Thursday, November 10, 2011

Mike Butler: Property investors squeezed

Property investors are between a rock and a hard place in the coming election with the Labour Party, Greens, and Hone Harawira calling for a range of measures against rental property and the National Party silent about further moves after a number of dramatic changes imposed without warning. Those who expected change under a National-led government did not expect more tax and more compliance issues that came with the Residential Tenancies Amendment Act 2010, since the National Party went into the 2008 election promising to retain existing tax rules and deduction provisions for rental property owners, and since the party perceived no need to cool down the housing market.

Responding to recommendations from the anti-property Tax Working Group, the 2010 Budget:

1. Ended landlords' and businesses' ability to claim depreciation on buildings with an estimated useful life of 50 years or more.
2. Tightened the definition of income for Working for Families eligibility to exclude investment and rental losses.
3. Changed the rules on loss attributing qualifying companies so that tax losses of those companies could be attributed to shareholders. (1)

The Clark-Cullen government’s 39-cent top tax rate plus its Working For Families policy created the incentive and means for some of those earning more than $60,000 a year to rort the system. Treasury had told the Tax Working Group how 9700 families used losses on rental property to reduce their taxable income so they could claim Working for Families tax credits. Meanwhile, Inland Revenue figures showed that the use of loss attributing qualifying companies had exploded after 2001 and the tax losses claimed by those vehicles doubled to almost $2-billion by 2007. (2)

These tweaks to rules on rental property were part of a much-vaunted scheme to transform the economy from a consuming/borrowing/importing set-up into a saving/investing/producing/exporting machine. The scheme included increasing GST to 15 percent and removing the 39-cent top tax rate. (3)

The money saved by ending depreciation claims on buildings (about $1-billion a year including commercial buildings), and tightening up loss attributing qualifying companies and Working For Families, remains less than the money that gushes out for interest-free student loans, which cost $1.4-billion a year with total borrowings of $13.9-billion from 1992 to the end of 2010, and Working for Families tax credits that this year will cost the government $2.8-billion.

By leaving in place the expensive Working for Families tax credit and interest-free student loans policies, both inherited from the Clark-Cullen government, transformation was not achieved and the government’s credit rating was downgraded by two agencies in late September of this year.

Once in power, the National-led government moved quickly on the Residential Tenancies Act that had been a work in progress since 2002 under the Clark-Cullen government. Changes brought by the Residential Tenancies Amendment Act 2010:

1. Allowed letting agents charge a letting fee.
2. Tinkered with fixed-term tenancies, which would revert to a periodic tenancies on the date the fixed-term tenancy ended unless either party gives notice to the contrary.
3. Required landlords leaving New Zealand for more than 21 consecutive days to appoint a New Zealand based agent.
4. Made tenancy agreements on unit title properties subject to body corporate rules.
5. Changed the 10-working days notice (to remedy a breach of the tenancy) to 14 consecutive days notice.
6. Added new rules for termination of a tenancy by notice.
7. Added new rules for landlords dealing with abandoned goods.
8. Added a number of unlawful acts including failure of the tenant to quit the premises at the end of the tenancy, the tenant using the premises for unlawful purposes, the tenant exceeding the maximum number of people who may reside at the property, the landlord’s failure to comply with obligations regarding cleanliness, maintenance, relevant building, health and safety regulations, and the landlord’s interference with the supply of services, for example electricity.
9. Extended the Act to cover boarding house tenancies. (4)

Housing Minister Phil Heatley claimed that the amendments were to balance the responsibilities of landlord and tenant. To test this question of balance, I asked the select committee pondering the changes for the standard notice to terminate a self-contained tenancy be 21 days for both parties. Members of that committee choked. I was able to get a verbal agreement with one committee member of 42 days for both parties, but the recommendation vanished in the final wording of the act.

Boarding house operators became the target of a campaign driven by the Coalition to End Homelessness, a group of government-funded faith-based charities that provide social housing helped by Labour housing spokesperson Moana Mackey. Atrocity tale television footage whipped up public hysteria as the select committee sat during August. A campaign to tighten controls on hostel operators continues in Labour Party election policy. Providers of social housing and student accommodation are exempted.

Who are property investors and what motivates them? A report done in March 2008 for the Prime Minister’s Department of the Clark-Cullen government entitled “House Price Increases and Housing in New Zealand” profiled property investors. (5)

Fifteen percent of all households in New Zealand owned an investment property, including holiday homes, rental property, timeshares and overseas property, the report said. The 2006 census recorded 1,478,709 occupied dwellings; therefore there could have been 221,806 property investors at that time.

The report noted that around 50 percent (110,903) owned two investment properties and around a third owned one property (77,935). The report did not comment on or seek to quantify the number of “accidental landlords”, those who somewhat reluctantly decided to rent out a former home that would not sell.

An ANZ Property Investors Survey (ANZ, 2007) shows that property investors tend to be higher income earners, with mean annual household income of property investors of $80,000 to $90,000, with 37 percent having household income in excess of $100,000, according to the report. (6)

Another survey, the National Landlord Survey (Centre for Research, Evaluation and Social Assessment, 2003) found that 38 percent of landlords were investing in property for capital gain, 32 percent liked the regular income stream, 25 percent were investing for retirement, 9 percent were in it for the tax advantages, and 8 liked rent paying off the mortgage. (7)

With a total of 2,356,536 votes cast in the 2008 election, property investors would comprise around 10 percent of the voting public, possibly making it a group easy to vilify with impunity. Parties on the left that want the support of the large number of “free money from the government” voters are in the habit of appearing to crack down on property investors.

