Announcements drifting in the wind about possible tax changes for rental property have made a surprising number of people I know apprehensive.
This is a personal story from one of my friends, who takes good advice and works hard; he left school and got a trade, he is still on the tools, and after 30 years has paid off his house. He rides a good second hand Harley, not new, has a five year old Jap import for a car, so there is nothing excessive there, but he is concerned.
He was told to save for his retirement, and he felt he needed to after all the changes to super; cuts to rates, taxes on it, increase in age of entitlement, constant speculation about more age increase, nothing was certain, so he started saving to look after himself.
The 1987 stock market crash made him justly nervous about investing there. He remembers Ariadne and Mr Judge: Gold Corp and Mr Smith and November 1987 when people appeared to him to be dumping share script by the rubbish bag.
Leaving the money in the bank on fixed deposit didn’t seem good enough, as the rate of return was less than inflation, so it was being eaten away over time.
Investment companies were of little interest to him and he has watched a succession of them explode like a string of Chinese fireworks so he feels good about avoiding them. The only thing left was a rental property, which he is paying off.
This man is no bludger, no rack rent landlord, he is not highly leveraged gambling on capital gain to off set other costs, he is a hard working Kiwi and a saver. He has done what was asked of him and now he fears that he is to be punished some how for doing the right thing, saving prudently. He saw a house as a good investment. Property values might go down, but he would still have the house. Tenants might be a problem, but he would still have the house and he was in control of his investment, he wasn’t in the hands of some young, out of control investment manager such was the case for former Bearings Bank investors.
He has been prudent and saved his hard earned cash. I am surprised by the number of friends who are in a similar position with a rental property and who have asked me what is going on. They include a journalist, teacher, shop manager, all walks of life; they are ordinary Kiwis who have done what was asked of them, to save for their retirement.
There must be thousands of people like this who own a house, flat, apartment which is their way of saving for that extra to help them with their retirement and good on them too.
I have told them that I have no inside information and know just what they do from the public record. They all feel put upon by the implication in the papers and from the commentary that somehow they have been gaming the system, ripping off taxes and are somehow directly or indirectly to blame for the “imbalance’ in the tax system.
These people have all worked hard. They have saved hard, forgone big holidays and other excesses in order to pay off their first house and then save for their second property, their retirement income.
Rick – that’s the first piece by a Labour MP in ages that really suggests you’ve got it and really want to reconnect with the sort of people who used to be the backbone of your party. Learning a trade, working hard for 30 years and taking steps to provide for your old age doesn’t make you an evil capitalist. Others please note.
O_o
Sometimes it would be, sometimes it wouldn’t be. It would average out overtime to be in excess of inflation.
And in doing so have damaged the economy.
He didn’t save prudently though did he? He bought a house and then expected such non-productivity to provide for him. Now, it’s not entirely his fault as the economy has been set up wrongly in the first place (set up to provide for those with more from those with less) but that doesn’t make what he did right.
Welcome to Red Alert Rick. So glad you’ve made the plunge. Can tell already that you’ll be a star. Clare
It’s going to be so awesome seeing the Labour Party argue that the landowning class shouldn’t have to pay any tax. Go Rick!
I have to agree (mostly) with Draco on this…. The purpose of rental property owners paying extra taxes is to drive them away from investing in porperty. It’s not productive. Ask your friend if he would have bought the house if he would have had to pay extra tax for renting it out. The answer is probably no, this would have pushed him towards a more productive investment such as the stock exchange… The taxes, in theory, will push people like your friends towards productive investment… That’s what you want. But tell your friend not to worry, between Key and English, they’ll find 10 reasons not to change anything. They have their own fianances to worry about……
… and the subsequent comments show that at a grassroots level the activists still have a very long way to go.
Well that’s the problem – you do the math and realise that the way the system is set up, buying another property is the best way to make money.
Meanwhile the next generation who have student loans and no chance of any kind of super when they retire, are priced out of the urban housing market for their FIRST home. Then are expected to support the multiple-property owning generation (who got their first homes cheap) not to mention will pay the bulk of the costs for the environmental damage of generations before them.
Poor wee property investors? Come-on.
“The only thing left was a rental property, which he is paying off.”
Saving via a rental house is fine… it’s the making it loss-making rental to rort a tax return that is the problem. A problem which will lose a few votes to solve but I think the nation needs this tidied up.
I think the key problem here is simply if you can’t invest for retirement in property – what else is there?
All the hesitations over other forms of investment listed in this post are valid. Does reform of property tax need to be accompanied by improved regulations in other areas of investment so these become somewhere people could put their life savings?
