Ask specialist property and tax accountant Matthew Gilligan what he thinks property investors will do if the capital gains tax (CGT) proposed by the Tax Working Group goes ahead and he is in no doubt.
Investors will hold. But that’s not a good thing.
“The one distortion that comes out of the way that CGT works is that it will encourage ‘lock in effect’, meaning people won’t sell,” he says. “CGT is easy to circumvent, and we’ll be telling our clients that.”
Gilligan, whose specialist practice Gilligan and Rowe has some 9000 property investor clients, making it the largest property practice in the country, says that the tax is a huge incentive not to sell. He’ll recommend that to his clients, showing that they’ll be better off gearing against the improved value of the asset and using that money, tax free.
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“Say you’ve got a property that you bought for $500,000, and 10 years later it is now worth $1 million. If you sell, you’d pay CGT at 33 percent, and have $333,000 in hand,” he explains.
“Or, you could go borrow against the gain and pay no tax on it. You don’t have to put it into property. There is a tax incentive not to sell.”
He reckons there are other, less complex ways of the government getting the revenue, such as stamp duties or extending the Bright Line Test to ten, even 15 years - both less burdensome for both IRD and investors’ compliance costs.
Gilligan, who bought his first home aged 25 and the first of his 30 investment properties three years later, tells his clients in seminars and books “don’t sell it, gear it”. Even for first time investors, the mums and dads, the teachers and policemen, he advises to develop property to hold it - to make it tax efficient to create housing supply.
He anticipates that along with lock-in, there’ll be what’s known as “mansion effect”, where instead of selling, as they would before CGT, owners just keep pouring money into their houses. Carried to its extreme - as has happened in Australia - and investment properties became so heavily geared that when the market fell they are now in negative equity.
“That means they’ll never sell.”
On the other hand, mortgage broker and investment strategy Kris Pedersen anticipates a continuation of the sell trend that started as capital growth levelled.
“Since then, we’ve seen more focus on trading, rather than buying to hold,” he says. “Some long term investors are doing trades and development - buy-renovate-flick - mixed with long term holds.
“The average investor is just trying to set up for retirement, but when there’s been quite a beat-up on property investors in media and politically, some people don’t have the same incentive to be a long term landlord.
“And, as a mortgage broker, I see banks backing out of interest-only loans. So there’s a perfect storm of lots of things all at once, investors questioning property and looking at other asset classes.”
So yes, Pedersen does think more costs will shift investors out of the market, but he doesn’t see loads of houses flooding the market, as it’ll be 12 to 18 months before changes like letting fees or no tax refund will actually be felt.
Daniel Coulson, Bayleys national head of residential, says that while it’s too early to say on CGT, landlord sentiment has already been impacted by things such as the healthy homes bill.
“In Auckland in particular they are operating on low net returns already and are unable to offset this against capital gains due to the lack of price pressure in the market, as they have in the past,” he says. “Any future tax on realised capital gains would create further imbalances in the value equation.
“There is a risk that continued pressure on landlords could further increase rent prices…as well as the real possibility that the pool of rental stock decreases due to landlords selling,” says Coulson.
Philip Macalister, who recently surveyed some 1300 investors through his NZ Property Magazine and landlords.co.nz found that 90 percent had a buy and hold strategy, not flipping.
“Most investors I talked to today and yesterday can live with CGT, even if they’re not particularly enamoured with it,” he says. “There are a lot of people who still want to rent, and landlords who want to run a service business providing accommodation."
