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Little replies to property specualtors

Written By: - Date published: 1:21 pm, May 19th, 2017 - 60 comments
Categories: Andrew Little, housing, labour - Tags: , , , ,

Good piece by Andrew Little (appearing in The Herald) where he addresses the arguments of the property speculators:

Andrew Little: Removing rental write-off will not hurt long term investors

We all know there’s a housing crisis in New Zealand today. As Jacinda and I travel the country, it’s the number one issue people raise in our public meetings.
…
There’s no magic bullet but Labour has been rolling out a set of policies that, together, will start to fix the housing crisis. We’ll build homes people can afford to buy and sell them to first home buyers at cost. We’ll crack down on speculators who jack up prices. We support families in need.

Last weekend, I announced the third part of our plan to tackle speculators and let home buyers have a fair go. As well as banning overseas speculators and making speculators who flip houses within five years pay tax, we’ll close a loophole that lets speculators avoid $150m of tax each year. We’ll invest the savings into grants for homeowners and landlords to spend on insulation and heating.

It’s common sense. Taxpayers shouldn’t be subsidising speculators and helping them outbid home buyers. In recent weeks, the IMF, the OECD, and the Reserve Bank have all called for the loophole to be closed because it’s fuelling the housing bubble.

Even the Property Investor Federation admits “Yes, the investor has an advantage” over a home buyer thanks to this loophole. So, let’s close it and put the money into something worthwhile – making homes warm and healthy.

Naturally, the property lobbyists and others who make money off housing bubbles are predicting doom if speculators lose this taxpayer hand-out. It’s their job to say things like that, after all. But their claims don’t stack up.

The shortage of rentals won’t worsen. If a speculator sells their houses and people buy them – then there’s no change in the balance of supply and demand.

There’s fewer rentals but equally fewer people needing them because they’re now homeowners, which is a great outcome!

Plus, we’re going to be building affordable homes for people to buy, which will reduce pressure in the rental market.

And speculators don’t really add to the supply of housing. In Australia, only 5 per cent of residential investments are in new builds, the other 95 per cent are for existing properties. We all know that most rentals are not new houses; they are former family homes that get converted to rentals.
…
If that means speculating on housing is less attractive, well that’s exactly what the IMF says needs to happen: “limitations to subtract negative gearing losses from other income sources, would reduce incentives for leveraged real estate investments by households and help redirect saving incentives to other, potentially more productive investments”. In other words, less money into the housing bubble, more money into investments that actually create jobs and wealth – that’s great!

Lastly, they claim “mum and dad” investors will be hit. The figures say otherwise. Eighty per cent of the tax avoided goes to people in the top 30 per cent of incomes.
…
It is not surprising property lobbyists are scaremongering. Removing this loophole gives home buyers a level playing field and gives the Government the money to invest in healthier homes.

Plenty more in the full piece in The Herald.

60 comments on “Little replies to property specualtors ”

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  1. Wayne 1
    19 May 2017 at 1:35 pm

    The speech left it open as to whether a family with one investment property could continue to offset tax losses from the property against other income.

    The answer from the article appears to be “no”, except that the prohibition of offsetting will have a five year phase in.

    So in future, if Labour is the government, any such losses will have to fully funded from post tax income from wages and salary, or that the family should not buy an investment rental unless they have at least 50% deposit. However most family investors typically spend a few years doing an offset until the mortgage is reduced a bit. So this policy will bite hundreds of thousands of families who purchase a single rental property.

    In practice if Labour is in government, I would expect NZ First will stop such a draconian policy, at least as it applies to say one or two investment properties. Maybe that is what Labour intends, so they something to bargain with in coalition negotiations.

    • Policy Parrot 1.1
      19 May 2017 at 2:15 pm

      That is only the case if they sell the property before they get to the stage where they are making a profit (i.e. rent is more than rates, mortgage, maintenance etc.). And clearly, the intent there is to make a capital gain.

      Once the rental is making a profit, obviously there is scope for deferred losses to be brought forward.

      So yes, it will hit those who are heavily leveraged, cash tight and are essentially buying for capital gain.

      It surprises me that National has not done this themselves, unless they are so deep in the property speculators’ pockets that they cannot move.

