Andrew Courtney says renters pay for their accommodation out of tax-paid income, yet owner-occupiers avoid that, plus they avoid any tax on the gains on their assets. The unfairness won't change unless that tax rules change, he says

Andrew Courtney says renters pay for their accommodation out of tax-paid income, yet owner-occupiers avoid that, plus they avoid any tax on the gains on their assets. The unfairness won't change unless that tax rules change, he says

By Andrew Courtney*

Stories of the impending rental crisis in Wellington have reached fever pitch in recent weeks.

A perfect storm of mismatched supply and demand, short-sighted Government policy (such as the tertiary policy driving more students into the city), and the overarching inability to fix our tax system has led to a situation where rents are predicted to rise around 20% relative to this time last year.

We can finger point and lament poor Government policy (past and present) all we like, unfortunately this will not help us drag our property prices (and along with those, rents) back to affordable levels. Yes, the new Government is barely dipping its toes into their first term, but they have already thrown away their biggest asset in achieving housing affordability having hamstrung their tax working group with a long list of terms that makes any real improvements hard to envisage.

The reality is these continued price hikes are felt most acutely by the poorest in our society and continue to widen the ever-growing inequality that we have. We already have a situation where more New Zealanders than ever are spending over 30% of their income on housing (the percent that is considered the threshold at which housing is considered as being ‘unaffordable’), and as far as we can tell, things are only getting worse.  

What are we doing about it?

Some of the policy changes that we have seen, in an isolated sense and to varying degrees do alleviate some pressures. Building more houses will help, and even bright line tests ensure that at least some of the financial gains from housing speculation are taxed. The problem is that most are incremental fixes and are focused on the symptoms rather than the cause of the long-term housing disequilibrium (we have written about here).

So, what is the answer?

Under our tax system, owner-occupiers of houses do not pay a cent on the effective income they earn each and every year. Yet those working the 9-5, the double shift, or two different jobs, just to make ends meet, pay by far the highest portion of their income to tax. And, once that money is in the bank, they are taxed on the interest gain too. Meanwhile, those who have their wealth in property pay next to nothing and as a result get to enjoy semi-permanent tax-free capital gains because of that tax loophole! The average New Zealand house rose in value $48,142 in 2016. If that was earned through wages, they would be required to pay around $10,000 in tax. Teachers, doctors, lawyers, checkout operators, none can escape being skimmed by the swipe of the tax brush, yet property owner-occupiers are exempt. The worst part is that investing in housing is actually costing our society income – in the form of a crippling drag on productivity that such low-returning investment engenders.

By closing these loopholes in our tax system and making owners of assets (not just those with owner-occupied housing, but all owners of capital assets that continually declare lower than market income) pay their fair share we can lift the tax burden from wage earners. This will allow us to reduce every single New Zealander’s income tax rates by around one third. For the average Kiwi, this works out to be around $3,000 a year in your back pocket. Not only is this great for the vast majority of us, it also means house prices should steady and become more affordable as there is no longer any incentive to bid the prices up against one another – as we scramble to enjoy the tax advantage of ownership. Meanwhile, all that money that was once stored in housing gets funneled back into the productive economy, helping kick start our stagnant wages and productivity levels.

It’s human nature to dislike change, but often the greater evil is to do nothing. Yes, we should build more houses, yes, we need better rental standards, all these things help.

But, unless we address the crux of the issue that is a tax loophole, expect little to change.


Andrew Courtney works on research and policy at The Opportunities Party.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Weather you agree or not, isnt this just a plug for Mr Morgans tax policy?

Agree investment in property is busted and turned into a debt stacking balancing act just for capital gain. Perhaps the rule should be any property ever tied to tax loss offset is perminantly set for capital gain regardless of holding period.

Believe it or not: the Owners pay more than tax.
a. Insurance (with GST) most of which lands up with govt.
b. varying interest on mortgage .
c. Lost interest on the investment(if no mortgage) opportunity cost
d. Rates.
d. Maintenance of the house in case of tenants who may destroy the house without paying anything.

This is a govt and public issue because the govt has the power to develop and give incentives to settlers/homebuilders.
The public because it possibly believes in instant gratification. possibly believes that because it is in an OECD country it is entitled to something without creating wealth.

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Introduce a comprehensive land tax ...

... across the board , no exemptions ... all owners pay a small % annually straight to the tax man ...

Simple & equitable !

That will NEVER happen! Even wacky labour is tiptoeing around the capital gain issue and they won't touch owner occupiers. Renters stop complaining, start saving no matter how small

If there is such a thing as a gene relating to empathy you are surely deficient. While saving for a house you need to rent. As rents rise the chance of owning a house moves further and further away. We have THE least affordable housing relative to wages on the planet. It is causing huge social and economic problems and has to be sorted.

I feel for anyone trying to get ahead financially and I'm the first person to encourage someone. I know it's tough like anything in life. I have been there and made the sacrifices technical term delayed gratification. If that's what you're doing then good on you, it takes time but it's worth it.

Not according to TM2, those who struggle to afford to house themselves and I am including both renting and owning, are just jealous, and nillers. Does anyone know what a niller is btw? Might be a misspelling of Miller, so does he mean if your name is Miller you are jealous?