I don’t understand the point of your post Mr Barker.If your friend’s rental is paying its way, and your friend is not reliant on tax breaks to keep the house, then he should be unaffected by any changes.
If however the rental is not self supporting but is kept afloat by the taxpayer then he has no cause to complain if the rules are changed.
With any investment you have to weigh up the risks. If buying your “investment” is only possible because you have got access to cheap finance and tax deductions, and a change to either of those conditions would send you to the wall, then maybe that “investment” is just too risky.
I for one am angered that the taxes I pay go towards tax breaks for landlords and I want to see the tax breaks ended. No sympathy here for your friend and others like him. Your friend’s “investment” is other people’s misery as house prices are pushed higher and higher and then out of reach.
I would like my children to be able to own their own houses but I fear the selfishness of this property owning generation is going to force more and more young people out of NZ. Things have to change. And change should also involve getting foreign speculators out of our property market. You should have to be a citizen or permanent resident to buy housing in NZ.
Can someone please tell me “What tax breaks”???? There are none!
I know a hell of a lot about property and the tax mechanisms, but I also know that property investment is treated as a productive business by the IRD. It is not treated any different to any other business. Often business will make a loss in the growth phase on the expectation of future profit.
And then we get people Mark Weldon and the mutual fund workers on the TWG say they want to level the playing field by imposing ’special’ taxes on a property business but not the share market/other business.
Seems to me Draco that all their proposals are intended to keep the wealth where it is (expanding in the hands of the few) and take it from those who are trying to build wealth (all asset classes).
PS Also tell me why you think its unproductive to provide a vital service (shelter) to the community? Then find a developer, builder, Banker, Mitre 10 worker, property manager/agent etc and see if they agree.
Like so many of us (ie property investment owners) your friend bought a property because there are clear advantages, especially being able to offset the costs against the envy taxes introduced by Labour. Like your friend, many property investors needed a vehicle to reduce our tax bills and buying rental property is probably the easiest and best way to achieve this. We have enjoyed fantastic growth in the value of our assets. Tax free because we hold long term and use this as a vehicle for funding our retirement.
But because nine years of Labour wrecked the tax system and the economy, the National Government now have to undo the disaster that Labour left.
So please do not get all precious. Tell your friend that the nice National Government are just fixing what Labour broke, and that he should be grateful that he has enjoyed tax advantages and tax free capital gain – but now those good times are going to finish and he will need to look at other opportunities for his hard earned money.
Anyone driving around in a Harly, with a new car, and an investment property, is rich by most NZs standards? Labour has lost touch….
People like your friend are not evil capitalists, if he is running it like a business he should still make a decent return, but if you have owned two properties for the last 15-20 years or so you are not exactly dying out there.
There are a couple of interesting graphs in the TWG Report showing the money moving round after about 2000. If income is so malleable it is not on its own a clear indication of wealth or ability to pay – hence 38% as a banner rate for progressive tax isn’t credible.
Perhaps we need to go wider than property, but I see this as about redistribution between those who are doing passably well and an opportunity to take a bit less from those down the bottom – which is also progressive.
So does this mean it’s only the Greens left with the guts to do what is right and propose a capital gains tax? With hope, a new generation of younger, property-less Labour MPs will think differently…
Looks like we’ve got two ‘Jennifers’ posting on RedAlert. Unlike my namesake, I think Rick has got it pretty much right. What the tory tax ‘experts’ do not seem to take into account in their sterile analysis are the issues that Rick raises, and the benefit to the nation of having a healthy private sector rental market.
I had to laugh at that property investor thinking they provide a ‘vital service in providing accomodation’ – oh come on – seriously, get real. If you were providing a ‘vital service’ New Zealand’s rental housing stock wouldn’t be such an overpriced disgrace and it IS an overpriced disgrace. Property investment is a lazy, risk free investment for people who aren’t able to do something productive.
Tax it, kill it and start making NZ a desirable and affordable place to LIVE for those starting out and we’ll have at least one differential with Australia for our future.
Nice response Paul.
Since I’m not a property investor I guess then we can meet up at the hotel you’ll be using for accommodation and we can talk about overpriced?
Anyway, if you want to talk to someone who could dispel your “unproductive” myth just ask a developer, banker, agent, valuer, surveyor, council planner, Mitre 10 worker, prperty manager, tradesman and see what they say?
Also Paul,
Did you realize that half of all businesses are started with credit backed by houses. Banks would rather secure their loans against your house than the “productive” business.
Does that tell you anything?
Thanks Jeremy,
Well, I’m for basic economics so let’s assume we tax property, investors ‘flee’ the market, get real jobs and sell all their houses. Supply increases and meets demand (people would want houses to live in rather than rent) so the price falls over time to a market level borne out by NZ’ers ability to pay rather based on NZ wages and allows more renters to finally escape the rent trap.
