Time to sell our rentals then and let the Govt provide rental accommodation.....

Great article Bernard!

Brent, we don't need to rely on the Govt to provide rental houses, because when you sell your rentals, you must either sell to another landlord(who will continue to provide rental houses), or a first-home-buyer (who will at the same time cease to rent)

I agree with your analysis Bernard. I am surprised that denying depn on buidling would save $1.3bn. That almost offsets aligning the tax rates at 30%.
This solution is a no-brainer from an economic and political perspective. It addresses the inbalance towards property, addresses the unfair marginal tax rates for salary and wage earners and those who save and invest in productive assets.

@ Brent - your argument is a common one used by those who own rental properties to justify the current tax breaks. Rental yields need to be postive on a pre-tax, operating cash-flow basis. It is crazy to base a business model on ongoing operating losses, tax refunds and speculative capital gains. In reality, rents will go up and house price will come down (I suspect more of the later, given the constraints on rent increases).

brent Says:
January 19th, 2010 at 6:52 pm
Time to sell our rentals then and let the Govt provide rental accommodation"¦..

Yeah right! Who will buy them? The better quality ones (and even some of the others) will quite easily be absorbed by those not currently able to buy their own.
The forced lower prices will make that all easier.
It is called "market forces"

Agree with Dave,
Love the idea that genuine state beneficiaries may get a better quality of accomodation as a result. Heating?

Watch out overpriced suburbs.

(Sorry got carried away.... just like to see an end to property blogs.... Wally will tell me it won't happen though)

The 30% flat tax rate will be brilliant. Not very many people know the incredible waste of bureaucratic time that the 38% tax rate (formerly 39%) caused. Income attribution companies - ouch. As a trustee of several inter vivos trusts I am aware of how that new 12.5% tax rate helps the wealthy. Sullen Cullen could never comprehend that his changes to help the workers benefitted, principally, the wealthy. And put interest on Student Loans drawn down after, say, 1st April 2010. This interest free student loan nonsense must come to an end. And student loans owing at the date of death should be a liability for the executrices to pay off. Student loans to superannuitants must stop. The loans are there to help our young people get ahead. The land tax is real good. I would not want to see an increase in GST.

Would the land tax be administered to the family home? Most city homes sitting on 1/10 of hectare or less in most cases will be sitting on land far in excess of $50,000 per hectare.

What excites me more is the discouragement of residential property investing for investing's sake. It would be good to see investment money channelled into growth assests that employ people and develop our wealth base. Dropping the top tax rate will also remove some disincentives for overtime.

Key will not act on any of it and it will not be in time for this years Budget so no show they will do it in Election year. Key wants a second term and he will not get it if he upsets the massive amount of Kiwis who are heavily invested in rental properties.

Key will bring it on...you watch!

Key doesn't have to fund all the tax cuts, as reduced taxes will boost productivity and GDP growth, generating more taxes. So I think they can afford to go further into deficit by anything under $1 billion.

But hitting property with two or three major taxes would be too hard, and dent confidence. The US always sees construction as a barometer of economic health. New Zealand needs to do the same, and avoid too much discouragement of construction.

IMHO.

If they do nothing but equalize the top rates they will have achieved something.
History will show that the 39 % rate by the Clark government was an absolute disaster for NZ in encouraging poor investments from a nations perspective.

We are going to see all the good reasons for doing nothing - Landlords etc etc.

The reality is we are going bust on present settings.

We have to change policy settings substantially and change now!
As MarkTwain said - you go bankrupt slowly at first - then it all comes with a rush.

If Key's government can't do it in 2010 - buy a ticket across the ditch.

Any change depends on the election certainty first, the aussie tax plans second and whether enough time has passed for the National Party rump to divest itself of the property porfolios.
At present the policy mix centres on keeping the property bubble intact with cheaper credit for longer and govt pork for the building sector via the splurge on infrastructure and bigger loans to first home owners.
I have yet to hear Key or English use the term 'unaffordable' when it comes to housing. They are planning on having inflation and immigration save the ponzi scheme.

