'CGT rent hikes prove tax break'

Opinion: Don't rent increases because of a Capital Gains Tax show how favourable the tax incentive is now?

14th Jul 11, 8:48am by Alex Tarrant

Surely rental property owners threatening to raise rents on day one if a capital gains tax is imposed must be doing so in order to cover lost expected earnings from when they sell their properties.

That must be the case. If it weren’t the case then it’s pretty silly to say your rents would increase because of a new tax, when you’re not going to be affected by the tax – ie, your business plan doesn’t bank on the sale of your property down the track.

So those saying they will raise rents due to a capital gains tax must be those expecting to make X from the sale of their rental property at some point in time. That would become X-CGT under Labour, so now they are saying they will raise rents to cover for the CGT impact.

For these people who had chosen to invest in rental property, while their main ‘reason’ for doing so was to earn income from collecting rent (so that they are not caught by current capital gains tax rules), they are also obviously expecting untaxed income from the sale of their property.

Now if this is the case, does it not just highlight how favourable the tax treatment of property can be?

If it's not the case, then could someone please tell me why landlords are threatening to raise rents if a capital gains tax is imposed?

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23 Comments

by Gloom | 14th Jul 11, 9:39am 1310593163

The landlords did it this year after the depreciation tax benefit dropped by goverment. My rent was increased $50 by LL.

Please don't fo anything until I buy my house back.

by Landlord | 14th Jul 11, 9:58am 1310594295

Please leave it as it is! It is so nice to make so much money without working and without paying any tax. I love New Zealand. The paradise for speculators and landlords.

I know that the coming generation will not be able to buy any properties and renters will not be able to pay any increase in rents any more.

But is that my problem. If the politicians of New Zealand do not care about creating a social chaos why should I care.

Please do not touch my capital gain and my tax free profits.I love New Zealand, the last tax haven in the western world.

by LAJ | 14th Jul 11, 10:12am 1310595128

When an investor buys a rental they work out the price they will pay as the NPV of the future income ie the rent and the resale value when they eventually sell (both of which they expect will increase with inflation over the long term) less any expenses (tax, rates, insurance, maintenance etc). This cashflow may initially be negative and offset against other PAYE income but over the term of the investment provides a return that compensates the investor for the extra risk and work involved in holding that investment.

If the tax is increased, to get the same return rents also have to increase to make it viable and rebalance the equation.

At the moment the increase in the property (much of which is due to inflation) is not taxed. This has the effect of providing a rent subsidy for the tenant. If CGT is introduced tenants will start paying a "fair rent" based on the value of the property they are living in. It may take a while to trickle on through but it will happen.

by Nicholas Arrand | 14th Jul 11, 10:18am 1310595522

Landlords always charge rent at the maximum,LAJ, regardless of the equations. How can they not?Do you charge the lesser of 'what the figures' say, or what the market will bear? Rents cannot increase in nominal terms without income rises. And income rises, today, are being consumed, literally, by the household food and energy bills.

by LAJ | 14th Jul 11, 10:47am 1310597277

The "maximum", what the market will bear, supply and demand ... they are all in an equilibrium. If you fiddle with one it will eventually affect the others by the same amount. It may take 10 years but it will happen.

If people can't pay more they will have to live in worse accommodation or fit extra people in. They'll pay one way or another in money or convenience.

Or alternatively the government will step in and build more houses themselves to keep rents down which will cost the taxpayer. Private landlord subsidise rentals at the moment, as the lack of CGT means rents can be cheaper than they would be otherwise. It would cost the government/taxpayer way more to provide the same service as landlords also spend a lot of their own time doing admin, tenant selection etc, for free which the government would have to pay for if they did it themselves.

by Ricardo | 14th Jul 11, 1:41pm 1310607693

Nick Arrand..totally agree..it's nonsensical that property investors think they can just hike rents...rents are related to a tenant's willingness to pay (demand), after they have assessed what properties are available (supply)...a CGT will see investors exit the market (less supply), and the investment properties will be sold to owner occupiers (less demand)...which won't result in higher rents.

Heard Leighton Smith on the radio bleating on that rents will rise...and the problem is that many people will believe this because they don't understand economics.

by Bobby | 14th Jul 11, 10:15am 1310595311

You aint no landlord and you talk rubbish.

by midgetkiwi | 14th Jul 11, 10:15am 1310595300

"If it's not the case, then could someone please tell me why landlords are threatening to raise rents if a capital gains tax is imposed?"

