Westpac says investors need capital gains to justify buying rental properties

Greg, you are incorrect.



Stop peddling lies for the IRD/CGT crowd.

All capital gain is finite. At some point an asset becomes fairly valued and ceases to increase in real terms. 

Assume his 'break even' numbers are for NZ over all?

In auckland, taking one example, net rent after fees = 400, price = 550k, rates insurance = 3k:

Assume own a house outright and have used equity to borrow 100% of purchase price (to avoid difficult considerations of opportunity cost of using deposit to earn $ elsewhere).

$34650 interest exp + 3k = $37650 + 2k maintence = $39650 expenses.

rent income = $20,800.

Net operating loss = $18,850 Gauranteed loss p.a.  = $13,195 loss after tax refund.

Equivalent to 2.4% of purchase price of house.

So long as prices continue to increase by at least 2.4% then they will be breaking even/ make money.

Would have been 3.4% if tax refund was unavailable (eg set up in trust).

So my figures make it look a bit better than Dom's above... Some working of his numbers would be good to look at.

Outside of Auckland example:

Purchase price: 200k.  Net Rent 300. Rates insurance 2700. Maintenence 3k

int exp = $12,600

total exp = $18,300

Total income = $15,600

Net loss: $2700, after tax refund = $1890, or 0.9% of purchase price of house.

So the capital gain needs to be at least 0.9% p.a to break even (barely have to keep up with inflation);

For properties that have not seen any price increases during the same time auck/chch has moved into 'very stretched' territory, I know where I'd feel safer placing my $$.

From my Auckland example, an investor can easily still make money if they want to gamble on price rises of atleast 2.5%.

What it also highlights is the fact they get close to $7k of tax payers money every year to make up for there constant loss. (Likely a lot more once 'paper expenses' are added, eg chattle depreciation, travel expenses for inspections).

Then to rub salt into the wound, they then benefit from tax free capital gains.

Sorry but as a PI myself, I see this as wrong.  Either they plan to make a profit from renting, and hence pay a yearly tax (not get a yearly refund), or they make a loss (get a refund) and in so doing admit they are buying for captial appreciation and hence pay a capital gains tax (assessed after say 5 years of ownership after looking at tax returns and GV's of the property).

Fairs fair, and you shouldn't be able to have it both ways.  I dont buy in auckland as I cant logically justify lossing 18k a year on the hope that already stetched house prices get even more stretched.

How to implement: 

Change the IR3 ( I think it is..) form to include a tick box where before any tax refund is given, the investor must admit that the decision to purchase the property was at least partially based on the prospect of captial appreciation, and in so doing they are now liable under current law to pay a captial gains tax on this property.

Just enforce income taxation on any property you have claimed interest deductions on, even if you have scammed your family home into it some how. The whole "I didn’t meet to make a capital gain" path to avoiding paying any tax must be close to the biggest farce in NZ.

Lets not invent more tax models - just use the existing ones. Most profit making investments attract tax on the profit/income differental. Why is rental housing different. Buy for Y, Sell for X (assumes a profit), difference is Z . Apply your tax rate. Simple.

Rentals that operate on a realistic yield model - no problem. Ones that operate on a twisted leveraging model that is hanging out for its tax free gain for doing sod all...needs change.

Interesting that it was a non event in election run up. Perhaps it was swamped in the noise of affordable housing debate.

Its Balony, not all investors buy property to experience capital gains. Some investors actually feel comfortable paying into an investment thats operating at a loss knowing they will have multiple streams of income in retirement.

Perhaps Westpacs experience is that are providing loans to over-leveraged speculators?

Would this discussion be any different if the Goverment published the Total amount of

(a) Tax foregone on negatively geared rental properties nationwide

(b) Total rent assistance paid to all private landlords

(c) Total Rent assistance paid to domestic landlords

(d) Total Rent assistance paid to foreign owners of private domestic rentals

(e) Rent assistance paid out on negatively geared rental properties

Actually my strategy IS to pay into properties without realising Capital Gains. At 26 years old and owning 4 rental properties without children/dependents my only goal is to have 6 properties paid off giving me income when I hit 65. Having to pay Property managers/insurance/rates etc for the first few years out of my pocket due to being negatively geared is more valuable than "putting money in a bank account". Lets be honest how many Gen Ys have the ability to save that religeously and over that period of time. My strategy works for me, but at the same time more "astute" investors will be looking at different ways to make a buck.