That will NEVER happen! Even wacky labour is tiptoeing around the capital gain issue and they won't touch owner occupiers. Renters stop complaining, start saving no matter how small

This is wrong. Under a scenario where renters saved every last penny except for the income allocated to shelter, this would be absolutely devastating for the economy. Every cent not spent into the consumer economy has a multiplier effect. Economies like NZ and Australia are more reliant on consumer spending, particularly because of the following:

1. Most developed economies have greater economies of scale (essentially population).

2. NZ and Australia are relatively high-cost economies and businesses rely on high margins to remain in business. Japan has companies like Daiso and the U.S. has Dollar Tree. These businesses cannot exist in NZ because of scale and lack of buying power from the supply side. Our only real answer is The Warehouse, which is expensive relatively and doesn't provide the range of products that really impact high frequency spend for low-income families.

More savings means decreased consumer spending which is ultimately destructive for our economy. Here's a n article from McKinsey that will help you understand the broader concepts.

https://www.mckinsey.com/global-themes/employment-and-growth/the-economi...

Ermmm. Daiso is in NZ. Only the one store so far, Queen Street, awkland

It will be marked up significantly (in relation to per-capita income) compared to the Japanese stores most likely.

That one on Queen Street is nothing like the ones in Japan.

Gummy you’re right
The fact is Aucklands rating system is not equitable from all angles
Check out what % per $100;000 property taxation you pay annually in Boston plus transfer tax upon sale.
Aucklands relative low property taxation on higher priced RE combined with no land transfer tax upon sale means Auckland City will remain perpetually in high debt & be unable to meet service demands like a rapid transit system etc
Sadly this issue will remain a political hot potato so I expect the status quo will largely remain

I’m not so sure it is simple. How do you value the land? Do we all need to get valuations every year? Do improvements count? What about zoning - can I be hit with a massive unexpected tax bill if the council changes zoning? Is flat land worth more than sloping land?

.. every piece of land in private ownership comes under some council rating scheme ... the government can simply use the unimproved value of each title as provided annually by the councils ...

If someone has the good fortune to have their property rezoned , and the capital value jumps consequently , their land-tax bill will rise accordingly the next year ...

... easy peasy ... and unavoidable ... come rain or shine , GFC or boom , the government gets a regular stream of income , which increases annually , as land or section values go up ..

The point that's easy to miss here, and it's an important one, is that a land tax means there is a way of funding infrastructure. This is no small matter. The land value goes up when the infrastructure that services it is improved and this provides a mechanism for that to happen.

My problem is that, as far as I can see, all of the land price increase in Auckland is due to government mismanagement and dereliction of duty, whereby they have reduced the relative value of income for everyone living in Auckland and the rest of these Happy Isles and made them more crowded and dysfunctional to boot. So, on past record is it better to let them get their know it all, greedy, wasteful hands on more streams of dosh?

Roger , the land price increase in Orc Land due to government mismanagement and dereliction of duty , has allowed many land & property owners to get stonkeringly filthy rich ...

... the land tax claws back a small % of that largesse ...

And it's to the benefit of everyone , as it funds the infrastructure that councils can't afford , and allows for PAYE and company tax decreases ...

Win / win !

If that land is not returning or returning only a little, a low asset tax could have a large, disproportionate impact on it's value.

At which point, it absolutely makes sense for young Kiwis to seek and vote for politicians who will reduce income taxes and raise a land value tax instead. It would encourage more money into productive business (good for jobs and incomes) and disincentivise property speculation, making houses more accessible to Kiwis who need homes.

Are you not asking some very intelligent turkeys in government to vote for Christmas? I mean the real government, the one that endures, the Bureaucracy, whose ranks could be considerably thinned by such ideas as a Land Tax and Universal Basic Income. They are a very powerful special interest group, with unparralled access to those nominally in charge. They can be relied upon to find fault as necessary to preserve their class.

All organisations have a culture and will usually do whatever it takes to preserve their privileges.

Thank god for that. Everyone should fight to preserve their privileges. Things are pretty good, they've obviously been doing a bloody good job up until now.

Yes flat land is worth more than sloping. That is already captured in the c.v data

Good breakdown of the philosophy behind a land tax

https://www.youtube.com/watch?v=1pYSsME_h7E

Thanks for posting that video of the LVT ... awesome ... if only we could get each and every one of our parliamentarians to spend 30 minutes watching it ... SIGH !

It’s human nature to dislike change.. LOL

The problem with these suggestions is that it involves a double or triple whammy for property owners. Not only does your equity take a hammering but you have to pay a ton more in taxes while getting less rent as well. You don't have to be a genius to work out how devastating this would be for the local economy hence it ain't going to happen.
Low income workers with families already get significant tax breaks anyway with many effectively paying "next to nothing" in income tax.

GST, of course, does not count as a tax

Not when you are talking about houses and rent, of course.

The problem with these suggestions is that it involves a double or triple whammy for property owners. Not only does your equity take a hammering but you have to pay a ton more in taxes while getting less rent as well. You don't have to be a genius to work out how devastating this would be for the local economy hence it ain't going to happen.