    • Andre 1.2
      19 May 2017 at 2:17 pm

      Of the conversations I’ve been party to and overheard about investment property, the opportunity to offset losses against other income for taxes was a big attraction. That it allowed them to pay a lot more for an investment property was also frequently mentioned.

      For a genuine long-term investor, the property will eventually start to make a profit, and the ring-fenced losses will presumably be applied to the profit income at that point. So it’s only a temporary inconvenience to the long-term investor.

      So it doesn’t look draconian to me. And it just might do something worthwhile to dampen speculator willingness to pay silly money.

    • Grant 1.3
      19 May 2017 at 2:21 pm

      If you want to ‘invest’ in something buy some shares.
      Houses are not a commodity.
      They are a place to live in and make a home out of.
      Another thing I would do is cap real estate agent fees at 1% like a lot of other countries do.
      We hear a lot about driving down construction costs but nothing about the gross over charging by the ticket clipping agents who are by far the least skilled and take no risks .
      Capping their fees will help reduce the cost of bringing a house to market.

      • James 1.3.1
        20 May 2017 at 7:03 am

        Really ? What are all these countries that cap real estate fees at 1% ? I call bull shit in that.

    • mac1 1.4
      19 May 2017 at 2:49 pm

      Wayne, tell me how many people go into business to make a loss? If people are losing money from a rental it’s because probably their debt burden is too high.

      My wife and I are landlords- one property- and we make a profit on which we pay tax. When we sell, we will make a profit over the original purchase price. For a one bedroom body corp type flat we paid $120,000 five years ago. This year two similar flats in the same complex have sold for $150,000. That’s 25% over five years, and we consider that quite enough profit. Some might argue, too much.

      We are in it because my brother needed relocating and housing after the ChCh earthquake. If I had to pay tax on the profit of the sale of the flat, I’d do so willingly. I’d say that was fair. Just as I’d say it was fair to pay tax on the profit of investing it in a bank or other commercial investment.

      • David C 1.4.1
        20 May 2017 at 11:35 am

        mac1

        So if you lost 10% upon resale after 5 years (as many did who sold 2008 – 2011) would you also be happy to just take the loss out of tax paid earnings?

        Its clear that Little wants to squeeze investors. His use of the word “speculators” is just playing to numpties that have as little knowledge and the person that wrote Littles speech. Funny tho that. The numpties that vote for Little are they ones that will get the reaming when rents go sky high.

    • MikeS 1.5
      19 May 2017 at 6:09 pm

      “The speech left it open as to whether a family with one investment property could continue to offset tax losses from the property against other income. ”

      Why the hell should they be allowed to do this Wayne? If they are renting out a property then they are running a business like any other small business so why should they get special treatment?

      When i owned a small business we made a loss in the first 2 years but i certainly wasn’t able to offset those losses against my income tax obligations from income earned outside of that business, so why should someone who is already wealthy (Yes, in my opinion if you own more than one house then in our low income economy I would consider you wealthy) get to pay less than their fair share of income tax simply because they’ve decided to put their money into a business that is making a loss??

      Talk about bludgers!

      The only real reason someone would own more than one house other than perhaps a bach for some, would be that they plan to make money from that house (property). In my opinion, houses are for people to live in and call homes, not for people to make money from so I couldn’t care less if anyone with one investment property is affected. Anyone who can afford to buy more than one house and then complains about not being given special treatment at the expense of hard working kiwi taxpayers is nothing but a self righteous, self centered toss pot.

      grrrr…hehe

      • Muttonbird 1.5.1
        19 May 2017 at 6:23 pm

        That’s the thing isn’t it? It’s the offsetting losses on your nest egg against your regular salary and that is crossing a divide as far as I’m aware. A divide that the IRD says shouldn’t be crossed in other circumstances. Fringe benefit tax, etc.

        For some reason mum&dad investors are able to marry the benefits of a side business (even though they don’t want to be seen as in business) against normal salary and wage earning.

        From my experiences as a self employed person, the IRD frowns heavily on the practice of mixing business and personal expenses, so why should mum&dad investors be able to mix incomes/losses?

        The Nats have repeatedly crushed calls for income splitting with respect to tax thresholds yet they are fine with negative gearing. Go figure.

