Why does the diversity of rules (LVR, CGT, renter vs. ownership) to support one group over the others leads to further distortions in the housing market and how can the CGT in Wellington resolve the housing crisis in Auckland?
Housing Market 2015 – What is in for you?
As they say
Steady drop hollows a stone
Not sure what your situation is when it comes to housing, are you satisfied with the development over the last seven years or concerned about the shift in discussion from “affordability” to “demand and supply” with focus on Auckland?
The debates about resolving Auckland’s housing crisis reaching new heights and the media are full of suggestions how to fix it. Interestingly, the CGT (capital gains tax) is one of the hot topics. Well, how can the CGT in Wellington resolve the housing crisis in Auckland? So let me draw your intention onto a number of considerations—totally ignored by media commentators. I hope that will help you to reassess your situation to find the right answers you are looking for.
What is hot in the media today?
To illustrate snippets of conversation - people seriously think with the controversial CGT the supply of houses would automatically increase. Just by introducing tax houses will grow like mushrooms after rainy days, right? To quote CGT supports— the demand for housing is being driven by investors. In other words people who immigrate or found work in Auckland have no impact on the demand for housing, really? Read yourself:
The idea is—CGT is designed to cool down investors
Have you recently been on one of the selling auctions in Auckland? Who is bidding at any price? Because of low yields on rentals an investor would only buy if there is a chance to move an investment out of the red zone into neutral cash-flow and step-by-step into a profitable investment. That takes years, for that reason the CGT would be only due when selling. Saying for investors and long term investments the CGT would not change anything that impacts supply and demand today. Needless to say that for speculators, property traders and developers CGT would not apply as they are already taxed on profits and with GST.
How simple is it and what would change for you?
A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and also property.
In theory the introduction of CGT for investments sounds really simple
YES for rentals — NO for private homes
If you look at the diversity of the rental housing market how many exceptions and different rules would you consider— for rented out family homes during owner’s absence, home and income properties, homes with boarders/flatmates and all sorts of changes of usage (family home becomes a rental, rental becomes owner-occupied) that happens before selling a property? How would you treat mixed properties like farms, lifestyle blocks, etc. Surely each rule becomes a heaven of loopholes for professionals, but the majority of property investors are “mum & dad” investors working in a day job to keep one or two rentals.
Because of family homes are exempt that would encourage New Zealanders to invest further in owner-occupied homes as those are CGT free and used to support people’s retirement.
What will it cost you?
At this stage I see it a huge challenge and costs for the government to implement changes to the tax system. And if so, you, the taxpayer will take care of it.
Sure, compliance costs and book keeping will gain complexity. As mentioned, NZ’s low yield rentals commonly result in loss in the first years. These losses would be similar to losses in business carried forward and offset against future capital gains. And capitalized property improvement like double glazing, house extension, a new deck, etc, which are not rent income deductible would reduce capital gain tax as well. Nobody at this stage understand that the cost might outrun the benefits of CGT. Come to your own conclusion and be prepared.
I see so much room to manipulate the outcome of CGT, look only at NZ’s subjective property valuations to assess capital gains. I see already the army of professional which are lobbying changes and rubbing their hands with glee. Personally I don’t have any feelings about CGT, what do you think about?
What affects you and divides a country?
Coming back to the initial problem. It is not difficult to see what the problem really is and why the demand on housing reached crisis level with increasing numbers of immigrants and people who have chosen to live and work in Auckland. Those people are prepared to pay for it. The key question is – why not Hamilton, Napier or Wellington?
My point here is—if the government increases the diversity of rules (LVR, CGT, renter vs. ownership) to support one group over the others, further distortions in the property market are the likelihood. Why not having a plain playground for everyone who derives income from something and is taxed accordantly? For instance what strikes me most is the design of being taxed on “intention” and assessed on volatile market values for property investments.
I think we can agree if changes would target a balanced infrastructure (not only focussed on AK) that creates job security in areas with sufficient housing and taxation for enough income to support working families, NZ wouldn’t have housing problems.
Unlike other industrial nations renting in NZ is classified as second lifestyle option (rooted in history). To compensate deficits many Kiwis are thinking to create wealth in home ownership without money, getting and carrying a huge mortgage like a prison sentence, waiting for selling with capital gain and not having the money for maintaining modern housing standards. Many people, I talked to, don’t have a clue what the real ownership costs are, believe in profit and capital gains that offset the losses paid for house and loan interests. That insanity divides a country. Don’t shout at me, come to your own conclusion, time will tell.
Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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