Yes, you're somewhat correct. However, the propping up of planned economics and asset bubbles is arguably worse in the long run. That is why Japan is still hungover from their bubble. The govt fiddled and fumbled and were not decisive enough because they were concerned about the short-term pain and deleveraging. Japan's problem was less about income inequality, but at the end of the day, the crux of the problem came down on the low- to mid-income households and change was necessary.

Zach
Sorry but you are undertaxed on your leafy suburb central Auckland RE

Land tax is also how landbanks were originally broken up and land gotten into the hands of NZ owner occupiers. It's probably natural that every generation will want to benefit from such effects when they're young then be rid of such effects when they're older and have land in their ownership instead.

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there should be no changes for owner occupiers - unless its some additional rewards for being prudent and investing in their future - some minor changes for investors and landlords or more enforcing of the current tax rules on flipping is ok- but we should not be penalising hard working people for making the choice to own their homes - this is a choice that already comes with huge sacrifices to save the deposits required and the discipline to not only pay their mortgages but also the existing TAXES of owing a home - rates and of course maintenance costs - Buying and owning a home is not an easy ride - its bloody hard work - and involves years of sacrifice at the start to get over the line - and not just missing the odd latte or avocado salad - it means chosing not to have that overseas holiday - or the latest i phone/ 1000 inch tv - brand new car - expensive meals and clothes - spending time maintaining the property -

Owner occupiers don't benefit from capital gains - as they have to buy and sell in the same market - and therefore never realise these gains

Owner occupiers save the country money - as their actions in buying a property during their working life- means they do not require state/ taxpayers support fro renting after they retire

Its pure and simple jealousy to target home owners - how about doubling GST on overseas travel, electronic goods - V8 cars - dining out over $30 a head ? Outrage i hear its already taxed - well so was all the money homeowners worked hard to earn to pay their mortgage and then it was taxed again with rates -

What part of the owner occupiers pay their mortgages with taxed income in the same way renters pay their rent with taxed income does the author not get

whilst owning may be impossible for some people - for a large number of renters its a choice as saving and choosing to spend money on property not lifestyle is either too difficult or not an attractive lifestyle

"Owner occupiers don't benefit from capital gains - as they have to buy and sell in the same market - and therefore never realise these gains"

If this was true owner occupiers shouldn't care if house prices fell...in fact they should favor falling prices as the difference between their existing home and an upgrade would reduce. The evidence would suggest the vast majority of owner occupiers are obsessed with propping up the market to protect their paper wealth.

Indeed the equity in the family home is very important. Most Aucklanders would consider a worse case scenario of selling up in Auckland when they retire and moving to a cheaper place somewhere in the regions. Even moving to a retirement home in Auckland should leave money left over for a better quality of life.

Agree. If you have worked hard and have little debt you wouldnt care. Those with crazy leverage stacking debt to avoid income tax would likely be ruined. In essence the distruction of the ponzi. Govt has a mandate...get on with it.

Absolutely spot on Kpnuts,

There is nothing in this Blaa,Blaa coming every so often from this losers party that meets any comment sense ... manipulation and emotional blackmail is what they are good at preying on the dont have by promising them heaven ...

What they are proposing is a rule of looters, they don't care how asset owners got there and how much tax they paid to get there and the amount of taxes they still pay because of this ownership - all they can think of is that we should change the rules to get these immoral criminals to pay us back and owning a house or an asset should come with additional price paid back for the privilege !! -- nothing different than a Mafia style rule.

The Guest, is another mouthpiece of GM eccentric ideas where they were rejected elsewhere in the world .... a load of rubbish based on assumptions of how human behavior would react when put under stress and squeezed in a corner "resist change" ... and should that fail , they would force their way and ideology through like any stupid dictatorship ..
They forgot that human nature also has defensive genes and designed to survive and counter all sorts of preditors and fools along his journey. somewhere along their rants they forget that people have brains and unlike sheep they resist and counter attack to preserve their wellbeing ..

Jealousy is the only drive to such hippocratic calls - no wonder why only 2% of us thought they were worth listening to .....

The Guest, is another mouthpiece of GM eccentric ideas where they were rejected elsewhere in the world

Nonsense. NZ has very generous tax breaks on property, particularly among countries in the developed world. Most countries have never had to deal with a situation like that of NZ. Of course, if you can show examples, please do. You won't because you can't.

I heard that GM avoids personal income tax. Like Donald Trump "paying no tax makes me smart " Gareth boasts about paying little tax on his gigantic income and asset base. Please explain why he gets up and preaches all his hypocritical nonsense

Well, please do us all a favour and show me how NZ owners get more generous tax breaks than others while sitting on a property ??

It sounds like your idea of comon sense is whatever suits you. A capital gains tax would be a tax on extra money over and above the money you have invested and paid tax on. The original money is not retaxed. Hardly unfair.
A land tax is different and you may have a point in that - but it is easily avoidable by investing in something other than property.

Kpnuts, I think you miss the point the article is trying to explain. It is not talking about taxing houses but the land the house or what ever it is sits on. A piece of LAND, developed or not, empty or occupied, owned of rented, has the same value that is therefore taxed. The owner of the land has the choice to develop it within the rules or leave it non productive and just pay the government the fee to be its caretaker.