I thought again, I think we need private landlords this country because the goverment can not afford to provide accomodation for so many people. The difference between private landlords and HNZ is that the private landlords do lots of hours of free work including managing finance, gettng tenants, cleanning the house, paying bills, doing housing maintenances, etc.... So it will cost much more if we let the goverment to providing housing.

Got yourself a property porfolio there JB!...be prepared to be screwed if you have. Bill did give you plenty of warning when he told the party faithful to shift direction away from the rentals and specs. Don't forget JB..every house dropped by a landlord is taken by a homeowner who was a renter...if the price is low enough and...there is always the chance they will get govt mortgage support .....if the price is low enough!!!!!!
Imagine that, landlords encouraged to sell to tenants with HNZ holding the mortgage...but only if the price is right! Market flooded with properties as landlords take the govt option to sell now or be left with no tenants and no buyer. let's put a close out date on that policy shall we...say 12 months to do the deal or miss out.
Jeeez ....I should have been a beaurocrat. Iain Parker would love it.

"Time to sell our rentals then and let the Govt provide rental accommodation"¦.."

There are a lot of long term 'professional' investors in rentals, that have been around for decades who operate in a manner fundamental to true returns...
These guys will be ok.
Those who are amateurs, jumped on the boom band waggon based on rorting the system thru tax brakes,,should worry, and so they should, the dont operate in a conventional manner....and if had any suss should have known the rorts would and could not last for ever....basic commonsense.
We all agree affordabity is way out of sync, and long term fundamentals still show values over 20% to high.....market pressures dictate that the market has to eventually return to long term fundamentals at some time before the long term values rise to meet current values in 10 or 15 yrs time...common sense.

Tauhei Notts Says:

"This interest free student loan nonsense must come to an end. And student loans owing at the date of death should be a liability for the executrices to pay off. Student loans to superannuitants must stop. The loans are there to help our young people get ahead"
A pet 'project' of mine...I take a different approach.
Interest free and even credits for different levels of pass rate
IE along the lines of a A and A+ for hard work gets a credit, Bs and Cs interest free, fail charged interest even if passed 2nd time around.
Not completing a degree or qualification, charged interest...and maybe different levels of interest
If you work hard you get rewarded, if you waste lecturers time, efforts, and clog up the higher education system you pay for it.

One aspect that seems to be not discussed is that in NZ how does a guy on a wage/salary get ahead? (excluding the few on high salaries). You can't get ahead much on your wage, that basically takes care of your living expenses/paying off your home.
The way that one has been able to get ahead a bit is by buying a few rentals and developing some assets/income. If the government ignores this, then quite a few people who try to get ahead and not retire dependent on a government handout will be affected.

Why should the taxpayer be paying out money to speculative landlords who open a business (housing investment) and run it at a loss. Imagine what would happen if the manufacturing industry decided to do the same. Those spec landlords are just the same as welfare cheats in my mind. Speculation has created a situation where house prices are so far out of reach of hard working people that social resentment disengagement is not far off and some areas well and truely here, perhaps these spec landlords could spend a bit of time in the heat of the street.

Student loans should be credited for those with an A or A+ pass and interest free for B or B+ pass with the proviso that those people live and work in New Zealand for 5 out of the next 10 years.

Muzza Muzza...to get ahead is easy mate..join either Labour or National and get a brown nose helping out then you get a plumb 'job' and your snout in the trough when the fools get to be in power. It's Noddylands path to wealth Muzza. Just ask all the Labour brown noses who had up to 9 years of pork given to them. Best spot is Party President....guaranteed top spot at the trough.

I like the signs, dont know what will be in but it is clear we will see 2 things:

1) reduction in personl income rates
2) finance the above by additional property related taxes.

