Article: Property Investment

Political Promises  (Part 1 of 2) with Frank NewmanPolitical Promises (Part 1 of 2) with Frank Newman

With just weeks to go before the general election on 23 September, the political promises have been coming thick and fast. This time the election outcome is more uncertain, so the promises have more relevance.
Unfortunately, for property investors some of the promises may not be welcome. Here’s a quick review of the housing policies of the main players.
Labour’s headline is “Crack down on property speculators”. The reference to speculators is misleading. Labour’s policies target residential property investors generally, not only those who speculate on house price rises with the intention of resale. Their two policies most likely to affect property investors are:
• “…extend the bright line test from the current two years to five years. This will
target speculators who buy houses with the aim of making a quick capital gain.” It
was National who introduced the bright line test which taxes gains made on the
resale of investment property (which includes baches) within two years of
purchase. Labour would extend that to five years.  Rather than capturing those
who buy with the aim of making a quick gain, the bright line test catches
residential property investors, and those with a second dwelling such as a bach.
In effect, it is a capital gains tax on the targeted properties if they are sold within
five years of purchase. No adjustment may be made for inflation.
• “….Speculators will no longer be able to use tax losses on their rental properties
to offset their tax on other income which gives them an unfair advantage over
people looking to buy their first home.”  They claim the current law that allows
property investors to offset any losses incurred on a rental property against other
taxable income is a “loop-hole”. In fact, the offsetting of losses from one taxable
activity against other taxable income applies to all income activities, not only
property. In effect Labour would make a special case of ring-fencing losses from
residential property. Those losses could be carried forward against future income
derived from that property - if any - but could not be offset against other taxable
income. If there is no future income, or the income is insufficient to cover the
losses, they would be lost. In times of high interest rates, losses most commonly
arise from high debt but now it is as likely to be because the tenant has done a runner.
Labour says that tax treatment would save $150m a year in lost tax revenue, which would then be given to home owners to subsidise the cost of insulation upgrades, double glazing, and heating.
Other policies proposed by Labour include:
• “Increase 42 day notice periods for landlords to 90 days…”  The 42 days notice
period currently applies when the property has been sold and the new buyer
wants vacant possession, or the owner or a member of the owner’s family wants
to live in the property.

• “Limit rent increases to once per year (the law currently limits it to once every
six months) and require the formula for rental increases to be specified in the
rental agreement.”  Presumably the “formula” could be a reference to any number
of factors like increases in the market value of the home, the average rental in the
immediate area, or increases in local body rates.
• “Abolish “no-cause” terminations of tenancies.” Presumably this means a property
owner or manager would need to state why a notice to vacate has been given, and
the tenant would have a right to challenge that in the Tenancy Tribunal. The
intention is probably to stop unscrupulous landlords giving a tenant notice so they
can increase the rent more frequently than the legislation currently allows.
• “Ban letting fees”. The letting fee, usually one week’s rent, paid by a tenant to a
property manager at the time they sign up for a new tenancy. Given these fees
form a significant part of a property manager’s income they would have to recoup
the lost income by increasing the management fee they charge property investors.
• “….ban foreign speculators from buying existing New Zealand homes.”
Presumably overseas residents could build a new home, but not buy an existing
• Labour would become house builders via their $2 billion KiwiBuild scheme which
promises to build 10,000 homes a year for 10 years. They say “homes in Auckland
will be priced at $500,000-$600,000… and outside of Auckland prices are likely
to range from $300,000-$500,000. These will be high-quality homes built to
modern standards…” Anyone who has bought a section and built recently will
be thinking, “Yeah right!” This would not be the first time that Labour has become
a substantial property developer, although it is likely to be the first time it’s been
done with the intention of under-cutting builders.
• “Establish an Affordable Housing Authority to work with the private sector to cut
through red tape and get new homes built fast.” It is interesting that both Labour
and National are promising policies to sidestep the Resource Management Act,
but neither wants to deal with the Act directly. As National discovered, attempting
to change the RMA attracts a great deal of resistance from greenies and Maori
whose interests are firmly embedded within the Act. In my view the market would
be able to deliver low cost housing if the regulatory hurdles weren’t so high, then
Labour would not need to spend $2 billion of taxpayers’ money on KiwiBuild. 

Next week: What are National and the minor parties promising? 

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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