The article encourages a society where Tax is sourced from something that is there not something that can be shown not to be there and therefore avoided. Imagine if the Government said form 1st Jan 2019 the only tax will be a land tax. GST, payroll tax, interest earned tax etc all gone. Would you remain the caretaker of the said land or lands you have or would you sell and use the money for something else like an overseas trip?

Don’t consumers and households pay for everything from tax paid income? And then pay GST on top.
And businesses, farms and corporations can use all kinds of clever mechanisms to legally minimise tax, including business owners achieving fringe benefits such as car use, expenses crossovers, etc.

kpnuts -- you are spot on. for some reason anyone who works hard, sacrifices here and there and ends up self supporting and then SUCCEEDS >>>>> i do not know why a majority of commentators here dislike this method of attaining success. if you can afford something and want to buy it, by all means go ahead. if not save some, borrow some and then buy as anything else will lead to GFC all over again.

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Rental housing is a business and should be taxed as such, including the Capital Gains. nuff said.

Labour..please note.

How about share investments? Tax these too?

They already are, as are any dividend payments.

not when you sell your share for price increases. there is a difference between selling your share vs getting dividend.

A capital gains tax can be a bit messy and unfair. Owner occupiers often spent large amounts of money improving their properties which in the homes value only shows up as a free capital gain. For it to be fair they should be allowed to deduct this expense. Also inflation is another obvious influence on the value that should not be taxed as it is not real value.
A asset or wealth tax is enivitable in Nz , but must be fairer and less messy ideas than a capital gains tax.

Rising rents are due to an imbalance between supply and demand, caused by excess immigration and houses being taken out of the rental pool for short-stay tourist accommodation. It really is that simple.

I disagree. The supply and demand equation is an overly simplistic view of things, even though I am not saying that its drivers are benign.The author's POV is that how policy impacts human behavior is also very important. Now consider that with a monetary / banking system that is able to create debt for houses (and corresponding assets on their behalf) at will. What that actually means is that you can increase the cost of housing like rents, regardless of the balanced between supply and demand.

Geez, why are there so many jealous people,in this country?
Home owners are people who have made an effort to have a better life than those that rent!!!
It is still extremely possible to own property in NZ and if you want to continue to hammer property owners, then you are NILLERS!

What the hell is a niller?

Pretty sure I've never nilled in my life.

Anybody who has nilled, please explain what it is.

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They are not jelous. Thats emotive trolling.

They are just disapointed how NZ has changed into a debt stacking game to pump bank profits all at the expense of the average man. People are sick of thie kids and future grand kids exporting themselves to avoid the shackles of stupid rents driven by the debt ponzi. Tax treatment for property has simply been taken advantage of to far, and partly this is why there is a new Govt.

TM2 your a professional investor, Im sure you will have prudent debt practices so it shouldnt be a big deal?

Ah the old jealousy argument, definitely one of the more stupid ones. I could argue that every day I go to work I am making an effort to have a better life so I shouldn’t be taxed.
It isn’t jealousy to expect all income to be taxed fairly.

Let's assume, I bought a house for 300k in a town. Prices went up and now it's 500k.

Now I want to move to another town, sell this house and buy a similar house.

But I cannot really do this. I will need to pay the capital gain tax and I will have just about 420k. I will be able to buy a worse house only. Is it really fair?

Houses are not only assets and should be considered differently.

Your house that is your home should be considered differently and every time a capital gains tax has been mooted here, it has been.

Which immediately becomes a distorting rort as wealthy economically inactive individuals invest in expensive properties in the middle of cities just to avoid the Capital Gains Tax

You have to include everything.

Point, but I was just pointing out how it has been every time a capital gains tax has been suggested by pollies.

Another ignoramus thinks tax is the answer, when ÁLL the evidence in the world proves beyond any doubt whatsoever that a capital gains tax has zero impact on house prices and rents. In the US interest payments are tax deductable and have been for a very long time, yet somehow they manage to have areas with very affordable housing.
IF there is a problem, then it has more to do with every man and his dog being allowed to have an opinion and a say on what his neighbour can and can't do. Too many moaning brchs, and too much legislation that treats every person like a retard and every situation as an opportunity to enforce control.

Thats true. Shouldnt effect yield investors much. Those that just stacked debt for free gains...probably will.

Who cares what affect it has on property prices.
It is simply unfair for a property investor to make tons of money and not pay tax while a hard working income earner does. It needs to be fixed.

I've seen the articles about a shortage of rentals in Wellington. This one recently;
http://www.radionz.co.nz/news/national/349386/wellington-rental-crisis-a...

However, I don't understand it at all. The article states that there were only 195 available properties to rent in Wellington. However trademe has listed between 750-800 for the last 2 weeks of Jan and currently has 767 available (just Wellington, i'm excluding the wider area). There are 33 properties available in my suburb. The number isn't rapidly decreasingly at any point, this has been over the prime student letting time, how is this indicative of a shortage?

What gives?

Might pay to email the journos and ask exactly what their search criteria were. Wellington rental crisis is standard story for January and has been for years.

I did but didn't get a response. I watch the Wellington market closely, and I am beginning to feel like the media choose to report on the alleged shortage in Wellington at the same time every year, simply for the sake of dramatic headlines. Victoria Term 1 has started already (end of Jan) but Massey term 1 doesn't start till end of Feb, so wouldn't the shortage still be apparent if it were real?