      • mikesh 1.5.2
        20 May 2017 at 11:26 am

        I don’t see why a person whose business runs at a loss shouldn’t be able to offset that loss against other income. After all a loss represents a reduction in his net income. Things are different for a limited company, but in that case losses can be carried forward until it becomes profitable.

        I’m inclined to think this ‘ringfencing’ policy of Labour’s is highly questionable. The real problem is that many landlords are so highly geared that interest costs eat up most of their profits, and sometimes even push them into the red. The answer to this would be to make interest (which in any case is a ‘capital’ cost rather than an ‘operational’ cost) non deductible for tax purposes. If we did this virtually all landlords would be making healthy (book) profits and paying respectable amounts of tax on those profits.

    • Bearded Git 1.6
      19 May 2017 at 9:33 pm

      @Wayne You are right the closing of the favourable tax treatment for property investors is universal; there are no exceptions and why would there be? The key point is that:

      “Eighty per cent of the tax avoided goes to people in the top 30 per cent of incomes.”

      Almost certainly 100% goes to the top 50% of earners. This is a great policy. If property investors don’t like it, then they don’t need to invest in houses; they can invest in something more productive. It’s called fairness and directing investment to better uses for the country.

      The “mum and dad investor” terminology is a National Party construct; they are all property speculators.

    • dukeofurl 1.7
      20 May 2017 at 10:17 am

      There is only 105,000 single property investors. A lessor proportion will be having tax losses.

      Would like to rewrite your claim “So this policy will bite hundreds of thousands of families who purchase a single rental property”

      Those who own 200+ properties own over 64,000 houses- thats only a few hundred persons/companies.

    • Karen 2.1
      19 May 2017 at 5:27 pm

      Fallow’s piece is the best analysis I’ve seen. by far.

      I particularly liked the headline “Housing is for people not tax”

  3. bwaghorn 3
    19 May 2017 at 2:42 pm

    the imf ? they are a bunch bunch of radical left wing loons

  4. Logicgerman 4
    19 May 2017 at 3:28 pm

    Wayne
    If you offset losses, that means you do not make profit. If you do not make profit – you are a lausy businessperson.

    If your “business model” is created by fraud law makes you a crook.

    Therefore if you want to be a business person – in an code of ethic – environment – you actually have to improve and work and the economic formula of buyers and sellers are in balance.

    This present “model” is a “modification of greed of the free market”

    Free market only exist if all participent follow the same rules. Unfortunately we as human beings are not able to be equal to another human being.

    • Wayne 4.1
      19 May 2017 at 4:21 pm

      Most property investors, “mum and dad,” buy an investment property on say 70% debt. Over time 5 to 10 years the mortgage will be reduced to 40 to 50% debt. So for the first few years it makes a loss, but then a profit. That is because they typically are buying for retirement income by which time the debt will be repaid or quite low.
      That is why the tax offeset matters, at for for the first 5 years.
      All this must be surely known to you. Nothing unusual about it and perfectly conventional in tax law.
      Now I get Andrew Littles approach on larger scale investors, but it is going to hit “mum and dad” investors with 1 or 2 rental properties quite hard, especially when they just started out.
      But if Andrew Litlle wants to give these folks a reason not to vote for him, that’s fine. It is many tens of thousands of votes, with each 25,000 votes being 1% of all votes.
      Labour’s choice to do that, but a good opportunity for National to hold onto their vote.

      • Muttonbird 4.1.1
        19 May 2017 at 4:35 pm

        I’ve noticed something which has crept into right wing dialogue on this and that is the separation of mum&dad investors with 1-5 properties from speculators and large scale landlords with more than 5 properties.

        The line from the property investors federation, National party politicians, and other right wing lobby groups and journalists is that mum&dad investors are harmless and not really business people and so are not in it for the business, rather just for a little nest egg. The the right wingers speculators are different, in it for the capital gain (as if mum&dad investors are not!) and are being taxed already thank you very much.

        I’d argue both are exactly the same and have exactly the same motivation but differ on degrees of scale. It is interesting the right wing people want us to consider mum&dad investors as ‘not really in business’ but still call for the full tax avoidance benefits to be available to them.

        It doesn’t matter one bit whether a mum&dad investor has even one rental, that is one home taken away from a young family hoping to buy in this most difficult of times.

