Capital gains tax would not hold back property investment

Thursday, 27 September 2018

The ability to borrow puts property in a different class to investment options where you can't use leverage

OPINION: Mark Twain once wrote 'The reports of my death are greatly exaggerated' and I believe so too are reports tax changes will kill property investment.

Between plans to ring-fence losses on rental properties and the possibility of a capital gains tax looming, there's no doubt the investment landscape is changing. But I still believe property will remain Kiwis' investment mode of choice – for better or worse.

There are several reasons for that, starting with leverage. The ability to borrow puts property in a different class to investment options where you can't use leverage, even if tax changes mean it's no longer a slam-dunk.

At the risk of stating the obvious, if you have a half million dollar property which you bought with a $100,000 deposit (let's assume it was a new build and thus a property investor could get away with a 20 per cent deposit) and the property's value rises 6 per cent, you make 6 per cent of $500,000, even though you only invested $100,000.

Hannah McQueen says property will remain Kiwis' investment mode of choice – for better or worse.

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The Government's Tax Working Group, chaired by Sir Michael Cullen stopped short of recommending a broad-based capital gains tax in its interim report.

That makes the gross return on your initial investment 30 per cent rather than 6 per cent.

Sure, a capital gains tax will reduce these returns, but as I've argued before, some of the money you would never have earned without the strength of the economy should feed back into the economy.

It would be even better if a capital gains tax was offset by lower marginal tax rates, to give those who don't currently benefit from appreciating capital assets a greater chance to save the money to get a foot on the ladder.

While borrowing to invest isn't unique to property, there certainly isn't $250 billion secured against share portfolios sitting on the banks' balance sheets the way there is against property. And remember, a capital gains tax will also apply to domestic shares.

Property prices are closely tied to a change in the price or availability of credit. Just last month Westpac revised its forecasts to predict house prices will pick up in 2019, after the Reserve Bank hinted it could cut rates if GDP growth doesn't match expectations.

Ringfencing losses on investment property will have an impact on landlords whose properties are negatively geared, especially those for whom the investment is a margin call, but I still don't believe it will result in a mass exodus of investors from the property market.

Rather, those extra costs will eventually be passed on to the tenant, especially while a housing shortage persists. If a capital gains tax is implemented however, theoretically ringfencing would be redundant. If the profit is taxed, you should be able claim all expenses related to generating that profit – including the years you ran it at a loss.

Capital growth is not the only reason people invest in property. While it's not common in the big centres, it's still possible to get a positive rental return.

For many it's also about investing in something that doesn't disappear into thin air in a downturn and doesn't involve shareholders, annual general meetings or really any other party, other than the bank.

Hannah McQueen is an author, accountant, authorised financial advisor and founder of enableMe and PropertyProNZ.