I am heartened that Phil Goff is trying to work with the Government to address over-investment in residential property. However, I think a capital gains tax is the wrong way to go about it.
In my view, the rush to get on the rental property bandwagon is the single biggest problem facing the New Zealand economy at the moment. It is the single biggest failing of the last Labour government that they never even tried to do anything about it. It is shameful that housing, a basic human need, become so grossly unaffordable under a left-wing government. The perceived security in property has led to serious under-investment in business and a spiralling national debt problem.
I’m glad Phil is trying at last to redress this but a capital gains tax is not the most effective solution. Most residential property investment falls into the category of rental properties, rather than flipping. Capital gains tax would target flippers, who buy a house, do some minor alterations and sell it on for capital gain.
Whatever solution the government comes up with needs to target rental properties, where the weekly cashflow from rent is the main attraction and capital gain is more of a bonus after a long period of ownership.
My preferred option is to remove the ability to use losses on rental properties to reduce the investor’s tax bill. This was floated by Dr Cullen before the election, but sadly never implemented.
Most rental properties in New Zealand are negatively geared due to high house prices. That means that the rent doesn’t cover the expenses, so the investor loses money. There’s no sane reason to do that, except for the fact that our very generous tax laws allow them to use those losses to pay less tax on their incomes.
There’s no reason why our tax system should subsidise people for this type of activity. Rental property should be treated the same as any other form of investment you can’t use losses on the sharemarket or in finance companies to reduce your tax bill.
This tax loophole is the reason I don’t think a land tax would work. A land tax would simply add to the costs of running a property and if you’re already making a tax-deductible loss, it’s not going to make much impact.
Fixing this loophole would be extremely unpopular. It would lead to a price crash as investors sold out and demand dwindled. Property investors, banks and the real estate industry would be furious at the dramatic effect on their livelihoods. In contrast, a capital gains tax would have a much more muted effect, and Key could probably sell it.
But for New Zealand to get back on track, there needs to be pain. Banks have to learn to lend to business again, investors have to learn to invest in the productive sector again. They’re not going to give up the love affair with property unless they absolutely have to.
The aim should not be to drive every single landlord out of the renting business. It should be to achieve a balance that New Zealand currently does not have. To make property just one option amongst many for investors, and to make owning a home an option again for young New Zealanders.