      • McFlock 4.1.2
        19 May 2017 at 4:59 pm

        Most property investors, “mum and dad,” buy an investment property on say 70% debt. Over time 5 to 10 years the mortgage will be reduced to 40 to 50% debt. So for the first few years it makes a loss, but then a profit.

        This is one of those things that financey people say but that I find completely surreal (and I tend to suspect they just say things like it to cloak dodgy deals).

        How does a property “make a loss” in the first few years and then suddenly start to make a profit?

        It provides rental returns all the way through, and if those returns added to any capital gains on selling (less taxes, interest and transaction fees) outweigh the purchase price, they’ve made a profit. Otherwise they’ve made a loss, regardless of when they sell up.

        • Craig H 4.1.2.1
          19 May 2017 at 5:31 pm

          As time goes on, the mortgage is paid down and rents increase, so the total interest paid drops, and eventually the rent is higher than expenses i.e. profit.

          • McFlock 4.1.2.1.1
            19 May 2017 at 5:46 pm

            But if you were paying down the mortgage in the first place, then that’s by definition profit. Otherwise your mortgage would be increasing?

            And even then, the mortgage is that much because the house was worth that much, so you can’t really call “profit” or “loss” until you sell the thing – hypothetically if I was renting it out but apparently making a loss for the first few years, then flipped it for a substantial profit in an overheating market… to argue I was making a loss in those few years is a bit surreal.

            I get the same headaches when I think about quantum physics. But at least that gave me a dvd player. 🙂

            • Andre 4.1.2.1.1.1
              19 May 2017 at 6:06 pm

              Unless it’s an interest-only loan, part of each mortgage payment is for interest and part for paying off the principal.

              So for a table mortgage, where the payments are the same for the entire length of the loan, early in the loan most of the payment is interest and a little bit is principal. But as the principal is paid down little bit by little bit, the interest part gets smaller and more of the payment goes towards principal.

              But it’s only the interest part of the mortgage payment that gets deducted from income for tax purposes. Because the portion of the payment that goes to principal is reducing what you owe the bank and is a kind of enforced savings scheme.

              But yeah, it is possible to buy a rental property, claim losses on it every year until you go past the bright line test, then flick it for a substantial untaxed capital gains profit. Provided you’re willing to put your hand on your heart and swear to the IRD that your intent when you bought the place was for the income stream or some other reason other than selling it later for profit. (There might be a bit of clawback from the IRD if you’ve claimed some things like depreciation, but ti generally won’t be much)

            • Craig H 4.1.2.1.1.2
              19 May 2017 at 6:22 pm

              Repayments of a loan aren’t expenses in terms of profit and loss, only the interest is, so only interest can be used to reduce profit, and therefore tax paid.

              Early on in a standard table mortgage, most of the payment goes toward interest, so early on, there will be a paper loss, which will become a paper profit over time as the payment of the principal increases, as long as the mortgage isn’t extended.

            • McFlock 4.1.2.1.1.3
              19 May 2017 at 10:21 pm

              Thanks for trying, guys. but it still seems like pretend numbers to me.

              If I get a loan to cover me between side gigs I don’t think “ok, the few weeks between side gigs when I’m making repayments but not getting money in I’m therefore making a loss, but when the gigs start up and I’ve paid the loan down a bit I’m in profit”. Instead, I think “I’ve borrowed a couple of grand, but I’ll have paid it back by the time I’m halfway through the next side gig so it’s cool”. And if I don’t get the second side gig in time, then I’m worse off and made a loss.

              • Jeremy …
                20 May 2017 at 11:44 am

                It can be viewed as a bit similar to what PE guys do when they buy a business. They load it up with as much debt as possible to pull their cash back out, and then the interest payments cover the underlying profit meaning no tax is payable. If the company makes a slight loss after interest, well then they carry a credit and hope next year makes a slight profit after interest with the credit from the previous year covering it. The underlying business can be wildly profitable but makes a loss and pays no tax. This can certainly be viewed as a rort, and has blown up many an otherwise sound business.

