A Capital Gains Tax would alter the rental property landscape by pushing down prices and pushing up rental yields

A Capital Gains Tax would alter the rental property landscape by pushing down prices and pushing up rental yields

A Capital Gains Tax (CGT) would have a greater effect on rental property prices than rents, but should lift rental yields, according to the report of the Tax Working Group.

The report says that assessing the impact of CGT on the housing market is complicated by the fact that the tax would apply to rental property investments but not to owner-occupied housing.

"Theory suggests that extending capital gains taxation would increase the ratio of rents to house prices, owing to rents increasing, house prices falling or a combination of both," the report said.

"However the supply of housing in New Zealand is very constrained.

"In a constrained market, where housing supply is unresponsive to changes in demand, theory suggests that extending capital gains taxation will have less impact on rents than would otherwise be the case and more of an effect in moderating prices."

The report said the Tax Working Group had explored the impacts of similar tax changes on housing markets in other countries, including Canada, Australia and South Africa.

"The Group has not observed significant increases in rents relative to prices in those countries - to the contrary, rents actually fell relative to prices," the report said.

"While there are only a small number of examples to observe, there is no evidence of a general rise in rents or a fall in prices following the implementation of capital gains taxes.

"On balance, the Group expects that an extension of capital gains taxation would lead to some small upward pressure on rents and downward pressure on house prices."

If that proves to be the case it is likely to lead to a change in behaviour by residential property investors, with them placing much greater emphasis on long term rental income yields, and much less emphasis on potential capital gains when purchasing properties, which should result in less short term speculative activity in the rental market.

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44 Comments

If rental yields go up, and land prices go down, then building more stock will be more cost effective. More tenancy supply = lower rents.

Yeah, but none of this makes land costs go down. A purchase price fall caused by the added tax cost, is going to be less than the added tax cost.

I don't follow this logic.

You only get an "added tax cost" on capital gains.

Any drop in purchase price would most likely be allocated to the most speculative aspect of real estate - Land.

Ocelot
* land prices go down
* building more stock
* lower rents
You will have to move to utopia for that ideal situation. Trouble is that Utopia exists in most people's heads but not in the real world.
One giant obstacle to more building known as the resource management act. Other giant obstacles to affordable homes are: 15 percent Gst, council infrastructure and contributions fees, the whole elongated consent process. Good luck

" .... more of an effect in moderating prices."

Non resident owners may choose to list their property for sale before the effective implementation date of capital gains tax. Please refer - https://www.domain.com.au/news/expats-and-foreigners-hit-prestige-market...

I acknowledge the collective wisdom of the TWG and I hope that they are right for both renters and first home buyers.
I think that property investors will face an interesting time with a high degree of uncertainity.
I note the comment ". . . there are only a small number of examples to observe . . " on which the TWG premise is based. It would be interesting to note the state of those small number of markets observed when the CGT was introduced.
I am a past property investor, getting out in part because of my life-stage but also other factors - including poor yields on the then current capital value, realising my capital gains, the peaking of the market and possible correction,the medium term likelihood of increasing mortgage interest rates, increasing anti-landlord legislation, and increasing compliance issues and costs - all supported the notion that the outlook for property investment isn't great and it was a good time to get out.
As the property market is predicted to be relatively flat (with some down side risk) as predicted by respected commentators - including Adrian Orr - in the short to medium term future I actually don't see a CGT as being a critical current issue for landlords.
It is currently the low yields - along with the absence of capital gains - that is going to put upward pressure on rents as landlords seek a return on the current capital value of their investment. For those looking to get into property investment, property prices would have to have a significant fall to make yields attractive - a 10% fall in value is only going to raise yields from around 4% to 4.4% (and that is before expenses such as rates, maintenance and insurance).
So at the moment under current market conditions, a CGT is not going to have a significant impact on property values or rents, but landlords chasing a return on the current capital value of their investment will especially if there is downside risk on the value of that investment.
I would consider re-entering the property investment market, however, the reality is that the days for making hay in property investment have now gone irrespective of the introduction of a capital gains tax.

