how the prop­erty mar­ket works, adding that ring fenc­ing tax losses will be the fi­nal straw for many in­vestors, and will largely have the ef­fect of push­ing them out of the mar­ket, fur­ther com­pound­ing an al­ready se­ri­ous rental cri­sis.

In en­cour­ag­ing feed­back on the pro­posed changes, Rev­enue Min­is­ter Stu­art Nash had said that the “per­sis­tent tax losses” that many prop­erty in­vestors de­clared on their in­vest­ments in­di­cated that they re­lied on cap­i­tal gains to make a profit. How­ever, Mr Church says this is sim­ply an­other ex­am­ple of “woolly think­ing” and a lack of ex­pe­ri­ence by the new gov­ern­ment.

“Yes, most in­vestors make a loss on the day-to-day op­er­a­tion of their prop­erty in the early years, but prop­er­ties do even­tu­ally be­come prof­itable, at which time tax is paid on that profit, just like any other busi­ness ac­tiv­ity. So the abil­ity to claim losses early on is off­set by an even­tual re­turn to the tax­man later on — and with­out the abil­ity to claim those early losses, many in­vestors would aban­don the mar­ket, or wouldn’t en­ter it in the first place”.

Mr Church says this would have a dev­as­tat­ing ef­fect on the rental prop­erty mar­ket.

“Pri­vate land­lords pro­vide the lion’s share of rental ac­com­mo­da­tion in New Zealand, and in do­ing so they have saved the state bil­lions over the past few decades. Scar­ing them out of the mar­ket is fool­hardy, bloody-minded, and will con­sti­tute a mas­sive own goal for the gov­ern­ment.”

Mr Nash had also said that, “In con­junc­tion with the re­cently an­nounced ex­ten­sion to the Bright Line test, ring fenc­ing losses from rental prop­er­ties would make prop­erty spec­u­la­tion less at­trac­tive and level the play­ing field be­tween prop­erty in­vestors and home buy­ers. Mr Church dis­agrees, not­ing that the ex­ten­sion of the Bright Line test to five years al­ready meant that spec­u­la­tors, the group the gov­ern­ment claimed to be tar­get­ing, would now be pay­ing their fair share of tax, but fur­ther moves would pun­ish a group who were per­form­ing a pub­lic good.

“Given that price com­pe­ti­tion has now largely dis­ap­peared — those who are in a po­si­tion to buy are al­ready do­ing — an ex­o­dus of land­lords will make lit­tle dif­fer­ence to that. What’s far more likely is that res­i­den­tial rental ac­com­mo­da­tion will go the way of farm land and our larger com­pa­nies, and will end up in the hands of a hand­ful of cor­po­rate in­vestors who will own the bulk of our rental prop­erty.

“Is that re­ally what we want”?

Ash­ley Church

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