Wairarapa Property Investors' Association

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Property dodges budget bullet, but still in some sights

The Minister of Finance did not include any surprise new taxes for property in this years’ budget. He has obviously seen that the changes from last years budget, which came into affect in April this year, have had quite an impact on the industry already and that we have made our contribution to these tough economic times.

However there are still some organisations who continue to propose measures against property directly and against asset accumulation in general.

In last years budget we saw the rate for building depreciation lowered to zero and the removal of LAQC’s as a business entity structure. Both of these measures were supposedly to remove distortions in the tax system.

In his budget night speech in 2010, Finance Minister Bill English said “The Government is strongly of the view that investments should stand on their own merits, and not be unduly influenced by tax”. This comment should have been extended to say that investments should not be unduly influenced through the support of tax payers’ money as well.

While property was being disincentivised, the Government was happy to use tax payers money to support the Financial Services Industry through Kiwisaver. This is the industry that has lost many millions of dollars and ruined peoples’ lives.

Taxpayers money made Kiwisaver so popular that more than twice as many people took up the offer than was expected. Fund Managers must have been laughing all the way to the bank.

So it was reasonable to see that the Government support of Fund Managers was reduced in this years budget. The Kiwisaver changes will be most keenly felt by the self employed. These are the kind of roll your sleeves up, hands on type people that could well change from Kiwisaver to rental property investment. But is that likely?

The NZPIF conducted a study to estimate the cost of removing depreciation for property. Respondents average deduction for building depreciation was $2,260 per year, which means the actual cost to cashflow is $679 or $746 depending on whether your marginal tax rate is 30% or 33%. However this is just an average figure and many rental property owners who have bought new and more expensive property will be hit a lot harder.

Reducing the cashflow for rental property shortly after the end of the property cycles growth stage has further turned more people off investment property. In a recent survey by Rabobank, only 4% of respondents planned to invest in property in the coming six months. This isn’t such a bad thing.

Different investors have different views on the current market conditions. It is the marginal investors, those who were thinking it would be great to have investment property but really don’t know much about it, who no longer think it is such a great thing to do.

Many seasoned investors I have spoken to at Property Investor Associations around the country have indicated that they are keen to buy more rental property.

These investors are taking a more long term view of the housing market and see more positives than negatives. Sure, property prices are not rising, but that keeps the competition out of the market, making good deals that much easier to find.

However there is no doubt that the “wannabe” property investors are no longer looking to enter the market and debt repayment is more the norm among home owners rather than striving for a bigger, better house.

With conditions such as these, it is surprising that some organisations and political parties are still calling for measures to curtail property. A capital gains tax just on rental property and nothing else seems to be their main solution to the housing “problem”.

Unions and the Greens say that a Capital Gains Tax on rental property is necessary to bring down rental prices and improve the ability of first home buyers to own their own homes. A fall in house prices may initially occur, but is that something that existing home owners would want? What would happen to rental prices as supply of rental property dries up?

The Financial Services Industry want a CGT to help them move investments funds towards their own industry.

The OECD and IMF want a CGT in New Zealand because they have one so it must be the right thing to do.

The Productivity Commission believe that if owning rental property is made hard enough, people will be forced to put their money somewhere else. Will they?

The fact of the matter is that there isn’t a housing problem and tax should never be used to influence peoples decision making. Prime Minister John Key continued to defend the status quo recently, repeating that a capital gains tax would be ‘inefficient’ and ‘difficult to apply’.

New Zealand has operated without a CGT without a problem for years with people structuring their decision making around this situation. We do not over invest in property as many claim. Our ratio of home owners to renters is similar to many countries such as Australia, Canada, the United States and the UK. To change the playing field now would be grossly inequitable

The NZPIF will be meeting with the Productivity Commission, politicians and other organisations to ensure that the rental property owners’ views are well heard. Support your local Property Investors’ Association and help support your industry. 

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