I mean, the entire housing market happens to be quiet in early Jan. Indeed, the entire of Wellington goes a bit quiet at the beginning of Jan. It's like the city empties. We had to come back early from our holiday because our youngest was poorly, which was a bummer, but we did enjoy zero traffic and how quiet the city was then.

I am just not convinced that there even is a shortage of rental properties in Wellington. These articles always appear to contain inaccurate figures and then a few interviews with tenants who have struggled to find somewhere and/or and RE agents opinion.

I'm totally willing to be wrong of course, but i'd like to see the actual data on the alleged Wellington rental shortage, rather than rely on articles like the one that I linked to above. If it were true that there was only 195 properties to rent throughout Wtgn in January, then sure, crisis.... but this just simply isn't anywhere near the case.

Sorry about your holiday being interrupted, and hope the kiddo is feeling better. But it is good in Wellington over that time, water is cold, but no crowds.

Think the media got their arms twisted by the real estate/property managers cartel to whip up some fake urgency? There's been a lot of politically-motivated speculation on expansion of public service and thousands of extra students, but neither of those really stands up to examination. Nothing's happened yet with changes to public service, and I've yet to be convinced that a free year will bring in all that many more students than were planning to start anyway.

Kakapo, I am deeply cynical about MSM at the best of times. Herald/stuff etc articles frequently have spelling mistakes (so may not even be proof read anymore I assume?), seemingly unchallenged inaccuracies and very little of substance content wise. Doesn't lend itself to placing any faith that journalistic integrity, pride or commitment to the truth exists within NZ MSM anymore. The culture is one of headline grabbing, trivial, click bait fluff. However the fact that *anyone* still values or is influenced by these articles is concerning.

If it's written by Anne Gibson, for instance, I expect it to be some thinly glazed lube for the property market but I assume a great many people believe this is objective journalism?

And what about this? Have NZ Herald simply regurgitated Bayley's press release?

http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1198...

Anyway, as to the Wtgn rental market.... I would assume that lower immigration and lower foreign student numbers would mitigate some of the prophesied tidal wave fee-free students anyway.

If someone can explain to me how, from the last 2 weeks of Jan, there have been 750+ properties to rent, that this number has not reduced into Feb but simultaneously a rental shortage apparently exists, then i'm all ears.

You're absolutely right. They're all terrible, but NZ Herald really stands out as straight-up propaganda, with no comments to challenge or contradict. Although the comments in Stuff are mostly crazypants.

TradeMe don't update their listings for weeks. If you enquire about a listed property, most of them will already be tenanted. It comes down to the way they advertise and how they charge. You pay a set amount for the advert over say 4 weeks, which means it will be listed for 4 weeks even if you find a tenant on day 4. So this explains why TradeMe is showing a few hundred more available properties when in reality only a fraction are still available.

Anyone else getting a whiff of fear every time they open up articles like this?

The problem with most of the arguments posted here is they assume everything is a cost plus exercise and that every cost added into the system, no matter how unjustified, either increases the value of the property AND justifies you being able to increase the rents to achieve the needed return.

It is easy enough to work out what rents should be based on persons present income, there are economic models for this, although the definitions they use have been captured by the vested interests. IE the use of household income used to mean a single person earner, then a double person earner and now whole families are having to shack up to use their combined income to pay mortgages/rent. This highly distorts the multiple.

Also since, in a real balanced free market, there is an inverse correlation between yield and capital, then a rental property based on fair rate of return would have very little capital growth except for inflation and value added improvements.

However even if you use the present inflated household income, and then allow the higher net return needed due to lack of further non-value added capital gains then you will automatically have a value that is less than what the properties are presently selling for in our restricted market.

From the new real value, deduct all the costs like building, development margins, consenting , and any other costs like any taxable costs, and what is left over is what the land is worth, which will still be worth more than the lands next best economic value ie its rural value.

The point here is, any of the extra costs mentioned, should not be added to the price of the property, or used to increase rents, BUT come off the price of the land.

But with our restrictive land polices in NZ, we have been conditioned to a cost plus process, with the restrictive cost of land being the first cost added, when it should be the last cost determined, as it used to be.

For a the last 10-15 years, Fair weekly rents have been calculated ( perceived) as the total interest portion of the mortgage on that house divided by 52 or 50. and that would be around 5% more or less depending on areas in big cities etc ....

Roughly speaking, an Auckland rental with 600K mortgage would rent for about $600pw ( as some use 50 weeks instead of 52). However, the value of the house could be 800-900K ..... Most if not all rentals would have fixed interest only loans, hence that $600k mortgage could stay the same for the life of the rental ownership.

Usually, rent increases by the rate of CPI and or the extra charges in maintenance, rates, and insurance costs or additional taxes elsewhere which need to be passed to the user of the property .. these are usually 2,3, or 4% pa .( maybe a bit more if there was huge jump in interest rates and that will lag by a year or two) ... Most landlords do not increase the rent in direct proportion to increase of property value as that is irrelevant to their costs.

Huge rent increases happen when properties change hand and new owners have a different mortgage amount to cover - hence we see lower yield for new landlords as they will be limited by tenant ability to pay the perceived rents and existing market rents in the area ......