                On the other hand, it is a perfectly sound and legitimate practice for businesses requiring massive cap ex that existing cash flows can’t cover to use debt and claim interest as an expense, power companies, telcos, railways, etc. are good examples. If I remember correctly Kiwirail makes a paper trading profit but has massive losses due to interest payable (I’d need to check their income statement) so they are accumulating interest related tax credits in case they ever make a profit. I don’t think anyone thinks Kiwirail should pay tax on their trading profit while losing $100+ million a year.

                So whether property investors are using a “loophole” or not depends on whether you view them as a PE type business or a cap ex type business.

                My personal opinion is that given the amount of capital and equity required to turn a profit on your average rental property, it definitely falls in the cap ex category – which I think is where a lot of the criticism is coming from, small time investors feel like they would be treated under this policy as PE sharks rather than someone running a small family business legitimately using debt and tax credits.

                • mikesh …
                  20 May 2017 at 12:53 pm

                  Making interest non deductible for tax purposes would put paid to this particular rort also.

                  • Paul Campbell …
                    20 May 2017 at 1:35 pm

                    but it is a valid cost of doing business – you pay it before you can figure out your profit, just like maintenance – it’s not really a rort, any more than writing off maintenance is

                    Let me give you another example – I work at home, I have a company so I can pay PAYE, my company could invoice me for rent for my office let’s say $200 a week – that’s $200 profit I make from renting out my home and I will owe the IRD tax on it. It’s also $200 less gross my company pays me in my pay check.

                    Alternately my company doesn’t bother charging me rent, I receive $200 more gross and pay tax on that.

                    For me it’s a wash …. so I don’t bother, I pay the same amount of tax either way and it’s less paperwork.

                    But if I still had a mortgage on my house I could write off a percentage of my mortgage interest on whatever portion of the house the company was renting – then it might make sense to do that silly paper transaction. I’d probably earn less than what I’d end up paying an accountant.

                    • Jeremy …
                      20 May 2017 at 2:43 pm

                      How is it a wash?

                      If you pay personal tax on it you’d need to pay 17.5%, 30% or 33% depending on your income, and if business profit you would need to pay 28%.

                      So depending on your income there is a course of action that will minimise or maximise your tax payable.

                    • Draco T Bastard …
                      20 May 2017 at 2:45 pm

                      but it is a valid cost of doing business – you pay it before you can figure out your profit, just like maintenance – it’s not really a rort, any more than writing off maintenance is

                      That would depend on how the loan was used wouldn’t it?

                      If the loan was used to procure more productive capital then the loan interest may be considered valid for tax deduction.

                      If the loan was for the purposes of paying dividends then it isn’t. how can you tell if the loan was to pay dividends? If the dividends paid out was only possible because of the loan.

                    • mikesh …
                      20 May 2017 at 4:59 pm

                      The business doesn’t borrow money in order to finance itself – you do the borrowing yourself and then you invest the proceeds in the business. Therefore how can you say that the interest on the loan contributes to the earning of taxable income as required by income tax law before it can be considered deductible.

                      In other words the business is not utilizing that expense in any way.

                  • Jeremy …
                    20 May 2017 at 2:33 pm

                    Hi Mikesh,

                    Interest is a valid expense if it has been occurred for legitimate capital expenditure, so you can’t simply make all interest non-deductible.

                    The Kiwirail example I gave above is incorrect, it looks like the Crown is directly funding cap ex and the large losses are from writedowns, but they are making a trading profit and losing money. If there were funding the cap ex via debt they would still likely be making a trading profit but losing money after interest payments.

                    Lets say they made $100M in trading profit, but had $110M in interest payments, resulting in a loss of $10M, would you really expect Kiwirail to pay taxes of $28M on their trading profit pushing their loss to $38M?

                    All business require ongoing cap ex, often it needs to be funded by debt and therefore the interest on the debt is a legitimate expense.

                    Remember businesses only have 3 real ways of raising funds, debt is one of them so it is crucially important.

                    • Draco T Bastard …
                      20 May 2017 at 3:04 pm

                      Lets say they made $100M in trading profit, but had $110M in interest payments, resulting in a loss of $10M, would you really expect Kiwirail to pay taxes of $28M on their trading profit pushing their loss to $38M?

                      Actually, I’d expect a company with that sort of interest bill on that sort of profit to fail.

                      Kiwirail shouldn’t be a company but a state department as it provides essential infrastructure and thus it shouldn’t pay interest either as it’s funded by the government.

