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Treasury looked at imposing 1% tax on capital value of Auckland rental property ahead of Budget 2015; also looked at mortgage interest levy and disallowing interest as a tax deduction for landlords

Treasury looked at imposing 1% tax on capital value of Auckland rental property ahead of Budget 2015; also looked at mortgage interest levy and disallowing interest as a tax deduction for landlords

By Bernard Hickey

Treasury was so concerned about Auckland's house price explosion in the lead up to the May 21 Budget that it looked at other options for slowing demand from rental property investors in the region.

The options studied but not adopted included a 1% per year tax on the capital value of rental properties, a mortgage interest levy and removing the ability for landlords to claim half their interest costs for tax purposes.

Treasury papers for Budget 2015 showed it advised that such measures could be the shock that reset unrealistic investor expectations and led to significant price falls in Auckland.

It also worried that the cumulative effect of imposing such a levy or removing the ability to claim interest costs for tax purposes in tandem with the Reserve Bank's new LVR restrictions targeted at Auckland rental property investors "may be undesirable if it results in overkill."

But in the end of the Government chose only to impose a two year 'bright line' test for taxing capital gains as income to rental property investors and to force resident and non-resident investors to declare their IRD numbers to Land and Information New Zealand.

Treasury said Auckland house prices could be judged to be "fair value" if interest rates remained near current record lows, migration rates remained near current record highs and housing supply issues were not resolved.

"If we assume that migration trends reverse or cheaper supply is gradually brought on stream or interest rates rise significantly, current prices look less reasonable," Treasury said.

It then listed other indicators "that the Auckland property market exhibits some features of unrealistic expectations", including:

1. the highest ever price/rent ratio in history in New Zealand,

2. the highest ever price/income ratio in history in New Zealand,

3. media stories of investors making very large returns from holding property,

4. media stories of first home buyers "desperate" not to miss out at an auction and see prices move higher, and therefore bidding "whatever it takes,",

5. anecdotal stories of foreign buyers buying multiple properties in short time frames with very little due diligence,

6. international and domestic evidence that most housing investors simply extrapolate recent returns in the expectations of future returns, and very high recent returns in Auckland.

Treasury said there were "bubble elements" driving unrealistic expectations for prices in Auckland.

"Our overall conclusion is that there could be a material impact from the announcements to the extent that unreasonable expectations are reset," it said.

Give the money to Auckland Council?

Treasury also discussed how the revenues from a 1% levy on rental properties could be collected and distributed, including the possibility the Auckland Council could manage the collections and retain some of the funds.

"If a levy is imposed on Aucklanders, it may be appropriate for the revenue to be available to the Auckland Council," it said, adding that if these revenues were 'hypothecated' in the same way as road user levies are directed to road building and maintenance, these levies should be directed to growth infrastructure for housing.

Treasury said the various measures suggested, including the levies and bright line test, could discourage investor activity financing new builds of apartments, but it concluded any impact on supply would be minor as prices were already high enough to encourage building.

'Downward pressure on prices'

Elsewhere in the documents, Treasury noted that the 'bright line' test and forcing all investors to supply their tax and personal details was "likely to place downward pressure on prices."

"We expect that part of the impact will manifest through offshore purchasers being concerned that their purchase will be reported to their domestic tax authority," Treasury said, adding the measure would strongly support New Zealand's international obligations to prevent money laundering.

Also in support of the two year 'bright line' test, Treasury pointed to rapid churn of of new developments in Auckland, saying 59% of all new properties built in Auckland between 2009 and 2013 were onsold during that time and 29% of all new developments in Northern Auckland were traded within three months.

How to collect a mortgage levy and what it might do to prices

Treasury also looked at the mechanics of collecting a mortgage interest levy (possibly by banks) and how much interest could be declared unavailable as an expense for tax purposes (50%).

It said a 2% levy on all the principal borrowed could be applied for three years, with a temporary exemption for new builds.

The 2% levy could reduce a rental property's value as an investment to a 70% geared investor by 4%, while a 50% reduction in interest deductibility would reduce the property's value by 19%.

Given investors made up about 28% of buyers, Treasury estimated the 2% levy could reduce market prices by 1.1% and the 50% interest deductibility change could reduce prices 5.3%.