To improve yield, prices will fall rather than rents rise. This will cause capital losses for existing holders of the asset. If capital growth is taken out of the picture then a property investor is probably looking for a higher yield. Assuming 4% yield now, capital prices would have to drop as follows:

4% - 0% drop
5% - 20% drop
6% - 33% drop
7% - 42% drop
8% - 50% drop
9% - 56% drop
10% - 60% drop

You are such a friggin dreamer there has never in the history of property been falls of those magnitudes. Large scale falls apply to crappy shares of sky tv, fletcher building, feltex, pike river and others. I'm sorry for those who lost family in pike river but shareholders were also shafted

If introduced as proposed, it might increase real estate activity before it's introduction as some investors might like to keep their tax simple, might not want to have to get new valuations done when the law takes effect or might find somewhere else to invest. But thereafter, if it does increase the number of owner-occupied properties, it might (like the Bright Line rule) ultimately reduce the rates of sales activity. What will all the extra RE agents do?

Does the proposed tax create "lock in" for investors? If you have a business / property worth $1,000,000 but want to sell and start a new opportunity you end up with $660,000 after Tax. You then have $660k that has to work a lot harder to generate a return that the 1000k was creating before. Therefore better the devil you know where you get a return on the 1000k. Adds one more hurdle for re investing, taking up new opportunities etc.

Just to clarify; when you say worth $1 million. Do you mean the capital gain? Remember the tax is only applied to the net capital gain over the time period allocated. If your capital gain on a business is worth $1million - sounds like you should stick with it for such a return on investment.

Businesses often run at a loss while they are getting established. Once established other players will often buy them to reduce competition or get their customer base. This is where the gains from those hard years of work come to fruition. Seen it so many times.

Rollover relief is proposed in the TWG's paper for businesses with turnover under $5m. So you can defer your capital gains until final sale.

e.g. Start a business with $0, grow to $1m, sell it and buy another for $1m then grow it to $3m paying no capital gains tax at this point, sell at retirement and pay capital gains on the full $3m.

The numpties in the labour party, Little, Robertson, Cullen, Arden honestly think people will vote for that. Its amazing they can say that is fair and keep a straight face.

If a CGT comes in the first thing I will do is sell my two small properties, and buy the biggest most expensive family home I can afford. I'll probably make more money in capital gains over time on the property than I will get in rent, especially when the capital gain is tax free, and the rental income is not (not to mention the fact that you wont have the stress of tenants to deal with).

Good luck finding a buyer

The labour party dummies have no idea what it is like being a landlord, the crap you have to handle and the dickheads you have to deal with. At least cap gain was fair recompense at the end of the day, which they want to take a third, get out of here.

CGT would be a significant disincentive to sell rental property if you are sitting on good capital gain post 2021.

Not quite. Remember the CGT is not retrospective - all gains up to 2021 are exempt

I think it's a long shot. CGT can ultimately cause the property prices to fall but for those who already has some properties out for rent, they will need to cover their cost from somewhere and it's likely the renter will have to pay. The root cause of astronomical property boom (especially in Auckalnd) is there nowhere to build caused by RMA, NIMBY's stranglehold on the council to reject densification, lack of infrastructure investments and most importantly, the cheap availability of credit.

CGT only costs you anything if you sell.

It ain’t coming in because if the Govt. campaigns on CGT they are gone and today’s parliament clearly showed that they haven’t got a clue!
Do you really think that it encourages people to improve property if they are going to be taxed on it?
D oyou think people will bother with shares?
Na,
What I will do is start trading property as I could make a small fortune buying low and selling after minor improvement!

There are easier ways to do well than being a building owner and landlord. A landlords work is never done. My commercial tenants earn far more than us yet think rent should be so cheap it's hardly worth for us to get out of bed.

News from 2022

"The Capital Gains Tax altered the rental property landscape forever by pushing up rents"

http://www.scoop.co.nz/stories/PA1811/S00223/capital-gains-tax-will-lift...