                    • Jeremy …
                      20 May 2017 at 3:12 pm

                      Your right, Kiwirail would fail if it had to pay the interest on the capital the government has invested in it since it went public.

                      But is shouldn’t have to pay tax on any profit before any interest that would payable, which ties the example back to property investment.

                    • mikesh …
                      20 May 2017 at 5:33 pm

                      [Interest is a valid expense if it has been occurred for legitimate capital expenditure, so you can’t simply make all interest non-deductible.]

                      It has actually been incurred for the purpose of augmenting one’s capital, which is a personal benefit, and it should therefore not be tax deductible.

                      [All business require ongoing cap ex, often it needs to be funded by debt and therefore the interest on the debt is a legitimate expense.

                      Remember businesses only have 3 real ways of raising funds, debt is one of them so it is crucially important.]

                      It may be true that all businesses need capital expenditure, but it doesn’t follow that interest on the proprietor’s borrowings should be tax deductible. Capital invested in a business may be used to buy assets such as plant and machinery, or property, but the cost of these is deducted from a firm’s bottom line via depreciation allowances.

                    • Jeremy …
                      24 May 2017 at 8:28 am

                      Hi Mikesh,

                      You’re assuming that using debt will increase the capital base of the business long term.

                      Sadly this is not the case for a sizeable portion of businesses. Many, many companies need to borrow because their ROIC vs. WACC is essentially negative and they are waiting for (or in the worst case hoping for) mean reversion – in the main, or some internal innovation, effects of cost cutting, etc.

                      Many investors who have had success at increasing their capital base have a rule that they will not invest in companies that don’t increase their equity at least $1 in the long term for each $1 of earnings retained. Which seems a very low bar indeed to me, but I think shows just how tough being in business can be.

                    • mikesh …
                      24 May 2017 at 1:43 pm

                      [Many investors who have had success at increasing their capital base have a rule that they will not invest in companies that don’t increase their equity at least $1 in the long term for each $1 of earnings retained. Which seems a very low bar indeed to me, but I think shows just how tough being in business can be.]

                      If interest were non deductible many businesses would probably work to a different business model, particularly those businesses which are highly geared, and of course many might not have entered the business “arena” in the first place. And of course all businesses would be pretty much in the same situation so the relative competitiveness of each should not change. Interest rates could also be lower.

                      The problem is that businesses which have based their business plans on certain assumptions regarding taxation, could be unfairly damaged if the supports that the tax system is providing are withdrawn. I think that getting rid of tax deductibility is something that would have to be introduced gradually over a period of, say, five years.

                    • Jeremy []
                      25 May 2017 at 2:43 am

                      There would be an effect on economic GDP and activity, employment etc. as it would lead to a lower number of viable businesses.

                      I’m curious as to why you don’t want interest as a tax deductible expense, but are presumably happy with depreciation, amortisation and the milk for the company fridge being deductible?

                    • mikesh …
                      25 May 2017 at 8:25 pm

                      Depreciation is clearly a business cost as it represents a portion of the assets which contribute to production in a given year. Milk would have to be regarded as labour cost since it is customary to privide workers with morning teas etc. Amortization is not usually deductible anyway, though I guess it would depend on what one is amortizing.

                      It wouldn’ t necessarily impact on GDP. You are arguing from a situation where interest is non deductilble instead of from one where it is. The economy would adapt.

                    • Jeremy …
                      25 May 2017 at 10:37 pm

                      I believe Amortization is deductible, using the Kiwirail example, I believe this why they have been declaring large losses while making trading profits and while being government funded, they are writing down goodwill – essentially.

                      I also think removing interest deductibility would push a lot of currently viable businesses into the red and out of business, which would have to have a negative effect on GDP, wages, employment, etc.

                      I had a quick google around and couldn’t find any countries that don’t allow interest payments as a deductible expense except Estonia which seems to have quite a radically different tax system. So we would be at disadvantage from a tax competition point of view – if you worry about suchlike.

                    • mikesh …
                      26 May 2017 at 4:12 pm

                      I’m pretty sure amortization of goodwill is not deductible for tax purposes.