Treasury estimated that such measures would see some renters become home owners, meaning any increase in rents would be marginal, although there would also be a marginal increase in over-crowding.

Treasury in the end suggested the Auckland Investor levy of 1% would be better than either a mortgage interest levy or reducing interest deductibility from 100% to 50%, given the logistical problems collecting the mortgage levy and the distortions in changing the interest deductibility rules, particularly for other forms of business.

It acknowledged an Auckland Investor levy on capital values would likely lead to a rise in rents.

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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Heaven help us if any of the above became fact.
If anyone seriously wanted to crash the market then let the looney economists have their way.
Why are we paying these morons?
Truly the lunatics are in charge of the asylum

10
up

Now you see why doing something about immigration is a better solution.

If the boom is not brought under control, we will get all sorts of inappropriate interventions.

Stop immigration. Auckland is full.

Mate, the only asylum in this country is the Auckland Property market.

I'm a huge fan of what Treasury have stated - they are rational conclusions that any sober person would draw if they looked at this situation. There is only a supply issue because "investors" (a term I use very loosely in this circumstance) are in a feeding frenzy, extrapolating recent price increases into the future.

These mugs who think prices will increase indefinitely are on borrowed time, pun intended.

Cmat perhaps you are not in business because if you want to decrease the value of something you don't go adding costs to the particular thing you want to go go down in value or even sideways in value!!

How any sober person could come to that conclusion is beyond me!!

Out of all the proposals the only that would get through would be the interest rate deduction. The other two were smoke screens to get it in.

the UK have cut interest deductions for rental housing
http://www.bbc.com/news/business-33447991

which stops highly leveraged peopled entering the market. and means more cost recovery on to tenants. lol. note that buy-to-let is a special category in the UK, as normally you weren't allowed to let (rent out) property you didn't own fully.

1% tax on capital value of $800k per year = $8,000 per year.

$8,000 / 52 weeks = $154 per week.

Depending on bargaining power btw landlords and tenants, tenants will, on average, need to swallow a rent increase round $77 per week.

I might be wrong.

You're missing the point there, which is that these tools are designed to bring house prices down, or at least slow their rampant increase. If this particular rule were to come in, then any future investor would go through the exact same calculation you've gone through, and decrease their maximum bid at the auction appropriately. If enough people do this, then the house prices decrease (or at least slow down), and the net effect on the purchaser is zero - ie no rent increase. It could even lead to rent decreases if house prices drop enough, as a result of this new rule.

Lots of 'if' or assumptions are in your statement above.

Economists tend to live in an ideal world.

No David, the landlord go through the process and look at the market value of the rental.
then when there's a ruling that affects the whole of the market (like a 1% rise) the property managers lift all rents by $77 - $170/week to cover the outgoings, and business moves on. You don't think telecom or macdonalds or petrol stations or banks won't pass on their market rise in costs... same as across the market costs stuck onto the rental sector industry. The tenants will just have the privilege of paying an extra 1% fine because Treasury said so. The extra rise in rental price, will _lift_ the servicing level to allow for _more_ debt. The marginal landlords (the only ones truly affected ) will drop out of the market, right behind the FHB, allowing the fewer suppliers to further consolidate their grip on price rises....
Although how this isn't obvious to experts in treasury/RBNZ is odd....so odd in fact that one wonders if that isn't their actual intention (would they "talk" the price up or down, would they tell a bit o' spin.... y'think maybe....

If landlords were capable of raising rents then why haven't they done it already?

Current yields are already less than borrowing costs + rates + R&M.

Why haven't they passed through all those costs of ownership?

A suggestion. Many landlords are in it for the long haul and have been for years. They are wise enough to know that if they have happy tenants, paying on time, the costs are beng covered and the property looked after, that the cap gin is worth far more than squeezing out a few extra bucks. Maybe there are enough of these guys to keep the rents in check? They bought before the madness, their cost of ownership is being covered.

Some of us actually have a bit of sympathy for our tenants. They're paying a fair whack'o'cash already,

Especially since many renters wages aren't very high. So yes we get sandwiched between rising rates ($50/week or 1.1% of capital here in palmy ... shows you how much of a rent jump a "mere" 1% tax will add to peoples' rents) and rising insurance bills. But passing on the cost to decent levels of returns... who can afford that in NZ? And even at this level we're better off than dairy, red meat and wool returns!