The general claim that rents jumped 20 -30% YoY in a certain town is hardly believable ... it could be few new houses or anecdotal examples --- unless the whole area is so starved off rental stock dictating such a rise ..or catching up with overdue and long low rental times.

For a the last 10-15 years, Fair weekly rents have been calculated ( perceived) as the total interest portion of the mortgage on that house divided by 52 or 50. and that would be around 5% more or less depending on areas in big cities etc ....

Which basically means that the cost of shelter (rent) has been dictated by the banks' ability to lend money into existence as an independent variable of house prices.

Furthermore, the CPI is not an independent driver of rents. More accurately, the ability to borrow is.

Sorry, you are not making any sense ... banks have nothing to do with this ....

Any property investor may borrow money from anywhere ( not necessarily a bank) to buy an investment property, whether the deposit is 20% or 40% is beside the point too - the basis for rent calculation remains the same : it should at least pay for the interest component of ANY mortgage.

No one cares if CPI is independent or otherwise, it is a consistent annual indicator of appreciation ( or depreciation ) of the basic costs of living.

here is some bedtime reading you might enjoy:
https://www.crockers.co.nz/research-hub/auckland-rental-prices-4-year-co...

R=I/V with I being income, not interest rate.

And of course the present owners return is based on what he paid at the time he paid, but on selling the new present yield is capitalized and taken by the old owner as capital gain.

And it not just about a shortage of rental housing but a shortage of affordable rental housing, which is due to the price of land.

If land was more affordable as it should be, and only increased at the rate of inflation and improvements with value added costs, then a higher yield can be charged to give the weighted average of capital growth (or lack of) and income. This would mean cheaper rents but a better return for landlords. Also present deposit amounts for purchasers would mean a lower LVR, lessening the risk for both them and the lending institution.

Dale, I really hope that you know what you are talking about and not just fogging everyone's mind with your assumptions and complicated theory. Steering the issue into other directions loses the reader as to how rents are practically calculated and why the are at these levels now and how they got here. Land ,LVR and deposit amounts have little to do with it , if any effect at all !! ...

The absolute majority of rent rises work on the simple yield calculation I mentioned above limited by tenant affordability in some areas , here is a real life example from one of the biggest property managers in Auckland :

https://www.crockers.co.nz/research-hub/auckland-rental-prices-4-year-co...

Talk and speculation is cheap - the proof is in numbers and how markets work !!

Hi Eco Bird.

The assumptions you are making, as you state in a post further up, are all about how things have been in the last 10 to 15 years, which has lead to why we have the imbalances we have today.

And 'how the market works' is not some universal true. All you can claim is this is how the market has worked in the last 10 to 15 years in NZ, ie totally dysfunctional and is not indicative of how property markets should operate, or use to operate in NZ.

Of course using the mortgage amount rather than what you paid for the property, makes the return look better, but 'I' in R(yield) = I/V has always meant income rather than interest rate.

You seem to have missed the points I was making about how the market use to work, should work for for the benefit of everyone, and will work if the present Govt. does what they say they would do (although I doubt they will).

Any investor should be stress testing their portfolio to show what would happen with different combinations and permutations, if little to no capital growth or if prices drop, rents flatten or go down, interest rates go up, or when you refinance you can only get P&I, not IO.

If you want to get a feel for what is likely, check out the various Aussie cities and what their investors are starting to go through.

And the price of land has everything to do with it.

What about the giant tax loop hole that exists because renters are exempt from paying GST on their rent. I had to pay a GST inclusive price when I bought my house, so why should renters get away without paying their fair share of GST? The Labour tax working group should look into it.

How is it, that you paid GST when you purchased your house? The only time GST applies to property is when you are building, because builders are a business and therefore add GST on top of their labour and materials. If you contracted an architect, then yes GST applies too. But when buying an existing home, GST does not apply.

Rents in NZ are very affordable to most families nowadays.
In Auckland the rental returns are less than the cost that landlords are paying and therefore the landlords are subsidising the tenants rent!

On that basis is it not logical that landlords who are subsidising should not receive capital gains or why would you bother?

Other parts of NZ landlords with sufficient number of properties are able to be positively geared and also provide good quality accommodation at a reasonable cost, or why wouldn’t tenants prefer to buy their own home?

Yes I know not everyone has a deposit but It is not that hard to save for one, but you need to use your head on Your shoulders.

You need both partners working and not to have children until you can financially afford them.

Not that difficult but many find that it is and don’t bother ever owning!

It is not for everyone but I can tell you that property ownership is not a god given right that everyone wants!

Rents in NZ are very affordable to most families nowadays.....It is not for everyone but I can tell you that property ownership is not a god given right that everyone wants!

Regressing into troll mode does really have anything to add to what is an interesting POV provided by interest.co.nz. But what I will say is that the level of critical thought published by the MSM is barely above the level of of internet trolling. And then you have the likes of The Hosk who takes it to a whole new level.

I would not consider stating Fact to be trolling.
If you need to be renting then it is up to you to do what is required to pay the rent!
Whether it be both partners in a relationship to be working or if you are single then you share a house!
Far too many in this country just think that they are owed a living!
Average rent is very affordable when 2 parties are working!