Rental properties are a business, which are about making money. if there is any possible reason, or even a partial reason to make more money or cover losses, then it will be taken.

Say for example a property is bought at the height of a property boom, and the landlord knows he will make a loss when selling up, raising rents "because of the CGT" is a simple way to cut losses.

Just follow the yellow brick road...

by David Whitburn | 14th Jul 11, 10:58am 1310597880

Property investors should be raising their rents if a capital gains tax is imposed, as it is a business decision to risk our capital and (usually) personally guarantee sizeable amounts of debt. We need to cover lost expected earnings from the eventual resale of our properties. Whilst there is an expectation of a capital gain over the long term, it is the income that is very important as this is what we will spend in our retirement years. We can look back at rents in 2001, 1991 and 1981 and see very significant rental rises over time, and I know several property investors who are Auckland Property Investors' Association members in their 70s and one aged 82, that have the regret of not buying more properties decades ago, as the income is fantastic and gives them a retirement where they don't have to worry about power bills, price of fresh fruit and veges etc.

Please remember the last property cycle was fuelled by credit, which kept volumes high, and history has shown volumes lead values (house prices). A Capital Gains Tax hasn't stopped housing bubbles in overseas countries (UK, USA, Spain, Australia) or helped affordability.

Professor Craig Elliffe and Chye Ching Huang stated "rents will likely go up under CGT" in the NZ Herald yesterday. This is correct. They will not go up from day 1, as you cannot raise your rent in periodic tenancies within 180 days and must give 60 days notice of a rent increase, and in the increasingly popular fixed term tenancies rents can be locked in place for a long period of time. There is room for rents to rise. The New Zealand Property Investors' Federation has analyzed that it is $4,200 cheaper to rent than own the median property, so on this basis there is room for rents to continue to rise currently.

David Whitburn - President, Auckland Property Investors' Association

by Landlord | 14th Jul 11, 11:05am 1310598342

Yessssssss. . Let's squeeze that last bit out of them

by Andrew S | 14th Jul 11, 11:07am 1310598449

"The New Zealand Property Investors' Federation has analyzed that it is $4,200 cheaper to rent than own the median property, so on this basis there is room for rents to continue to rise currently."

... or perhaps it's saying that house prices are still too high?

A property investor should already be charging the maximum rent that the market will bear. We'd get to find out how much of an increase the market will allow...

by Kunst | 14th Jul 11, 11:13am 1310598806

To make the introduction of the tax successful - a fair solution needs to be presented to the voters.

Hopefully the capital gain tax, especially on properties will be graded, so speculators can be taxed higher then honest investors.

e.g. Selling properties within one/ two years of purchase should be taxed significant higher, then after ten years.

by Nicholas Arrand | 14th Jul 11, 11:36am 1310600169

Tell me, David Whitburn, where are the tenants are going to get their rent rise money from? AFter all, unlike property owners, they can't get a mortgage to pay the rent. And why is renting already cheaper by $4,200, now, than owning? I'll answer that for you: Because the landlords can't charge any more, otherwise they would!

But let’s suppose rents do try to rise.

The tenant needs more income to pay for it with; he gets a pay rise from his employer to compensate for it; the employer puts up the price of his goods to compensate for it; the RBNZ see price and wage inflation and racks up the OCR to dampen it down – and then the mortgage interest rate rises (along with the compensating rates; insurance and maintenance costs rises) and is passed though to – The Landlord. So it doesn’t matter if you have 1 renter or 100; how do rent rise work in favour of landlords, exactly?

by LAJ | 14th Jul 11, 12:36pm 1310603802

All explained above Nicholas.

by Waripori | 14th Jul 11, 11:10am 1310598621

The taxation arrangements around residential rentals have always been an effective subsidy to tenants from tax payers. This was passed through landlords who were prepared to rent properties for less than their cash expenses because they could get some of this back by offsetting the loss aginst other income and would get an actual cash benefit when a property was sold at capital gain.