But that's what treasury and MBIE with all their fat salaries and high power spending just can't grasp, the view from their super privileged high horse, and theory-blindness says landlords must be wealthy, landlords must have money spend because everyone has money to spend (because treasury and MBIE do)...just talk to them one and find out what I mean. I no longer talk to my younger brother (whose a medical consultant in Australia because he simply cannot mentally conceive not having enough money to do whatever he wants, and he's a nice guy.

but if we pass on the full costs of ownership, we'll have tenants in the street, and none affording to live in houses, whats teh point of that. And the rate Treasury, MBIE, RBNZ are going, apart from foreign funded investments, NZ landlords might be pushed from the industry in NZ, or tenants will be in the streets.

That's not being "sympathetic", that's simply being cognisant of the market fundamentals that you operate in - just like any other regular supply chain you can't charge more than your customers' ultimate income stream. This is the crux of the issue in Auckland - prices are so far divorced from incomes and yields are such a joke that anyone saying they're not in it with the intention to sell is taking the piss.

"NZ landlords might be pushed from the industry in NZ, or tenants will be in the streets"
I hear this argument all the time and I don't buy it.
If a landlord is pushed out of the "industry" then their portfolio doesn't disappear into the ether - it's i) purchased by an investor willing to accept a lower rate of return or ii) an investor / owner-occupier pays a lower price so that yields are in line with fundamentals. The latter obviously being the preferred outcome.

I won't fully subscribe to the supply-shortage argument either until I hear stories of people having to substitute hotel living or the streets. What we have is over-exhuberance from investors in our market - most of whom are domestic (40% of the market) rather than foreign (9-10%) - purchase decisions are predicated on the notion that these price increases will continue, "prices never fall" or " but Auckland is different to Dublin, Phoenix or Toronto". Total BS.

Len Brown was in Brisbane this week (or may be he still is). He should be able to see the solution to housing crisis.. build more frecking houses/apartments. At the moment, within 10km of Brisbane CBD low rise/medium density housing blocks are popping up like mushroom. Last year Brisbane council had relaxed the rules for building up to 6 level apartment blocks and allowed multiple dwellings in smaller sections. Wouldn't it be better to address the issue this way?

Have you enjoyed the benefits of the Brisbane Metro Rail Service, and the Clem Jones 7 Tunnel etc etc your assessment would be good, can you have one without the other

Our car was in repair for 6 weeks due to storm damage recently and public transport was our only option for school, work and weekend travels. I have no complain whatsoever.
Clem7, Legacy and airport tunnels.. if you are running short of time, they are brilliant. You can cut out 15-20 mins of gridlock during peak hours (but they are pricey)

The NZ economy needs the housing boom now that dairy prices are down. People who feel rich would spend more.

Auckland Inc is now too big to fail. Government intervention to burst this boil is no longer an option. The consequences and social costs of doing so would far outweigh any benefits, and in doing so would savage the government coffers

If you are making 100,000 pa tax free on a 1m dollar home in capital gain untaxed you can afford a 1% tax(10,000pa obviously @ 1%)

The death of the kiwi
Budget documents released on Thursday also show Treasury opposed an extra $11.2 million over four years to help reverse the decline of our national icon, because it was "not aligned with overall Government priorities".

http://www.stuff.co.nz/national/politics/70106962/cash-to-save-kiwi-not-...

Which begs the question:-

Does anyone know what this government's priorities are?

A detailed list anyone? Or is it secret men's business

NBR 10 July 2015
Treasury papers show a worrying "air of panic" – Ernst Young director
Treasury papers released yesterday on Auckland housing market options show a worrying “air of panic,” says EY's David Snell

NBR 10 July 2015
Treasury warned cabinet of problems with Smith's housing plan
Cabinet knew about the hurdles in Nick Smith's housing plan for Auckland - including iwi objections

I've kindly pegged rent IMHO to a fair rate vs outgoings. Having vested interests I naturally oppose 'another' tax. Having great long term tenants I will be approaching the conversation around rent increases carefully, there would be an increase if the tax came along, how much is the question.