Capital gains on investment properties have been top of mind for many investors since Labour announced its capital gains tax plan if the party garners enough votes at next year’s general election.
While many will argue over the merits or otherwise of the plan, it raises a fundamental issue regarding investment property – in order to tax capital gains there has to be capital gains to tax, and that’s something that can longer be taken for granted.
Looking at the residential property market, capital losses more likely have been a feature of the market over the last few years rather than capital gains.
Residential property investors tend to buy properties at the cheaper end of the market because they usually provide better returns than more expensive properties.
To get a rough idea of the capital gains that could provide to investors, interest.co.nz tracked the changes to the Real Estate Institute of New Zealand’s lower quartile selling price back to 2004.
In September this year, the REINZ’s lower quartile price was $590,000.
That’s the price point at which 75% of sales are above and 25% are below, so it’s a proxy for the most affordable, and for investors potentially the most lucrative, end of the market.
A year earlier in September 2024 it was $594,000. So a property purchased for the lower quartile price in September last year and resold at the lower quartile price in September this year would have suffered a capital loss of $4000 (-0.7% of the original purchase price).
Going back two years to September 2023 the lower quartile price was $590,000, the same as September this year, so no capital gain there but no loss either.
If you go back three years to September 2022, the lower quartile price was $610,000, which would give a capital loss if it was sold now of $20,000 (-3.3%).
Go back four years to September 2021 and the capital loss would be $12,500 (-2.1%).
It’s not until the property had been held for five years that it would make a capital gain and it’s a reasonable one at $90,000 (18%).
If the property had been held for six years the capital gain would be $170,000, seven years and it would be $210,000, eight years $240,000, nine years $255,000 and 10 years $281,000 and so on.
These figures reinforce the old adage that property investment is a long-term game.
The extraordinary house price inflation and subsequent short term capital gains during the Covid-19 pandemic, as the Reserve Bank forced down interest rates to next to nothing and even briefly removed loan-to-value ratio (LVR) restrictions on mortgage lending, created a false sense among many that high capital gains were the norm and were there for the taking.
Bur hard lessons are now being learned as interest rates and property prices normalised after the bubble, with expected capital gains turned into capital losses for many investors.
That’s created a hangover the market is still dealing with.
The recent downturn in property prices is not the first time investors would have suffered capital losses.
Based on the REINZ’s lower quartile selling prices, a property purchased in 2007 and resold five years later would likely have provided capital gains/losses ranging from -1% to 3% of the original purchase price.
So low or negative returns can be a feature of the market, even over a longer-term.
What all of this tells us is that capital gains cannot be taken for granted.
They will wax and wane with market conditions and the overall economy.
So it follows that the amount of tax that could be collected from capital gains will also fluctuate over time, with its own highs and lows.
The trouble with pinning that tax income against specific expenditure such as free (to the public) doctor’s visits, as Labour plans to do, is that while the total amount of tax collected from capital gains will likely go up and down, the cost of doctor’s visits will likely only head in one direction, and it’s not down.
If there’s a shortfall in funding from capital gains tax, the money will have to come from somewhere else.
The pot of gold at the end of the capital gains rainbow may not be as big as Labour is hoping.
13 Comments
But but...isn't is a god given right to achieve massive capital gains for doing essentially.. nothing?
All while avoiding paying tax to boot. How will the fliperati justify the risk without gains? Will banks be forced to have more "yield please" conversations?
Today's quote is on point.
The market can stay irrational longer than you can stay solvent
If the pan becomes to hot ...🍿 catches 🔥.
PANdemonium.
Isn't the current situation and timing the more reason to introduce capital gains tax now? Likely to be less resistance as no one is making any capital gains now and so it's not going to be a big hit right now.
We are also about to go into the next property cycle so only up from here butnit will allow us to 'ease' into the new normal...?
Isn't the current situation and timing the more reason to introduce capital gains tax now?
It's a Labour proposal and theyre not in power.
I think the underlying element of Greg's article is valid. That capital gains is a call based on a reaction to the massive increases in the past twenty years. And it is smarter to try and overcome the massive swings in property values than tax a previous issue. Capital gains also result in big tax hits at the time of sale - so more lumpy and less effective.
I hate to admit it - but listening to a wider range of commentators about the international issue of income distribution (eg Gary Stevenson) - I wonder if a wealth tax is more sensible. something that is paid annually - rather than a big hit on sale.
Of course we have an effective wealth tax at the moment - it is called rates. It amuses me that the Greens call for a wealth tax but keep saying rates burden should be transfered to Central Government. And rates focus on the bete noir of housing.
I
I wonder if a wealth tax is more sensible. something that is paid annually - rather than a big hit on sale.
If a governments' aim with any sort of asset tax is to have a steady stream of revenue to offset another tax/pay for expenses, this would be a much more reliable method.
Of course we have an effective wealth tax at the moment - it is called rates.
It can't be a wealth tax if some can get rebates on them.
Assumedly those that get said rebates are anyway at the lower end of the wealthy bracket. So, in that regard it could be considered a tax on rich Peter to pay poor Paul.
"... listening to a wider range of commentators about the international issue of income distribution (eg Gary Stevenson) - I wonder if a wealth tax is more sensible. " = Hey, let's just steal what we want from those who have what we don't.
Matthew 26:11 "The poor you will always have with you..." - when the international population has trebled since WW2 & increased a third in the last 25 years. Primarily in countries riven by autocratic regimes, religious zealotry, intolerance, misogyny (resulting in deliberate failures in womens education, access to work & birth control,...).
Romans 14:13-23 "Am I my brother's keeper?" - my brother yes; your brother no.
There is a vast difference in taxing known income from a capital gain and that of taxing the value of assets and property.The latter relies on valuations. Valuations are variable and contestable. Have a scan through the court proceedings after the Canterbury earthquakes series and you will see just how those arguments can rage. The only certain winners from a wealth tax regime will be valuers, accountants and lawyers.
Likewise something like this CGT.
The delusional will think it's there to do something about landlording and affordability, the reality is the government wants a cut of the action.
If they're getting a cut of the action, how incentivized will they be to make houses cheaper?
The bible also has things to say about avarice and usury.
Then again, it also has rules about how to treat your slaves. Note, not that owning slaves is bad, just you should look after them.
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