An exodus of landlords?
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”?