Tauranga Property Investors' Association

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05-02-2010

On the block: houses, tax and angry investors

Stuff.co.nz

The government needs to get some balls. One minute they are cosying up to us private property investors to provide them with solutions; the next minute they are treating us like pariahs. It's bizarre.''

That's the heated view of veteran Auckland property investor John May, who's angry at the prospect of property tax reforms and the implication he's getting a massive tax break.

He's not alone. May is one of a group of Mum and Dad-type investors who are furious with the government and worried the proposed tax changes will devastate the property market, and for many, their retirement nesteggs.

The Victoria University-led tax working group's 70-page report recommends a drop in the top tax rate from 38 per cent to 30 per cent and a cut in the company tax rate to below 30 per cent to remain competitive
with Australia.

To fund this, the government needs to find $1.6 billion in revenue.

The working group has suggested taxing aspects of the property investment market and raising the goods and services tax rate from 12.5 per cent to 15 per cent (see The 8 things you should know).

A key point from the report is that the current system taxes too heavily activities that promote productivity growth, income from work, and profits from investment other than property. It identified what it calls a ''major hole'' in the taxation of capital, seen in the high investment and low returns in the property market.

But New Zealand Property Investors Federation vice-president Andrew King says if the government adopts the recommendations, many property investors will be wiped out. He predicts there will be a flood of properties on the market, property values will fall, and rents will rise as investors pass on the tax costs.

Some argue the benefits of a fall in house prices, because it would give

entry to first-home buyers currently locked out by the unavailability of easy credit. On the other hand, rent rises would cut into their ability to save a deposit. King claims the tax working group has been fed information that puts rental property in a bad light. The tax group has been wrongly inferring that the property investment market, worth $200b, takes $500m out of the tax system each year, he says.

That occurred in 2008, but only because interest rates were at their highest and investors were claiming for property losses. ''Normally there are more people [property investors] paying tax than claiming tax, but because of that shift in interest rates, there were a lot more people losing money than making money.''
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For instance, in 2000 and 2003, the sector paid annual tax of $250m, he says.

The Auckland property investors' group is particularly concerned about the impact of the proposed reforms on its members, who tend to be preretirement and have scrimped and saved to pay off the mortgage on their home in order to buy an investment property that will help make their retirement easier.

''This is the generation who don't have the time to backtrack and deal with a hit on their investments,'' says Auckland Property Investors president Sue Tierney. ''They are not going to take this lying down.''

Most of the market is comprised of this type of long-term investor as opposed to traders who buy and flickoff property quickly, she says. ''The message we have for government is whatever they do, to do it quickly and not drag it out six months. With the recession last year, our market doesn't need this uncertainty.''

Prime Minister John Key is under pressure from various quarters to cause an upheaval in the property investment sector in order to curb inflation and push Kiwis into investing in our more productive sectors.

One adding his voice for change is NZX boss Mark Weldon, who wants more companies listing and more investors buying into them. He reckons the proposals will lift our economy.

In particular, Weldon thinks the government should dump Loss-Attributing Qualifying Companies (LAQCs). Some commentators say LACQ's get a $2b-a-year tax deduction.

Any investment - whether it's rental property, shares, bonds or bank accounts - should be treated equally for tax purposes, he says.

But King is scathing about Weldon's bias. ''Weldon would like to cripple the [property investment] industry. The more he cripples the industry, the higher the potential for funds to come into his stock market.''

The trouble is, the NZX doesn't provide the sort of returns that private investors are after, claims King. He has spoken to several property investors who say if tax changes force them out of the local market, they'll simply invest in property overseas or overseas sharemarkets where there is more liquidity.

So the question is how far will the populist Key be prepared to go?

Most members of the tax working group support a low-rate land tax. And the majority support consideration of a risk-free rate of return. But most think a capital gains tax would be one step too far and difficult to apply.

It's thought likely that Key will give some stronger hints on his thinking on the issue in his speech to Parliament next Tuesday.

He and Finance Minister Bill English have until the Budget in May to make final decisions.

Many pundits doubt Key will want to alienate the entire property sector, many of whom make up a reasonable proportion of National voters.

BNZ chief economist Tony Alexander, who keeps a close eye on the property sector, doesn't support a property tax.

''That hits everybody, investment property, farms, and Maori land.''

While the working group has identified an issue with New Zealand's overall tax system, the property reforms appear to be tacked on, he says.

It's more likely the government will raise GST to fund the drop in tax rates rather than what he calls unnecessary changes that would simply add another layer of bureaucracy.

However, he does think it makes sense to remove depreciation allowances as generally properties keep rising in value.

Given the state of flux in the property market the big question remains: is now a good time to buy or sell?

So far the prospect of tax reforms hasn't had any major impact on the real estate market, observers say.

Tierney believes many property investors are just trying to get on with life and won't worry until the talk becomes reality.

Others disagree. Investment adviser Martin Hawes says it's inevitable people will start selling. ''I'm seeing it already. Even if they are not selling out, they are sitting on their hands.''

He doesn't see much value in buying residential property investment right now, as prices are still high and rents aren't sufficient to make a decent income.

''Smart people saw that [even the corrections] of 2009 hasn't brought yields back in line and there's no value in residential property as an investor.

The government moves will spur that.'' At best, the market will experience five years of overall flat prices, he predicts. ''To make an investment case for residential property at the moment, because of the low yields, you would have to be expecting a boom, and the government isn't going to allow that,'' says Hawes.

Real Estate Institute figures show the national median house price was $360,000 in December 2009, up 9.6 per cent from the previous year.

Despite that increase, Rodney Dickens, of property analysis firm Strategic Risk Analysis, predicts the housing market will experience a significant price fall over the next five to 10 years. Relative to incomes, house prices and section prices are still unaffordable, he says.

Realestate.co.nz chief executive Alastair Helm disagrees, and says it's still a good time to buy, especially if you can lock in a low mortgage rate. But what salesman ever says now is not a good time to buy.

There are signs sellers are reducing prices. The average national asking price of $404,040 in January is still 6 per cent below the peak of the market back in October 2007, Helm says. ''Sellers looking to transact in what is a quiet market, are setting price expectation at a realistic level to ensure their property stands out in a crowded market.''

But sales are weak, as evidenced by the high numbers of unsold homes on the market. In January these levels rose to 40 weeks, from 34 weeks in December.

''Everyone is writing about the flipping [sale] price but sales are stuck and if they carry on this way, the market is going to sit dull for a year.'' Both buyers and sellers are still uncertain about the economic situation, credit availability and high unemployment, says Helm.

Rumours of a capital gains tax have concerned some investors, he admits. And mortgage rate increases are likely this year with economists warning the Reserve Bank will start lifting the official cash rate in March, from its current record low of 2.5 per cent to 4.25 per cent in incremental increases by the end of next year.

This could equate to a floating rate of 8.5 per cent and a one-year fixed rate of about 7.5 per cent.

BNZ's Alexander says the reforms are likely to cause market uncertainty and discourage property investment, which in turn puts some short-term pressure on prices and rents. But he predicts house prices will rise again based simply on the laws of supply and demand. Reduced investor returns means fewer investors which in turn means fewer houses to rent. This then aggravates the existing housing shortage and rents will need to rise. No wonder Key is taking his time making his mind up on what to do.

Source: Stuff.co.nz

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