                      I’ve never denied that that making interest deductible might cause difficulties for some businesses. All I have ever argued is that interest deductiblility is an unwarranted subsidy which we should get rid of. However I think most businesses would adapt, particularly if the measure was introduced gradually over a longish period. Competitiveness could be maintained by reductions in interest rates (possible if deductibility was removed), or by reducing the ratio of borrowed capital to total capital. This of course would reduce the profits per share ratio, but if it’s the interest deductibility rort that is supporting higher p/e ratios then this would be justifiable. This problem would probably be rectified by falling share prices.

                      All that borrowing does is allow the rich to get richer by increasing their capital. If this is the case then I don’t think they should receive a tax deduction for the costs that this entails. I don’t see interest contributing to the production of taxable income, which is what tax law requires for an expense to be deductible.

                      I don’t think I can add to the above arguments so at this stage I’ll “rest my case”

              • Paul Campbell …
                20 May 2017 at 1:02 pm

                Think of it this way:

                – you pay a fixed monthly mortgage
                – part of each payment is interest on the outstanding loan, part a portion of the principle
                – over time as you pay off the principle the portion of the fixed payment that is interest decreases because the principle is getting smaller)
                – only the interest can be written off as a cost of business – so the amount you can write off drops over time

                This by the way is why it’s such a such great idea to pay off more of your mortgage in the first few years (something sadly most NZ mortgages don’t allow you to do) – scrimping together an extra mortgage payment a year on a 30 year loan removes 30 years of interest on that payment ….

      • Craig H 4.1.3
        19 May 2017 at 6:03 pm

        With the new LVR of 60% for investors, although the Labour Party policy will still hit some new investors, it won’t be many since they have to finance 40% themselves.

        Also, and more to the point, why should the taxpayer subsidise high income individuals (top 30% income receive most of the value of this) to provide high cost housing? Lower cost housing e.g. flats normally have high yields so don’t run at a loss, so the subsidy goes towards properties that arguably don’t help solve the problem, and were poor investment options unless there is some other angle involved. Usually that angle is capital gains, although I concede that not every property investor is out for capital gains.

        Personally, I think Kiwibuild will hit harder since it will eliminate a lot of rental demand – this subsidy loss is small potatoes for most people.

      • ankerawshark 4.1.4
        19 May 2017 at 6:55 pm

        Wayne, scaremongering again about losing votes.

        Two can blame that game………..think of all the first home buyers who will benefit and vote for Labour.

        Labour are doing the correct thing here. Not everyone is as selfish as you Nats who are only interested in feathering their own nests.

      • Grant 4.1.5
        19 May 2017 at 7:11 pm

        Caveat emptor, (let the buyer beware ) has been a fundamental principle in business since Adam was a cowboy.
        If you are going to dabble in the ‘business’ of buying extra residential properties as a way of trying to make more money and pocket the potential rewards, then equally you had also better be prepared for any changes or downturns to the market.
        Believing that the market should only and always take an upward trajectory is naive and crying “it’s not fair ” when rule changes are made is all part of taking the gamble.
        The residential housing market is not sacrosanct. Banks and ‘investors’ should know this.
        Gambling is what the Banks and ‘investors’ are doing.
        To quote : “If you can’t stand the heat , get out of the kitchen”.

    • infused 4.2
      19 May 2017 at 10:43 pm

      What? How dumb are you?

      Businesses do this all the time when investing in themselves.

      [lprent: drunk or drugged troll. Now dealt with. ]

  5. ianmac 5
    19 May 2017 at 3:43 pm

    A pretty good response from Andrew. Good stuff.

  6. Anne 6
    19 May 2017 at 4:17 pm

    I went to a well attended meeting on the Shore last night where the main speaker was Labour’s shadow housing minister, Phil Twyford. The depth of his knowledge of the housing situation and the myriad of social consequences was impressive.

    Prior to his speech, members of the audience were invited to relate their experiences and some of them were heart-breaking. To actually hear people’s stories in person makes it all the more real. If Bill English, Nick Smith, Paula Bennett and co. had been present to hear those stories first hand, I just wonder how they would have felt. All of them were hard working, articulate individuals who were in no way responsible for their respective plights. The social consequences for many of them and/or their family members was quite harrowing.

    Bear in mind this was the North Shore not South Auckland, which is an indicator of how wide-spread the housing crisis has become.

