Professor: New tax could discourage property speculation

A type of tax called the risk free rate method (RFRM) is being suggested by University of Auckland Associate Professor of Economics Susan St John as a way to discourage housing speculation.

Under the system, a person’s net equity in rental housing – aggregate holdings of all housing minus registered first mortgages – would be treated for tax purposes as if it had been invested at a bank generating a taxable income.

Landlords whose properties were vacant, or who were deducting huge costs against their rentals, would not be able to return tax losses and would be taxed fully on their net equity imputed income, St John said. An RFRM was ‘‘perhaps the only way forward’’.

‘‘A housing elephant is rampaging across New Zealand society creating intergenerational havoc, making already well-off people enormously wealthy and leaving a growing number of families desperately poor, ill-housed, overmortgaged and increasingly homeless,’’ St John said in an article published in Newsroom. ‘‘Rental housing is increasingly traded as a speculative commodity at the expense of secure housing for all as a fundamental human right.’’

St John, who is director of the university’s Retirement Policy and Research Centre, referred to research by Dr Michael Rehm and doctoral student Yang Yang, from the university’s School of Business and Economics.

They looked at rental property purchases in the Auckland region from 2002-2016 and found that nearly every rental property bought in that time had some degree of speculation. The ‘‘vast majority’’ were negatively geared and operating at a loss.

‘‘Housing speculation in Auckland is endemic and its housing market is a politically condoned, financefuelled casino with investors broadly betting on tax-free capital gains,’’ the authors said in a paper published in the International Journal of Housing Markets and Analysis.

They said that despite political leaders voicing concern at Auckland’s speculation-driven housing bubble, the Government’s main antispeculation tool was not being used.

That tool was the intention test in the Income Tax Act, which deals with the acquisition of land for the purpose of making profit through resale. Provisions of the test would tax profits made by speculators at their personal tax rate.

By holstering that key policy tool, politicians fostered housing speculation, the paper said.

St John said the researchers found the vast majority of landlords consistently made losses on their investment properties, which indicated their intention was to make tax-free capital gains.

‘‘They are not serious landlords and their houses often poorly tenanted or empty,’’ she said.

St John pointed to problems with some of the methods that have been suggested to try to solve the housing crisis, such as a capital gains tax, the bright line test and stamp duty.

She said changing loan-to-value ratios for bank lending on investment properties was ‘‘only tinkering’’.

‘‘A housing elephant is rampaging across New Zealand society creating intergenerational havoc. . .’’

Susan St John

University of Auckland Associate Professor of Economics