I dont think Key will go far enough, but i am confident we sill see steps in the right direction. The incentive to speculate will be reduced by a combination of lower personal taxes and greater costs of speculation. Even relatively small measures will place more downward pressure (or remove govt largesse upward pressure) on a market that is obscenely overpriced. the writing is on the wall chris_J and Murray, sell while you can before the bubble premium in housing is expunged once and for all.

I don't recall there ever being a serious shortage of rental accommodation in NZ, regardless of the ratio of house prices to income. So why would a drop in house prices cause a rental shortage now, as suggested by some?
Key will smile, say a few vaguely positive words, pass the ideas on to a committee. And then either do nothing ordo the least he can get away with.

Sean - "Why should the taxpayer be paying out money to speculative landlords who open a business (housing investment) and run it at a loss. Imagine what would happen if the manufacturing industry decided to do the same"

There are plenty of businesses around that run at a loss for the first 3 - 5 years while establishing themselves. This loss is often offset against profitable businesses under the same parent business. The idea that residential rentals is the only business that starts out with a negative cashflow is wrong. Most rentals go cashflow positive in 5 - 10 years thanks to increasing rents and decreasing loans. Sure, if you can start from day one with positive cashflow it's all the better, but many start out with a negative cashflow not because they WANT to, but because they don't have a choice. There are some high income earners who might do it purely for the tax breaks (technically tax evasion if that is your primary goal), but the majority of landlords are hard-working low - middle income earners aiming to pay off their loans over 25 years.

The process of clearing out inexperienced and/or highly leveraged has been going since the beginning of 2007. I run a service business with hundreds of residential property investors as clients. Since 2007 hardly a week went by when I didn't get calls from owners who were either fed up with grief from tenants or selling because they wanted to take the money and run. Some had made a fortune out of it.
Long term professional landlords who operate their business at a profit already should welcome the proposed changes. The extra costs will be almost balanced by tax savings and increased rents. They also welcome the thought of being able to add properties to their portfolio without competing with wannabes who do nothing but muddy the waters of the rental market. Bring it on.

Muray - what would happen to cash flow positive returns on rental properties after five years with interest rates at 12-14% unemployment at 10% and rents capped by the powers that be at CPI?

Agree Pete and Murray well said

My rentals will be cash flow positive very soon. Hard to start with nothing and get a portfolio all cash flow positive. I paid off my mortgage free then used the equity to get three more. Now paying them down. Bernhard has stated that bank lending is still tight...the banks will loan if you have the equity, if you don't save harder.

Sean and Steps
"Student loans should be credited for those with an A or A+ pass and interest free for B or B+ pass with the proviso that those people live and work in New Zealand for 5 out of the next 10 years..."

Sounds a little bit like a communist state don't you think ;) line up the people who get a D and shoot them etc

Half the problem is the Universitys are milking it, bums on seats, 100s in AUT, Unitec nothing courses

Blue,

Good points. Housing is largely dependant on govt and RBA policy as well as the general economy. So tax changes should always be contemplated.

28 yr old - Sounds like those with D passes should not be studying or be studying something they enjoy and are good at. I have interviewed so many from the Asian sub culture that have overstudied with the opportunity cost being that scare resources have been consumed by those who will never use what they have gained. I see no shame in someone studying mechanics and making a good living out of it.

28_yearOld,

"My rentals will be cash flow positive very soon."

Great, you wont miss the tax deductions being removed then ... but others may, and this will surely affect how much they are willing to pay and therefore the value of your property.

" a small land tax" even a small percentage of the current values is a substantial amount for the average person.

Land Tax = lost votes, Capital Gains on sale of second etc properties is the only fair resolution. A Land Tax would hit everybody and is completely counter productive.

Overall rental owners cost the tax payer. The Neg geared properties create losses which are greater than all the positively geared properties profits. And you would have thought there would be a shite load free hold rentals out there brought in last 20-30 years, so the new rentals of the last decade must be hugely reliant on negative gearing.

