Property Investors Federation vice president Andrew King has described the Tax Working Group's proposals for new taxes on residential property investors as an "orchestrated attack" that would unleash a mass exit from the industry.
This in turn would create rental property shortages that would drive up rents and slam house prices lower, King warned.
King told the New Zealand Herald the proposals outlined yesterday to deny depreciation on buildings as a taxable allowance, impose a land tax and a tax on equity invested in residential property would 'devastate his sector'.
Mr King predicted the recommendations would create social chaos by creating a rental property shortage. All house prices would drop because landlords who bought under one set of rules would quit and flood the market with properties. Tenants would be out on the street if the changes were enacted, he predicted. The tax working group had a strong bias against landlords and was not interested in the federation's views, Mr King claimed, a point Mr Shewan rebuffed, saying the group had listened to the federation but did not agree with it.
King said in a news release that rental property did not have a tax advantage and the widely quoted figure about NZ$200 billion of assets generating NZ$500 million of losses for tax purposes and reducing tax receipts by NZ$150 million was a one-off from 2008 when interest rates were high.
Many businesses make a loss during the first few years while getting established and rental property is no different. The rental market is extremely competitive and Tenants enjoy lower rents because of this, helping them to save for a deposit on their own home. The statement that rental property owners actually reduce the level of tax available to the government by $150m has been repeated so often that it is now thought of as a fact. It is actually very misleading. The often quoted figure is an anomaly that occurred in 2008 when interest rates were at their peak, making it extremely difficult to provide rental property. However with lower interest rates rental property will once again return to be a net payer of tax. To suggest that rental property owners are not paying their way based on one very difficult year is grossly misleading. Another point often raised by rental property opponents, is that the rental industry is not part of the productive sector. This shows little understanding of what it takes to make a country productive. Rental property owners house around a third of New Zealand's workers. Without access to decent housing, these workers would be considerably less productive. Rental property owners also contribute to the general economy through supporting banks, local councils, trades people, professionals, hardware stores, insurance companies and a host of other businesses. In summary, it is a fallacy that rental property has a tax advantage over other businesses or investments, so any tax applied solely to rental property would not level the playing field, it would distort it. Rental property does contribute to the tax system and it is definitely part of the productive sector. To suggest otherwise is completely misleading. While the goal to align the top marginal tax rates at 30% is admirable, to target landlords and tenants with the cost of paying for these tax deductions is completely unjust.
My view
The world will not end. The depreciation denial, the RFRM tax and a 0.25% land tax would raise around NZ$3 billion, which represents around 1.5% of the value of those NZ$200 billion of residential property assets.
Landlords made at least NZ$100 billion worth of capital gain over the last 8 years.
They can afford it. Land prices didn't rise when the last land tax was removed in the early 1990s and they continued to rise through the 2002 to 2008 period when councils were increasing their land taxes at near double digit rates.
I'd be surprised if house prices fell much on all of this, given the deep love many investors have now for residential property, regardless of the business sense of any investment.
If they were irrational before, they'll stay irrational.
Rents are set largely by the ability of tenants to pay.
What might happen is that some landlords try to increase rents to create a more sustainable economic return and tenants simply adjust their living standards by moving down or moving in with friends and family.
An era is ending for the property investors.
They need to accept the glory days of tax-free capital gains driven by credit-fueled speculative fervor are over.
They need to get back down to the business of making sustainable yields on rental properties with real people in them.
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