“Average rent is very affordable when 2 parties are working!”
Yes, I think you are right – except – in the last year we have lost 2 very capable staff to the provinces – on the premise that in each case, they wanted to start a family and could not afford to do so in Auckland.
We lost 2 good staff members, they are now living where they don’t necessarily want to be and to be honest, I struggle to accept this as the new normal.
This is not the NZ I was born in, raised in and grew up in – I know we can do better than this.

It was more affordable for one person five years ago, 10 years ago and 20 years ago.

But hey now you have your piece its better to have more unaffordable properties and have two people paying. Where does it end, 10 people buying a property.

People need to lower expectations, batten down the hatches and not purchase property until this mess bottoms out. If all people of NZ have little fear prices will not sky rocket because foreign buyers with tonnes of money are no longer investing in NZ properties, they can make better decisions. Let property prices meet the local market.

What about people with kids, don't have kids make sure you can afford property prices. Its a sad country NZ is becoming. We use to be a community based country now its all but ME.

I would not consider stating Fact to be trolling.
If you need to be renting then it is up to you to do what is required to pay the rent!
Whether it be both partners in a relationship to be working or if you are single then you share a house!
Far too many in this country just think that they are owed a living!
Average rent is very affordable when 2 parties are working!

If you want to state "facts", use quantitative data that prove or support the fact. Saying that that renting a property requires an obligation to exchange to pay rent is an "irrelevant fact." Furthermore, if you want to say that "rents are affordable", use a relevant benchmark to prove the fact.

If you can do the above, you can rise above trolling. Simple stuff.

What happens to the business model when the landlord (and possibly taxpayer) is subsidising the tenants rent and for whatever reason, there is not an offsetting capital gain.
Has the landlord simply made a poor business decision at some point which has now crystallised, and either soldiers on or exits – deciding that in the end, they can’t be bothered.
In the short to medium term a constant reliance on capital gains can sometimes prove frustrating, long term the lack of capital gain would suggest something is seriously amiss.
Apart from that, I think it is safe to assume that some form of capital gains tax is coming, it’s basically here already. There is much talk of it being hard to implement or manage – well, Australia and the US seemed to have manged it – I struggle to see that NZ could not do the same. Whatever, it will not involve the family home – in the US, rent your home out, but come back and live in it for 2 years – it’s exempt.
Residential property isn’t the only game in town – stay with it but modify your expectations – you’ll still probably win, it’s just the “house” is going to keep a little more.

Personally don’t know why landlords want to subsidise tenants housing costs by being negatively geared!
However, many do rely on capital gains and that is their perogative and shouldn’t be mocked by people who rent, as they are being provided with shelter!
The coalition will bring in the 5 year brightline which won’t really bring in a hell of a lot money for the country and anyone that knows about capital gains tax, are well aware that all it does is increases house values!

I would suggest a 5 year brightline over the last few years, if implemented, would have brought in a considerable sum – possibly an opportunity lost some would suggest.
I would take issue with “anyone that knows about capital gains tax, are well aware that all it does is increases house values!”
My only experience with capital gains tax is Australia and the US – and in amongst my fiddling and faddling a capital gains tax failed to ward off some fairly dramatic declines in value.
Forgive me for being a little be presumptuous, but if all that capital gains tax did was increase house values, I would imagine many property investors would be welcoming it with open arms and demanding its immediate implementation.

Custard, where in Australasia over the past 5 years have owners who have held property 5 years are financially worse off????
Tax anything and prices go up!!
Anyway the property doomed on here are saying that prices are going to collapse so what is the point of a capital gains tax.
True investors tend to hold their properties for more than 5 years anyway, so the only ones that will pay are speculators and they will still be doing very well.
I will guarantee that any capital gains tax will not drop prices and will just put the prices further out of reach of first home buyers and force up rents!

Not really talking just the last 5 years - certainly the Gold Coast in the early 90's and from memory Sydney in the late 70's or early 80's - although perhaps Australia didn't have a CGT back then.
I don't think the intention of a CGT implementation is to simply "drop prices" - that is not it's purpose, however it could do as a by-product if there was some sort of corresponding reduction in short term speculative behaviour - but I imagine there's no real guarantee there.

Westcoast property price deflation: 10%. CPI increase 2%. Question: what's my refund for the tax year?

Places like the coast are the last to feel the effects of an upturn and the first to feel the effects of a downturn.

And this is why a Capital Gains Tax doesn't work and is expensive to monitor. As an owner occupier, will I be taxed on the theory that my house has increased in value because property has been pumped up by speculators? I have no interest in my property to increase in value further. Who wants to pay more for insurance, rates and maintenance costs based on an over-inflated false value? And how would I make a claim back from tax paid on the unrealised increase in value once that same property deflates? Who pays for my loss? IRD? Government through clawbacks? What a mess! Also, if CGT is applied, it will cover all investments including shares and it will pretty much kill off our sharemarket. CGT would be very bad for our economy and John Key was right when he said it doesn't work.

Put all residential property owners on the same tax base.
Investors for a start should not be able to deduct interest payments for tax purposes.
If every investor had to consider owning every property outright to get a good income there would be an immediate revaluation of investments. They would be on a more even position with both owner occupiers and investors in other areas like shares.
Longer term all property prices would even out.

