General - David Whitburn

By: David Whitburn  06-Dec-2011
Keywords: Property Investment, Property Investors, Capital Gains Tax

With the results of the election out, I am very happy to see that there will be no introduction of a Capital Gains Tax for property and business owners, as well as no ring-fencing of tax losses brought in for the tens of thousands of property investors that make tax losses on their portfolios.

These were an important part of Labour’s Own Our Future policy.  Not only did the majority of voters reject them on Saturday with Labour’s lowest polling in their 95 year long history, but Labour’s campaign strategy team (led by Trevor Mallard) pulled any mention of these for unpopularity reasons in the leaders’ debates, and Phil Goff focused on stopping asset sales instead.

Capital Gains Tax is a poor policy that “would lead to hoarding of property, would take a long time to have any effect and would discourage property investment and push up rents”.

Ring-fencing tax losses isn’t political suicide as most people don’t understand it – however this is the very policy Bob Hawke (PM) and Paul Keating (Treasurer) implemented for the Australian Labour party in 1985, only to rescind it 2 years later in face of their supporters backlashing against higher rents.

Labour will need to learn that you can’t legislate into prosperity half the population, by striving to legislate the ‘rich’ out of prosperity, hence the attempts at demonising John Key as a merchant banker with no social conscience and envious attacks based on his wealth.  Looking at the National led Government, with support from ACT (John Banks) and United Future (Peter Dunne) guaranteed, there are 62 votes, with a maximum of 59 votes against them.

It is likely the Maori party (3 seats – Turia, Sharples and Flavell) will however play an important part in Government to give 65 seats for, 56 against, as National need to look at multiple coalition partners to retain power in the 2014 election.  As a result the policies of the centre-right including the status quo of having no Capital Gains Tax and no ring-fencing of tax losses will remain in place.

Lets look at what this means for property investors.

Impact on Property Investors’ Cashflow

Slightly Positive - there will be cashflow gains from a stronger economy that doesn’t take on as much debt as Labour would for its increased Government spending campaign. After the very dark clouds over Europe move away, business confidence will be restored, hiring will begin and with National’s more friendly employment policies (eg. not raising the minimum wage to further punish elementary or semi-skilled younger workers), there should be higher employment.

This in turn will lead to steady rent increases and hopefully a reduction in the amount of cases going to the Tenancy Tribunal – The Department of Building and Housing tell me approximately 75% of cases they hear are for rent arrears.

Auckland’s constrained housing supply with the large costs of development and urban limit will be maintained. Perhaps the most entertaining thing would be to have John Banks as Minister of Local Government, or Minister for Auckland to keep an eye on the Supercity Praetor Len Brown.

Almost perversely Labour’s ring-fencing of tax losses policy would have meant a number of investors would have sold their properties, and this would have reduced supply increasing rents even further. This would have been a nice cashflow transfer payment as the middle and lower income New Zealanders would have been given transfer payments (increased benefits, accommodation supplements and such like). A lot of property investors love Labour – just look at how well the property market did in 2002 – 2007.

The most important thing though is not to have NZ given a Sovereign credit downgrade again, as this would push up interest rates and restrict access to credit that help underpin property as an excellent investment choice for many.

This means the Government will have to look closely at borrowings, and I believe have to revisit the retirement age of 65, which is simply too early in this day and age.  It was fine when implemented in 1898, but in 2011 people live a lot longer with medical, pharamaceutical, healthcare and diet advances and a more sedentary lifestyle with lower rates of smoking (both my grandmothers were in their 90s when they died).

Other good news is that the Tenancy Tribunal will be less busy and have shorter wait times with redirection of Government transfer payments (benefits and accommodation supplements), so they are paid directly to landlords.

Impact on Property Investors’ Equity

Neutral - The status quo is being maintained and other market drivers are more at play.  Capital Gains Tax and ring-fencing of tax losses would have reduced house prices, as investors sold off properties because of the tax impacts.  This would in the long-term equal out, but not without short and medium term pain.  I think the National Party should have said that if CGT were introduced that they would rescind it when they returned to power as it is not part of a more aspirational and brighter future.  The real equity gains come from another boom in a property cycle.  That is not anytime soon.  However a recovery is already underway in some parts of Auckland, particularly in the higher decile areas led by home-owners and immigrants into Auckland.

Whilst I still prefer a four year election cycle to better encourage longer term thinking, we have a three year cycle and the popularity contest means Labour have a lot of work to do to win the 2014 election, including getting a new leader more palatable to the country and to move that party towards the right to get votes off National and NZ First.  The poorly worded and overly confusing voting system question for the referendum should have simply asked which voting system do you prefer and listed 4 or 5 choices.

Some polls were remarkably accurate, others didn’t fare so well.  John Key’s “show me the money” line to Phil Goff on how much revenue CGT will bring in was a highlight of the campaign, and the poorly handled teagate incident at Urban Cafe in Carlton Gore Road, Newmarket was a lowlight.  It also brought back Winston Peters and Andrew Williams who some in the media have affectionately termed the “leaky mayor”.  It will be interesting to see the impact that NZ First have in Parliament.

The recovery of our great nation’s economy is what we are striving for.  The economy underpins our housing market, not the other way around despite what others may tell you.  When our economy is performing strongly, there is good money to be made in being an accommodation service provider.  Congratulations to all those elected MPs, to National on winning another election, the Green party for getting their highest party vote ever and to NZ First for returning from the dead.  All the best to Phil Goff and Don Brash for the future as they step down from the leadership of their parties, and best wishes to their replacements.  Now we have voted in a Government and they will try to support and improve the system and framework we have to live our lives – the hard work is now up to us to live and improve our lives.

Disclaimer: All information provided in this blog is provided on a best-endeavours basis, and is generic information. It doesn’t constitute financial, legal, accounting, taxation, building or any other advice. The author encourages all readers to obtain the appropriate financial, legal, accounting, taxation, building or any other advice from a suitably skilled professional before making any decisions that could impact you financially.

Keywords: Capital Gains Tax, Property Investment, Property Investors

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