By contrast, there are more votes to be had in interest-free student loans. In June this year there were 621,158 interest-free student loan borrowers. (8) At 200,000, the total number of Working For Families tax credit recipients (9) in June of this year, receiving an average of $153 a week, was roughly equivalent to the number of property investor voters.

While discussing the perceived political cost of curtailing a "free money from the government" scheme, it is interesting to note that respondents to a YahooXtra poll that asked whether individuals voted solely out of self interest, or wanted to vote for what was best for the country, a sizeable majority said they would put the country first. Restoring interest on student loans and ending Working For Families may not cost as many votes as a timid government may fear.

So what are the housing-related policies that the parties are campaigning on?

The National Party has ruled out a capital gains tax, says there will be no other new taxes, no further changes to the Residential Tenancies Act, and there are no other issues stated. But, because the party made substantial changes to the rules around property without warning, there is no telling what the Nats may do. (10)

Labour would implement a capital gains tax of 15 percent on sale of the property with the family home exempted, would consider reinstating gift duty, would revisit tenant insurance liability, would regulate property managers, would tighten rules on and create a mandatory register for boarding houses, and hold a ministerial inquiry into homelessness. (11)

The Greens would back a capital gains tax of 15 percent on sale of the property with the family home exempted, tighten the rules around loss attributing qualifying companies, and could require all rental properties to meet minimum standards for warmth and insulation, and extend the government-assisted home insulation scheme to 400,000 homes. (12)

Hone Harawira’s Mana Party would introduce a capital gains tax on all but the family home and Maori land, would introduce a financial transactions tax, and would introduce a warrant of fitness for all rental housing. (13)

United Future would capitalize Working For Families payments to help buy, build, or modify a home, investigate alternative local body funding with the view to abolish rates, continue to sell high value Housing New Zealand properties, review Housing New Zealand tenancies each year, promote co-housing for older people, extend direct payment of rent from Work and Income to private landlords, would adopt a national strategy to insulate all homes to 1977 standards, and would require all buildings on the market to be assessed for energy efficiency. (14)

The Maori Party has previously supported a capital gains tax but has no explicit property-related policies. (15) The ACT Party (16), the Conservative Party (17), and New Zealand First have no specific housing policies on their websites.

In the day-to-day business of providing accommodation, there is a high degree of co-operation between government departments and private property providers. A wise government would foster this co-operation since it is less costly for the government and more efficient.

A capital gains tax, increased regulation on private landlords, and expensive requirements for heating and insulation make property investment less attractive, meaning the private rental stock would shrink, shifting more responsibility and costs back to central government, as does the National Party love affair with hand-picked social housing agencies, which exist on government grants.

1. Budget 2010: Income tax slashed, GST to 15 pc, NZ Herald, May 20, 2010,
2. Rorting for families,
3. What did double-downgrade day really mean?
4. Residential Tenancies Amendment Act 2010,
5. Final Report of the House Prices Unit: House Price Increases and Housing in New Zealand - March 2008,
6. ANZ Property Investors Survey (ANZ, 2007),
7. National Landlord Survey (Centre for Research, Evaluation and Social Assessment, 2003)
8. Student loan quarterly report,
9 Inland Revenue Annual Report 2011,
10. National Party manifesto,
11. Labour Party manifesto,
12. Green Party manifesto,
13. Mana Party,
14. United Future Party manifesto,
15. Maori Party manifesto,
16. ACT Party manifesto,
17. Conservative Party manifesto,
18. New Zealand First party manifesto,


Anonymous said...

you have not explained how it is in the nations interest for an investment Class with over $200 billion invested in it to generate a negative tax take.

That might just suggest an unbalanced tax incentive for residential property investors fuelled by easy access to cheap debt and the ability to negatively gear the investments.

KP said...

In 2003 we bought a house in Cairns, an ordinary 4bedrom concrete block and tin roof place on the edge of a good suburb, like Howick in Auckland. It cost $203,000 but stamp duty and solicitors costs etc made it $212,000. We got no subsidies, such as first home buyers grants, because we didn't live in it. Conversely, when we moved to Aussie and bought a family home we still didn't get the grant because we already owned a home there. Now we are looking at selling it, its worth about $330,000. However I'll need to put $10,000 of that into painting it etc, paying agent's fees and $18,000 capital gains tax. 8 years of inflation at 4% has made our $212,000 worth $300,000 in today's worthless cash, so you can see we will make no money out of it at all!

So you can expect Govt taxes such as stamp duties and capital gains taxes on housing investment to kill it completely. No doubt Housing NZ will step up eagerly to build more state houses and take over...

Mike Butler said...

Anonymous, the 9700 negatively geared families did not own $200-billion worth of residential rentals. It would seem that most investors make a cash profit, some very little. It's in the nation's interest to flatten out the tax scale to remove the incentive for rorts.