Basel, that is a ridiculous thing to say in regards to not being able to claim interest costs!
They are a legitimate expensecin owning the house
If we can’t claim interest costs then the investors shouldn’t have to pay tax as you can’t pay interest and tax as it is a ridiculous double whammy.
Same basis business,s shouldn’t be able to claim back wages costs!

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Actually, it is more likely than you may realise. You obviously haven't heard of the IRD's Thin Capitalisation Rules that they have been applying to international companies for decades.

Basically those rules prevent companies loading their subsidiaries up with intercompany debt rather than equity so that they get a boosted interest deduction, effectively minimising their income tax payable.

It would only be a short step for the IRD to apply that same rationale and basis to leveraged property investors. They have all the capability in place. Basically businesses funded with excessive debt (more than 40% is often the guideline for normal businesses) could not deduct the interest on the excess portion.

Income tax is on profits. But the IRD is quite up to identifying artificial, manipulated low profit calculations. (Excessive leverage is a way to manipulate taxable profits.)

Does IRD exercise the rules rigorously and impose penalties?

Public, but dated assertions suggest not.

As a regulated utility, Wellington Network's returns are controlled by the Commerce Commission, so there was little scope for the new owner to make more money from it than Vector could.

At the time, CKI's managing director Kam Hing Lam said: "Upon completion of the transaction, Wellington Electricity Distribution Network Ltd will bring in immediate profit contribution to CKI."

Oddly enough, since CKI took it over Wellington Network has made nothing but losses.

Of course, those losses are not real and CKI did not pay $785m for a duffer.

Wellington Network is in fact highly profitable, with an earnings margin consistently around 30 per cent before interest and tax. What drags it into "loss" is interest on its huge debts.

Under CKI's ownership, Wellington Network's debt has consistently been around 80 per cent of its total assets. This contrasts with typical corporate behaviour since the financial crisis of 2008, whereby gearing is kept below 50 per cent and often 40 per cent.

Of the network's debt, around $300m was due to related parties at a premium interest rate. In 2012, for example, the related-party debt cost 12.5 per cent, compared to the commercial rate of 6.97 per cent.

In cash terms that worked out at $54m paid in related-party interest and $31m in bank interest.

The interest payments greatly exceeded Wellington Network's earnings before interest and tax, producing a loss - and a corresponding tax benefit - every year until 2013. In the last six years, the only tax expense recorded by Wellington Network was $2.2m in the year to December. On a cash basis, it appears that the business paid no actual tax at all. Read more

THEMAN2, perhaps not so far fetched as you might think.....this is exactly what is happening in the UK from this year. They are withdrawing mortgage interest as an allowable expense, withdrawing 25% per year over the next 4 years till no interest expense is allowed. Of course you're still tax liable, so it's the double whammy.

https://www.gov.uk/government/news/changes-to-tax-relief-for-residential...

I suggest you look at those countries where it is impossible to borrow from the bank to buy property. I have recently been in Argentina. People have to pay cash to buy. Not a happy place.

That would fix house prices in NZ. Unless you are tapping super low interest rated from overseas.

I've been to a few open homes in last one month and all the agents acknowledge that houses aren't selling at the current CV, in fact, about 10-15% below CV. Just one year ago, houses were selling at about 20-30% above CV. I don't know where it'd go from here. Unfortunately, prices are so high, we can't afford even at these discounted prices.

You are right. Tax is a terrible evil. It has been a problem for thousands of years. But are you really serious. You write. "By closing these loopholes in our tax system and making owners of assets (not just those with owner-occupied housing, but all owners of capital assets that continually declare lower than market income) pay their fair share we can lift the tax burden from wage earners." Governments around the world have always made their working citizens pay taxes and fight their wars. So lets increase the tax on everyone who owns a car, boat, tractor, fishing net, fruit tree, lathe or other machinery. Have you not noticed no government around the world is fair with tax. The only way to avoid tax is death.

I don't get the argument being made in relation to owner occupied property.

I pay my mortgage and saved my deposit with money that has been as taxed as much as an money a renter pays - PAYE is standard on a salary, I just choose/have the oppurtunity to put mine towards home ownership.

I pay for all maintenance costs on my house and do not receive any sort of rebate back from the tax man when I paint or add a fence - wouldn't that then would put the renter ahead as they don't have to cover these costs? Or at least they're no worse off because they pay these costs in their rent.

The only difference I can see is that IF I sell the house I may make more back than I paid for it (with my already taxed dollars). If I have to pay a capital gains tax on that profit, does the TOP policy then allow me to claim back all the costs associated with the properties upkeep, can I claim back all the interest?

Will TOP also want to tax other owned assets like cars that advantage the owner and disadvantage those who use Uber/taxis?

Totally agree, the increase in value is not realised until the property is sold. Maintenance costs have to be paid in addition to mortgage payments throughout the period of ownership. You should not tax notional gains, as they may never be acually fully realised into actual cash.

Totally agree, the increase in value is not realised until the property is sold. Maintenance costs have to be paid in addition to mortgage payments throughout the period of ownership. You should not tax notional gains, as they may never be acually fully realised into actual cash.