Now new home owner former renter wants to plant a garden, so he goes to Mitre 10 to buy some tools, then say he wants to open a pie shop, employ a few kids, so he goes to the bank and secures his home against the loan …. maybe he wants to expand his property, calls a surveyor in.. etc etc. You’re never going to convince me that property investors are an asset to the economy and we need them. We need more home owners, sure – but we don’t need property investors. One is more engaged with the local community, the other is a parasite who lives in a better suburb and contributes to social disengagement in rental traps where his ‘investments’ are. Sure, I agree most businesses are secured against the family home, so why can’t we let more people actually have family homes rather than people just using their home to buy more homes?
Spare a thought for those people actually forced to pay half their salaries every week. They are just getting siphoned off and are tax sheep for people who don’t need the money as much as they do – most young expats will tell you that. Why should these people at the start of their careers be locked out to protect a few babyboomers’ investments? They’ll just give up and leave and we’re not talking about people in HNZ homes here, we’re talking about young couples who have to decide where to live and to whose economy they are going to contribute to for the next 20-30 years. And who can blame them when ‘market’ rents in Auckland (where most ‘first’ jobs are) for a place match the average take home wage? Where’s the future in that?
and also Jeremy,
Let’s assume a hotel costs $120 a night, that’s the same price as a 3 bedroom place in Ponsonby per week and some apartments in the city ..
Anyway, thanks for sharing your ideas.
Paul,
How about supply and demand? Assuming investors all cash up on mass (I doubt this will happen, more likely just push up rents as any business will seek to recover cost). Prices fall, but homeowners and first home buyers will still be paying more than investors. All new developments will stall as developers figure out they cannot cover council costs & credit, trade wages fall and tradesmen leave (do you think they will survive on small reno jobs). Less rental stock available will push up prices (we are already heading for a housing crisis).
Part 2 Yields will rise (rent up, price/supply down), new investors will enter (more foreigners than before). Prices rise again. So whats the point of going through this pain now and stripping the retirements savings of the boomers just when they need it. Just consider what the market alone will do as they do retire/die on mass & sell off (shares & property).
The other question is why would you seek to make the sharemarket look better by making property worse. What they are effectively proposing is to make one business class disadvantaged to all others.
As for my preference, a clean land tax, with kickbacks for superannuates, but I guess they can get this wrong just as easily.
You also forgot to divide the 3 bedroom house by 3 as you can get flatmates in a house.
And I guess we will disagree about productive, as long as you also call any other ‘lease’ business (Car hire/DTR) unproductive.
The topic is inter-generational theft – a subject that I don’t think Rick Barker considered while writing about his “poor” friend whose properties have soared in value over the past decade or two at the expense of most kiwis under 40 years of age.
We’ve only worked for 20 years after being made to stay at school until 17 and then been kicked into the workforce with 6 figure debts for working longer years at school and uni than most of Rick Barker’s class mates back in the 60’s.
Most of those his age have been making more a year by owning a home than the average wage but they still don’t think it’s right that they should pay tax. Many have taken loans against the difference to buy the Harleys etc and are now a bit worried they’ll lose their toys.
It makes me very angry. This is Labour missing the point…
If I earn $100k from working, I pay $35k or so in tax.
If I do nothing and make $100k from property inflation, i pay no tax.
How is that fair?
As a 31 year old single male making slightly over median income for someone in my age bracket, home affordability is a more pressing issue for me than returns on rental properties and I’m not prepared to wait until the baby-boomers die off before I can achieve the modest dream of owning my own home. With a Masters’ degree (an MLIS, I’m a librarian) I am qualified on the British highly skilled migrant points system to migrate to the UK, or I can always go to Australia. I can appreciate that Labour can’t be seen to support the government on a supply issue, but communities are far more stable and have greater potential for social growth if the people who live in them have a stake in them.
Labour is to be credited for Kiwisaver and the first home owners’ deposit subsidy, but unless incomes rise or home prices drop (probably a combination of the two), the Kiwi dream is out of reach even for me.
Thanks Jeremy.
You raise some interesting points. I’ve heard some bluster about investors cashing up and leaving and I hope that’s exactly what they’ll do. However, I tend to agree with you that investors will just push prices up and just make everything worse – that tends to be the cut of their gib.
When the babyboomers finally get out of the way, they’ll just hand their ‘assets’ down to possibly an even more selfish generation (us!) so I don’t see any relief there.
I think Key is right for at least looking at the issue – what will ultimately happen, however is anyone’s guess.
Thanks for your ideas. Food for thought.