Peter Thompson: Capital Gains only compounds housing issues

Peter Thompson - Managing Director, Barfoot and Thompson
Peter Thompson: Capital Gains only compounds housing issues

The biggest losers from a Capital Gains Tax may well be the 380,000 households that rent their accommodation from the private sector, writes Barfoot and Thompson Managing Director Peter Thompson.

The tabling of the Tax Working Group’s recommendations for tax reform will have no immediate impact on residential property prices.

There are two reasons for this

  •   The proposals were all well flagged, and there is nothing in them that comes as a surprise and

  •   It will be at least two years before any changes will come into effect, and even on day one there will be no Capital Gains Tax (CGT) to pay, so property investors will have ample opportunity to consider their options.

For the time being investors will take a wait and see attitude, and consequently there will be no sudden exiting of the market by investors.

Numerous commentators have already pointed out that if all the Working Group’s recommendations are implemented, we would go from having no tax on capital gains to one of the harshest CGT regimes in the western world.

The consensus appears to be that there will be major concessions between what is proposed and what might eventually be put to the test in the 2021 election.

It also needs to be remembered that the Government, in the early days of coming to power, put on record that it wanted to maintain house price stability rather than destroy capital by forcing prices down.

Those that are eager to see the Government intervene and bring down house prices, making them supposedly ‘more affordable’ to those not already in the market, should look at the loss of capital involved, and the economic consequences this would have.

If, for example, there was even a 5% across the board price decline of residential house values, it would mean on average every home owner would face a capital loss of $33,000*. Collectively, the national loss of capital would amount to multiple billions of dollars.  

The Working Group’s views is that a CGT will likely have only a small impact on rents. This may well prove wishful thinking.

Property investors will undoubtedly rethink their attitude to the rents they charge under the proposed CGT proposal.

And the biggest losers from this may well be the 380,000 households that rent their accommodation from the private sector (2013 census data).

Already, investors face the loss of being able to write off tax losses on their investment against other income and, were a capital gains tax to be introduced, they would also lose the advantage of being able to trade short-term operating loss for long-term capital gain.

Based on our property management data covering 16,500 rentals, the average gross return an Auckland investor is likely to be making currently from a three-bedroom home is 3.25%.

That is not a high return on which to pay rates/insurance, maintain the property to a high standard and receive a return on capital invested.

The average Auckland rent for a three bedroom home is currently $568, an increase in the past 12 months of 3.2%**.

Under a CGT regime many investors will undoubtedly in the future look to make their investment properties more sustainable on an operational basis and their only option is by raising rents.

There are no easy answers to the competing challenges the Government faces in applying a capital gains tax on investment properties.

Perhaps the first step is to make the decision whether it wants to treat speculators and property investors differently, and then whether it wants the private sector to be participants in the provision of housing.

If the answer is yes, then it needs to create an environment where investors can achieve a commercial return.

If the answer is no, then it needs to find a way to find an additional 380,000 properties to house those currently renting.

While collapsing the value of property would undoubtedly open up ownership to some currently renting, not everyone wants or will ever be in a position to own a property.

And is the Government really prepared to see the capital flight of billions of dollars in value from the country’s 1.8 million properties by knowingly collapsing house values?

When the Government comes to make its final decision, ideally common sense will win out over ideology.

*  Average value of NZ Property $672,000. QV, February 2018

** Barfoot & Thompson data

 

Peter Thompson

Managing Director, Barfoot & Thompson

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