The removal of depreciation expense as a tax deduction and the replacement of the LAQC regime has already seen landlords quitting their portfolios and consequent shortages of rental property. Introduction of a capital gains tax will make rental property investment even less attractive and landlords will have no reason to hold properties which are not cash flow positive. The shortage of properties will worsen which will create an environment in which landlords will be able to charge more , and they will need to, particularly if interest rates rise as you all expect.

Rents will rise.

There is always an arguement raised on this site that just because a rental property is sold does not make it disappear and it will still be available as accommodation. The problem with that is that tenants cant magically become property owners. The other problem with it is it assumes the housing stock is somehow frozen in time. In fact houses do disappear from the stock all the time as they become unrepairable, are knocked down so the land can be used for a different purpose or are simply in the wrong place. A former farm labourers cottage in Southland is not much use to someone working in Auckland.

Just to maintain equilibrium we need to build more houses all the time, not even taking population growth into account. I cant see too many investors being prepared to build new rental units with capital gains tax, no depreciation expense and the look through regime in place. We will either have a major housing shortage or the Government will have to build a whole lot of houses.

by FirstHomeBuyer | 14th Jul 11, 11:45am 1310600753

"Introduction of a capital gains tax will make rental property investment even less attractive and landlords will have no reason to hold properties which are not cash flow positive"

Lets see the options the landlord has if a CGT is imposed

1. Sell the property to a tenant ( would reduce the no of tenants in the pool and lower rents)

2. Sell the property to a property investor (won't happen as you say)

3. Knock down the house to use the land for some other purpose ( not likely to happen)

4.Try and charge more rent from tenants (more landlords will end up in the new 39% tax bracket and pay a lot more taxes.)

So all in all , chances are that we will remain in a status quo.

by LAJ | 14th Jul 11, 12:40pm 1310604021

Well said Waripori!

by Les Rudd | 14th Jul 11, 11:50am 1310601058

Good article Alex. Here's another one, by Brian Fallow making similar points:

The case for a tax revolution

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10738286&ref=rss

"It would be impossible to justify the prices rental properties have commanded in recent years solely on the basis of the taxable income stream they could be expected to generate.

Which brings us to the macro-economic case for a capital gains tax that would include investment properties. "

by bob | 14th Jul 11, 12:06pm 1310601969

No Alex.

You are saying that landlords will raise rents to cover future CGT expense. That is illogical - if landlords could raise rents now they would now - they wouldn't wait for a reason.

The arguement is that a CGT will discourage property investment, construction etc. therefore there will be less property available for rent therefore rents will go up.

Landlords will not increase rent to cover a new expense. They will increase rent because they can - even if they never intend to sell.

by philthy | 14th Jul 11, 1:24pm 1310606675

The thing I find surprising is if you are a person with a big mortgage on your own home, you should be all for capital gains tax not against it like some pretty uninformed people are. If capital gains tax or something of the like doesn't come in, all people with mortgages are definitely going to pay higher interest rates, this is a definite fact.

by Billy | 14th Jul 11, 1:40pm 1310607651

landlords quitting their portfolios and consequent shortages of rental property.

I still don't get this reasoning.

Landlord quit by selling to somebody else. So either same supply or one less demand.

by Waripori | 14th Jul 11, 2:00pm 1310608831

These things work themselves out over time Billy. Less new construction, gradual attrition of the housing stock, population increase possibly including cashed up migrants and the existing landlords who want to quit their investments will find buyers without reducing the demand for rentals. It is not that easy ( unfortunately) for New Zealanders to get out of the rental trap, particularly if they have families.

Contributors to this site are always pointing out that renting is better than owning. I hope for their sake that turns out to be true over the next few years if a CGT reduces the supply of rental stock.

Interesting that whenever the Aussies want to stimulate their economy they do something to increase house building because they know it flows through to lots of other activity including furnishings, whiteware etc etc. We are going to see some of that in Christchurch for a while but longer term a further reduction in home building here wont be a good thing.

by Murzalanza | 14th Jul 11, 3:38pm 1310614720

So if we make a capital tax loss we can claim a tax refund...sounds fair. You cant have it all ways. Interesting that capital tax losses have been ignored by those proposing the CGT.

You should also note that when you build a commercial business up you expect to increase the value of the business (and shares) when you sell it. If you dont trade in shares then it is tax free.....

Lets get the full picture on the table.