Recently the Government has been working out how to cut funding for school lunches for poor kids while at the same time it has also announced that it will restore interest deductibility for landlords.
The interest deductibility changes are being pushed through by tweaking an existing bill when it is reported back to Parliament. The ability for the public to make submissions and to point out how bad the policy is will not be there.
The Government claims that the tax change is a return to conventional tax treatment of the business of being a landlord and will also mean that rents will reduce.
As to the former claim there is one difference. Landlords almost inevitably get into the rental business with the expectation that after a while they will be able to sell their property and make a significant tax gain. Rental income is not the primary driver.
As to the latter claim there is precious little proof that this will actually occur. When interest rates reduced there was no discernible reduction in rents.
This Treasury paper concludes that wage inflation and relative supply and demand of dwellings are the two key drivers of rent inflation for new tenancies at the national level. The paper also said that “[m]ortgage interest rates positively affect rents but relatively little, and the relationship is not robust across model specifications”.
Let’s think about one recent example which shows why the Government’s assumptions are overly optimistic.
The subject person, who for present purposes will be called “Christopher” is the head of a large organisation. He also owns a property in Auckland that he rents out to his employer as an office. Rental for this property is determined by an independent valuation.
Along with five other properties he also owns a Wellington Apartment that is mortgage free. As part of his entitlements under his employment contract he also has the use of a large mansion in Wellington.
Instead of using the mansion he chose to maximise his return by electing to receive $1,000 a week so that he could continue to use his mortgage free apartment. Clearly maximising his wealth is more important than anything else.
Would giving him a tax return make him reduce the amount he claimed? This is unlikely as shown by his earlier behaviour.
And here is the thing, the tax rebate will not affect him at all as his apartment is mortgage free. Clearly he is maximised by personal gain and not by anything else. And he was asked if favourable tax treatment would cause him to reduce rentals on his properties and he said that he was not sure. I am confident that when push comes to shove he will rely on market forces to set rental levels for his properties, and not let some generally expressed desire to reduce his return
The group that are most likely to be affected by the change are the mega landlords. There are 346 in the country and they each own at least 200 properties. The CTU’s pre election analysis was that they would each save up to $1.3 million over five years thanks to this tax cut.
Ka Ching.
Can you imagine them agreeing to reduce the rentals they charge? Especially at a time that immigration is strong and there is increasing pressure on housing stock?
This is a classic example of the Government rewarding its funders. The policy will not work. All it will do is increase money for the wealthy and drive up house prices as landlords look to increase stock.
If you wanted to increase stock you would do what the last Government did, allow depreciation but only for new builds. Competing with first home buyers to purchase homes does not add one new house to existing housing stock. Offering incentives to landlords to buy new stock would, but that incentive will soon be gone.
This is yet more evidence free Government reckons. Clearly they think that trickle down works, and all that is needed is more, not less trickle down.
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