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Property taxes and tenants – have I missed something

  • January 30th, 2010

I'm not surprised by the left's enthusiasm for new property taxes.  "Soak the rich" is enough policy analysis for them – whether or not it hurts the poor more than the rich.

Catherine Harris in the DomPost last weekend put some of the landlord's case. But it would not persuade anyone driven by righteous joy in punishing the moneyed classes, and it did not explore the possible effect on tenants.

With my self taught economics I've been puzzling the apparent lack of public concern about what will happen to rents if and when the alleged taxpreference or subsidy for ownership of rental housing is removed. 

As I understand things when we subsidise suppliers we usually get more of their product than market demand alone would produce. Supply is artificially high and prices to consumers are artificially low.

So why would rental housing be any different?

Yet I've seen plenty of confident assertion that assumes the property market is different – somehow prices are driven to unsustainable levels by the artificial demand created by tax preference. I could perhaps buy that in relation to property for which there is finite supply, say for the best locations. But why should it apply to property generally, when there are hundreds of developers, and thousands of builders just waiting for the signals to produce more housing, and more rental housing in particular if there are landlords to buy them for more than they cost to build?

Business journalists have uncritically reproduced the theory that changing the tax treatment of property investment will steer New Zealanders toward more "productive" investment. Not so many have added the second leg – that as a consequence property prices will fall to become more affordable, but that seems to underlie much of the political enthusiam for the Tax Working Group's focus on property.

But will prices fall, at least in the rental market, if rent already provide a return that is better than bank interest rates? If more people need to rent, and the supply falls over time, as it might if it is correct that landlording has had a subsidy which will go, will rents not rise?

I think our 'unaffordability' of housing (it now takes over 6 times the average wage vs the 3 times that was the previous long run average) has nothing to do with tax preference. Indeed it may have been masked by it. Instead the problem is strictly the result of the mad RMA and the panicky regulatory reaction to leaky homes, which together have doubled the cost of new building.

Why is the left not panicking over the coming housing shortage?


  • Lindsay
  • January 30th, 2010
  • 7:46 am

I have also pondered this in a vague sort of way. A great deal of rent is currently paid  for with the accommodation supplement (a $billion annually ). If rents rise as a result of a property tax, under this government's approach of compensating the 'poor' for any rise in their living costs, the accommodation supplement will also have to go up. How much of the extra revenue raised will be offset by the extra expenditure?
The Left puts up two irreconcilable demands. As you put it "soak the rich" and subsidise the poor. But while the landlord has freedom of pricing nothing has been achieved except more cash transfer. The same happens with employment. While on one hand the Left wants workers topped up be the state,  they also rail against subsidising the employer. Hence a minimum wage is legislated.
So don't be surprised if the Left  start talking about a maximum rent. If National go down this road they will have to contend with this demand, and as Mr Key has already fiercely asserted that the 'poor' will be compensated for any rise in GST,  he will be in a very weak defensive position.

  • MarkS
  • January 30th, 2010
  • 9:33 am

I think that your assumptions about an infinite supply of housing is incorrect.  A combination of the RMA plus the Metropolitan Urban Limits ensure a finite supply.  The MUL restricts the amount of land, and the RMA restricts the speed at which it is developed. 
I notice that the National Government has changed the RMA and is reviewing the MUL, which I suspect will do more for correcting house prices than a land tax ever will. 
Other things would be to apply tax on capital gains for those who trade in houses (i.e. just apply the current law), and to reduce the top tax rate.  The top tax rate is perhaps the most critical (it allows investors to borrow more for the same interest cost than for somebody living in the house), soperhaps if the land tax is added and reduces the top tax rate as well it will have enough of an impact.
And as for rents, they will have to go up.  It may not be immediate, but landlords will want to cover costs.  They are in it for profit, not as a social service.

  • Robert
  • January 30th, 2010
  • 7:26 pm

Landlords have been providing social service for years. No tenant pays rates, only the landlord does and the landlord is specifically prohibited in the RTA from charging a tenant rates.
So nothing new about landlords being suckered for social welfare.
More importantly though taxing land is even more inequitable that what we have now. Todays herald points out that Aucklanders would pay $1-4000 and Southlanders would pay $30. Now how that is fair when related to services provided is to me unclear, especially given that the estemed economists reckon that farm land and Maori Land and forests will need to be untaxed.
Good for Billy boy but won't elect to many of "Hone" Keys mates in Auckland or Wellington or Tauranga nor other urban centres.
Another thing worth remembering is that the banks rely on property for their security and if that security drops then not only does the landlord have an issue but so do the banks. Their funding ratios drop and they then have to lean on evryone. Now that won't be good for NZ Inc.
The best thing all the Banks can do right now is refuse to lend on new housing. Price support for their existing lending base and automatic increase in rents. Just follow Aussie.

  • brendan
  • January 30th, 2010
  • 9:38 pm

Correct .Our debate is poor and as I see it apart from depreciation the tax treatment is the same.Further causes are:
The LAQC regime which provides the only tax relef for middle class familes (Mum,Dad & the kids on a salary earner's wage);
Distrust of the sharemarket which is less transparent;
Cartel material suppliers;
Defensive behaviour by Council's ( quite rationally given how our light weight judiciary beat them up).

  • Stephen
  • January 31st, 2010
  • 6:35 pm

I agree that land use restrictions are probably our greatest contributors to housing unaffordability. Hugh Pavletich has driven this home.

But our recent experience of building a granny flat over a replacement garage on our own home property told us that out of control building regulation is now adding plenty of valueless cost as well.

  • al
  • February 16th, 2010
  • 12:24 pm

What you have missed is that over the last few years ten of thousands of new entrants into the rental property market are people whom have mostly paid off their mortgage in the last 20+ years and bought a 'renter' based on the depreciation tax loss. They often have multi-year contracts with Housing NZ, and do not want to be landlords, they are just looking for a safe investment/tax loss
A couple earning $100,000+ may pay no tax based on the "losses" and do no work other than sign the paper work with Housing NZ for a ten year period. After ten years they then sell the house and expect a capital gain
If this situation is changed by new tax laws, these people will all want to sell, as they cannot afford the extra mortgage payments without the tax loss. The housing market will then have a massive oversupply, and maybe the very tenants can buy the house they currently rent

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