Our industry has been hit with a double punch over the last week. LVR limits for Auckland rental property owners up to 30% (don't laugh too hard in the provinces, you may be next) were announced by the Reserve Bank and the Government brought in an effective Capital Gains Tax called a Bright Line Test.
The Bright Line Test means that investment property price gains will be taxed if the property is bought and sold within a two year period. Although the policy directly affects property investors, the NZ Property Investors’ Federation believes it is aimed squarely at property traders, or speculators as some people like to call them.
We have been saying for years that people who trade property have always had to pay tax on their profits and this move is aimed at clarifying this existing situation. It would be nice if the new policy finally put to rest all the unfounded comments from people saying property has a tax advantage, but that may be wishful thinking.
On the day after the announcement some commentators were already saying that the policy doesn't go far enough and the period should be five or even ten years rather than two. This would be a serious mistake however. There is currently a shortage of rental property in Auckland, where most house price inflation is occurring. We need more rental properties not policies that make the provision of rental properties even harder than it already is.
If the term was extended then the policy would change from a Bright Line Test for property traders to a capital gains tax for rental property owners but for no other investment or business classes. Apart from being unjust, this would break a cardinal rule for good tax policy, which is that tax should not be used to influence peoples’ investment decisions.
There is also some potential unfairness about the current policy. While property sold in a relationship property settlement will not be affected by the policy, other circumstances could see owners disadvantaged. An owner contracting a terminal illness or losing their employment and being unable to fund their rental property would see any price gains they made taxed if they were forced to sell within two years of buying. This appears unfair given that the tax wouldn't apply if the same individual had bought and sold shares, a business or some other form of investment that went up in value.
It is unclear if the move will have any effect on house prices. Many New Zealanders believe that speculation in the property market is rife but there is no data to back up this belief. If property trading is rife and the cause of house price growth as many suspect, then this announcement should reduce property prices. If speculation isn't a significant contributor to house price increases then the new policy will have no effect on house prices.
There is also little known about foreign buyers in the property market, so the new requirements for non-resident buyers appears reasonable. Clarifying the number and effect of non-resident property buyers in the New Zealand market is sensible before introducing new laws aimed at controlling perceived problems.
The NZPIF will be raising these points with Government and opposition parties.
Go here to listen to John Key and commentators on the subject.