If the 'only neg geared for first few years' BS was true then there's little chance the amount of losses would exceed the huge profits of all positively geared rentals. That would only happen if more rentals were set up in last few years then the entire rest of NZ history.

What is happening is people/companies on huge incomes (either through owning many positively geared rentals, or other...) have been buying up large on rentals to absorb there income so no tax is paid. It works as the cap gains outweigh the expenses, which is especially true when large portions of the expenses are FABRICATED DEPRECIATION figures, which act as an interest free loan until property is sold.

God, its good to see the slumlords squirm.
Proper investors wouldn't care 2 hoots about the tax changes. I invest in shares and ultimately only care about the profit and projected profit.
The way it should be in housing.
We've all heard numerous stories about those with rental properties rorting WWF and those paying next to no income tax. These are the people that the govermment is after.
Nothing wrong with a land tax if we all pay less income tax.

"alot of people work two jobs to live in the big flash house, house & lifestyle 1st, kids 2nd"
Sure, and most people don't.

Lowering the income tax rate to 30% will give people more money to spend on property.

"Why should the taxpayer be paying out money to speculative landlords who open a business (housing investment) and run it at a loss."

There seems to be so much ignorance out there. If a loss is made the taxpayer does not pay for this. It just reduces the overall taxable income of the entity (IF there is sufficient income from another source). The much touted "minus $150 million overall revenue to the Government" is a refund where too much tax has been paid. The difference in top two rates is 5 cents so, simply put, investors have paid $3,000 million in tax at 39c when they should have been charged $2,850 million at 33c so they get a $150 million refund...

... but of course nobody says thanks for the $2,850 million of tax that is payed - they all just moan about the $150 million refund.

So after all the moaning property will probably end up the only business where legitimate business expenses can't be claimed. Depreciation is about the worst expense to pick on as New Zealand houses are already substandard and this effectively increases cost of improvements by a third, making improvements less likely to happen - oh yay.

Larry you miss the point lack the intelligence to ever get the point.

There us too much emphasis on the tax being claimed back via LAQC's and depreciation, surely the real loss to the tax payer is the huge capital gains that eventually gets realised tax free. Any other investment income gets taxed as it should...

shorts - if you want to stop them getting ahead and stay poor make sure they pay ever increasing rent for the rest of their life rather than mortgage interest payments that don't go up with inflation. Then make sure wealthy people like you get to make tax free capital gains on rental investments with tax rebates to help cover any expences you may have till you get there...

Trademe made $0 profit from that transaction, it's shareholders sold their shares and so should not be taxed on that as the sale of shares is not considered income unless you are a trader - dividends always are. Trademe paid tax on any profit it made, as well as collecting GST and paying income taxes for all it's employees.

Purchasing a property with the intent to make capital gains is a completly different story, in this case capital gains is your income so should be taxed.

"Property traders are already taxed on capital gains as their profit" I think you are confusing the issue with developers. They are not being questioned here...

Landlords are not classified as property traders, there are plenty of people who live off money they have made from capital gains on their rental investments and have not had to pay tax on that money, that is the tax dodge that people are not happy about and to make matters worse it is pushing up property prices for first time buyers. Not to mention the tax rebates that are recieved for years prior to the tax free capital gain windfall when the property is sold...

No confusion - if you make your money from trading property you currently get taxed on the capital gain. I doubt there are " plenty of people who live off money they have made from capital gains on their rental investments and have not had to pay tax on that money" because IRD aren't stupid. They watch peoples buying patterns and prosecute those who avoid paying tax on property speculation profits.

i think we can all accept now that property is going to suffer large falls over the next few years now anti ppty tax changes are certain. Could not have happened sooner, in fact if it had been sooner our bubble would not have got so bad, and would have crashed by now (a la UK, US). The only other coutnry with worse laws re proeprty than us is Aus, and their bubble is going full steam ahead at the moment. Bad tax policy MAGNIFIES bubbles, especially when it encourages speculation over profit making activity.

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