Best of luck with that
Unless wages and incomes go up at the same time there will be a lot of empty rental properties

Interesting.... that conclusion (that prices will drop) is completely opposite to the advice they received from officials: https://www.stuff.co.nz/business/property/107359055/capital-gains-tax-wo...

The good news is that speculative assets like gold and bitcoin (already taxed as revenue assets) will actually have a better tax treatment that capital assets - as losses from capital assets will be ring fenced, but that is not the case for revenue assets. So I can happily trade my crypto, knowing that any losses can be recovered at a rate of 33%, offset against my PAYE income and paid via a tax refund.

You can look forward to a lot of tax rebates on selling your crypto

FYI - the perspective of a property investor who is negatively geared

http://tenancieswar.nz/2019/02/21/capital-gains-tax-plan-not-geared-for-...

But the golden weather for investors is ending. The proposed capital gains tax comes on top of a raft of punitive changes for rental property owners which make property investment no longer attractive, driving property values down, he said.

Talk to any accountant. Now, many owners are unloading rental properties that have become loss-making liabilities and the Tax Working Group appears to have resorted to loss ring-fencing to avoid giving capital loss refunds to investors, Mr Butler said.

“It won’t be a matter of investors timing the sale of assets to their advantage,” he said.

“It will simply be a matter of investors selling for whatever they can to stop haemorrhaging cash to a loss-making investment,” he said.

A perspective with an investment property portfolio that is positively geared. This is an income oriented investor.

FYI - https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12206014

It won't raise much money and it hasn't stopped prices rising where it's already in place. Once you start taxing appreciation, you open the door to offsetting expenses.

I don't think it will make much difference to property but it's an equity issue. Also if income taxes for lower incomes can be reduced in parallel then that's a good thing in my books.

If house prices go down then how does one make a profit building new houses given the cost of construction will be going up due to another round of wage inflation and how is supply addressed in the housing crisis?

Become more efficient and build more houses in the same amount of time (you know, higher volume, lower margin)....oh hold on that will increase supply even more and push prices even lower....shit...what have we done?

The land price gets cheaper.

Horticulture land has a value based on its productive capacity and conversion to residential property only takes place if the lands residential value exceeds its productive horticultural value. I wonder how a CGT makes horticultural produce cheaper or horticultural land less productive (which results in land becoming cheaper)? or does CGT decrease the price of development contribution, cost of services etc....

Are there any examples of countries that have introduced cgt's in the last 10 years? Most countries have had them a long time. So bit hard to find precedence for what happens with the introduction of a cgt.

Once introduced. Let the market settle. Then CGT wont matter. If the deal will work investors will jump in. If it wont, they wont. Either way it will not make it better for the renter. As in the Govt wont take there extortionated cut and hand some of it to the tenant saying "look see, like we promised, i taxed the greedy rich and gave some of it to you.." But they will tell the media its the landlords fault for not making it better for the tenant.
Nothing new. Same thing different decade.

cloud cuckoo land springs to mind -- - the costs of a CGT will be passed on to tenants -- just like every other legislated cost -- every business does this --

more important -- if all the legislative and tax changes work against ownign property as an investment -- then people woll move away from it -- and despite many commentators sayign what a good thing this would be -- they are missing the simple basic premise that first time buyers do not FINANCE new builds.

if developers and investors walk away from underwriting new builds - where will the extra properties coem from - -certainly not this government --33 houses in 16 months!

Gee how do you figure that? Are Landlords not already charging what the market can bear? Lets say hypothetically CGT takes an average of $50 a week in future capital profit from a Landlord. If they can recover this from the tenant, what prevents them from charging this in the absence of a CGT?

Tenants will have extra cash due to tax cuts on wages and benefits.

Great point.

Utter nonsense

The cost of a CGT will be known only on realisation of the asset. By which time the landlord is no longer the landlord. Any cost will not be transferred to the buyer, which might simply become an owner-occupied-residence

Would you do that with your tenants? I hope they don't last for too long and move somewhere else, offer and demand isn't it?.