Government tinkering with the housing market doesn't work

Over the past few years we’ve seen several initiatives introduced to accomplish this.

The introduction of Loan-to- Value restrictions (LVRs) in 2013, the bright line test in 2015, and the soon-to-be-introduced ring-fencing of tax losses are supposed to dampen house price inflation and make houses more affordable.

Yet, despite grand claims from some quarters, none of these measures have achieved these goals. Instead, while the Government and the Reserve Bank have succeeded in dashing the home ownership aspirations of many Kiwis and quelling the appetite of investors to provide the lion’s share of rental accommodation in New Zealand, their actions have done little, if anything, to make houses more affordable.

To the extent that the market has flattened in Auckland (and will soon flatten in other parts of the country) we’re simply seeing the entirely predicted cooling of the property cycle.

Despite this, the Coalition Government is now moving to extend the Bright Line test from two to five years, and it’s justifying this measure to, in their words, “preserve the integrity of the tax system”.

That sounds reasonable — until you drill down to find out precisely who these measures are aimed at. Both Revenue Minister Stuart Nash and Housing Minister Phil Twyford use the same word — “speculators” — to describe who they have in their sights.

In doing so, they expose their lack of understanding of the property market.

‘Speculators’ (known also as ‘traders’, ‘flippers’ and ‘renovators’) come in two forms.

At their best, speculators renovate a property during the short time that they own it, thus performing a social good by improving the quality of housing stock.

At their worst, they simply buy, wait a few months, then sell – although this behaviour is generally confined to periods of very strong capital growth.

These people buy and sell in the expectation of making a capital gain and there’s no question that they should pay tax on this gain as this is their income and the purpose of their business.

However, the idea that they hold on to these properties for up to five years is ludicrous. A successful speculator is likely to be in and out of a property in less than six months because the holding costs of retaining it longer than that would erode their profit margin. This view is supported by Valocity data which show that around 14,500 properties were sold within any six month period since 2013 – and only a portion of even this number will have been sales by speculators.

The other way to run a property business is to become a landlord, generally refered to as a property investor. These people are overwhelming mums and dads who buy property for the long term, usually in an effort to provide for themselves in retirement.

While there are no hard figures on how long these people hold on to a property, in my experience I would suggest that the average period would be around 15 to 20 years.

As such, they are in the business of providing rental accommodation — an activity on which they are (and always have been) taxed once a rental property becomes cash flow positive.

To label this group as ‘speculators’ is not just wrong, it’s offensive. According to one measure, there are at least 525,000 rental properties in New Zealand, and of these, the overwhelming majority (over 450,000) are owned by private property investors.

We know, from census figures, that four in every ten Kiwis are housed in rental accommodation, so if these investors were not in the market these homes would have to be provided by the State (which is just a front for you and I as taxpayers).

As such, property investors provide an important and tangible public service — yet this Government seems hell bent on doing everything it can to get investors out of the market and discourage others from entering it. This is lunacy and an act of bloody-minded ideology over reality.

That said, the extension of the Bright Line test will have little impact on property investors, precisely because most hold on to their properties for much longer than even five years.

Oh, and the Bright Line test is a form a capital gains tax – something Prime Minister Ardern promised not to preside over during her leadership. But that’s an article for another day.

- Ashley Church is the former CEO of the Property Institute of New Zealand and now writes for OneRoof.