    • mac1 6.1
      19 May 2017 at 5:02 pm

      He also gave a good speech at the Grey Power AGM, who are a mixed bag of political leanings. Housing is a policy concern for GP and the govt is not well favoured by many of us oldies who also are keen voters.

    • simonm 6.2
      19 May 2017 at 5:31 pm

      English, Smith and Bennett probably would have told them to stop whining and pull their socks up. The fact that they might be out touch with New Zealanders struggling to make ends meet in an extremely tough housing market seems to have passed them by. Either that or they take perverse pleasure from seeing societies “losers” ending up on the scrapheap, whilst “winners” like themselves rise to ever greater heights on their taxpayer funded salaries and rapidly expanding property portfolios.

    • Ad 6.3
      19 May 2017 at 6:19 pm

      Twyford is fully primed to be the best housing minister we’ve had in generations.

    • infused 6.4
      19 May 2017 at 10:45 pm

      Go to a Bill Engish speech and ask him any question around stats and figures. He knows most of it off the top of his head.

      The media shows all politicians in the way they want to show them.

  7. AsleepWhileWalking 7
    19 May 2017 at 10:01 pm

    At least with this type of deal investors can’t immediately say that it will be added to the rent as they do with other costs.

    Now get rid of letting fees, the property managers are being paid twice and have a duty only to one party.

  8. Cricklewood 8
    20 May 2017 at 2:15 pm

    I cant see how this affects professional investors, surely they will offset any loss on one property against the profit from another as any business would do with a loss leader etc?

    Also will those with one property be able to keep the loss on the balance sheet for a number of years and use said loss to reduce tax liability when it becomes profitable?

    If finding hard to see how this will be effective in the long term.

    • Craig H 8.1
      20 May 2017 at 3:53 pm

      Yes, the losses can be carried forward. The point is to impact investors who never run their rentals at a profit and then sell, ostensibly because they’ve changed their mind, but actually for capital gains.

      • Cricklewood 8.1.1
        20 May 2017 at 4:15 pm

        Wouldnt a proper cgt do a much better job of that?

        • Andre 8.1.1.1
          20 May 2017 at 4:26 pm

          Yep. Even the paperwork for a CGT isn’t particularly onerous (done that in the US for CGT on the family home I had there). Personally I favour a CGT for everything including the family home, with a rollover provision for when people change their family home.

          Sadly, CGT seems to be so politically toxic in NZ that no party seems likely to push hard for one anytime soon. Even though most other countries have some kind of CGT.

          • Cricklewood 8.1.1.1.1
            20 May 2017 at 5:15 pm

            So it seems to me a *hopefully* populist policy which in real terms does a pretty crappy job of targeting the real problem areas?
            It wont effect those that flip houses quickly nor professional speclators/investors who have numerous properties in a company structure or those that have one ot two properties that can afford to bank the losses until the rental runs at a profit… cant see it helping much tbh.
            I also think a cgt would actually be politically very acceptable if it was well explained and simple.

            • Andre 8.1.1.1.1.1
              20 May 2017 at 5:41 pm

              I’ve got hopes the ring-fencing policy might work a bit better than rational analysis suggests.

              All I’ve got to back that up is anecdotes, but here goes anyway. All the conversations about buying investment property I’ve been around have touched on the ability to deduct losses from other income, and that that gives the ability to pay a much higher price for an investment property. The idea that the government is somehow helping to pay for the investment through tax breaks seems to have an irrational attraction to many people. So yeah, I think the policy might dampen the enthusiasm of some of those willing to pay top dollar because it’s an investment with tax breaks.

              As for selling a CGT, I’ve got no idea on good ways to do it. To me it’s about the idea that a strong stable society is needed for assets to appreciate in value and for profitable businesses to be able to start and grow. A CGT levied at the time those gains are realised is simply contributing back to maintaining that society. But that argument doesn’t lend itself to a snappy soundbite.

              • Cricklewood …
                20 May 2017 at 6:01 pm

                I think that offset is attractive to ‘mum and dad’ and no proffesional speculators or investors who the policy is aimed at.

                Anecdotally Cgt would be palatable in my circle of friends and colleagues it has a reasonably positive response only criticism was the delivery and to many exceptions. Tax needs to be broad based and simple to understand. Like gst.

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