The country's facing the prospect of an "exodus" of landlords that will have a "devastating impact" on the rental property market following the Government's moves to 'ring fence' property tax losses, the Property Institute of New Zealand is warning.
"[The moves] will have a disastrous impact on the market and will significantly worsen the shortage of rental accommodation in our largest cities," chief executive Ashley church says.
The effect of the changes would be that the costs associated with owning a rental property (interest, rates, insurance, maintenance, etc) could no longer be offset against other income as has been the case for many decades. Instead, these losses would be ‘ring fenced’ and could only be applied to profits made on the property against which the costs were incurred.
The Government is claiming that the moves are “an effort to level the playing field between speculators, investors and home buyers” but Church says this is nonsense and shows a continuing misunderstanding of the difference between ‘speculation’ and ‘property investment’.
"This Government continues to have a blind spot when defining these terms. ‘Speculators’ are people who are in and out of the market very quickly – sometimes within just a few weeks or months – and who seek to make money through renovations or quick capital gain. ‘Investors’ are Landlords – people who are often in the market for decades – and who perform an important social service by providing accommodation over long periods of time.
"Treating the two in the same way demonstrates an unacceptable ignorance of how the property market works."
Ring-fencing tax losses will be the ‘final straw’ for many investors and will largely have the effect of pushing them out of the market – further compounding an already serious rental crisis, he says.
In encouraging feedback on the proposed changes Revenue Minister Stuart Nash has said that the “persistent tax losses” that many property investors declare on their investments indicate that they rely on capital gains to make a profit. But Church believes this is "woolly thinking" and demonstrats a lack of experience by the new Government.
"Yes, most investors make a loss on the day-to-day operation of their property in the early years – but properties do eventually become profitable at which time tax is paid on that profit just like any other business activity. So the ability to claim losses early on is offset by an eventual return to the taxman later on – and without the ability to claim those early losses many investors would abandon the market, or wouldn’t enter it in the first place," Church says.
Private Landlords provide the lions share of rental accommodation in New Zealand – and in doing so they have saved the State billions over the past few decades, he says.
"Scaring them out of the market is foolhardy, bloody minded, and will constitute a massive ‘own-goal’ for the Government.".
Church notes that Nash has said in conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers.
Church disagrees, saying that the extension of the ‘bright-line’ test to five years already means that speculators – the group the Government claims to be targeting – will now be paying their fair share of tax.
However, further moves "will punish a group who are performing a public good".
“Given that price competition has now largely disappeared – those who are in a position to buy are already doing so and an exodus of landlords will make little difference to that.
"What’s far more likely is that residential rental accommodation will go the way of farm land and our larger companies and will end up in the hands of handful of ‘corporate investors’ who will own the bulk of our rental property.
"Is that really what we want?"