OPINION: A few weeks ago a news story from another media organisation dismissed my criticisms of this Government’s landlord policies, saying “house prices are going up”. I don’t know whether the writer was inferring that the Government is deliberately delivering higher house prices to investors as some sort of trade-off for their draconian policies in other areas of the rental market – or that, despite those policies, house prices are continuing to rise and therefore investors are still doing well out of the market even though they’re under attack by the Government.
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The comment demonstrated the same lack of understanding of the rental property market which has driven so many ill-considered policy initiatives. That confusion was best epitomised, a couple of years ago, by the extension of the bright line test from two to five years. This test is used by Inland Revenue to determine whether the speculative profit made on the sale of a property should be taxable – and the move to increase it clearly demonstrated that the Government doesn’t understand the difference between speculators and investors.
Let me explain.
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Speculators – also known as traders or flippers - are in the business of buying houses for quick resale. As such, they should absolutely pay tax on their profits. At their best, they buy a property, do it up, and sell it on – thereby improving the quality of the overall housing supply. At their worst, they buy when house prices are rising strongly, wait a few weeks or months, then resell at a profit. This latter group add nothing of value and are simply a blight on the market. But both are in the business of buying houses in order to sell them. The timeframe within which they do this can be weeks or months and, for this reason, they are not in the business of renting these homes to tenants. Their business strategy could be summed up as “get in and get out at a profit” and, for this reason, extending the bright line test to five years was nonsensical.
Property investors couldn’t be more different from speculators. Investors buy for the long term – often decades - and they derive their business income from rent. For this reason, they are taxed on the profit made from this rental income – essentially, whatever is left over after the cost of interest, insurance, maintenance, rates and other costs have been deducted from the rent they receive. In this respect, investors are no different to any other business owner. They establish an enterprise, operate it for a period of time as a going concern and then sell it when they’re ready to retire. The proceeds of any increase in the value of that business (or rental property) over those years isn’t taxable for the simple reason that the Government’s share of the success of that business (or rental property) has already been extracted, through tax on the income of that business, over the lifetime of the business.
But what happens if the rental income on a property isn’t enough to cover the outgoings on the property? Pretty much the same thing that happens to any business which isn’t making money. If they can, the owners will sustain a loss for a while – but eventually they’ll choose to get out or be forced to do so by economic reality. This is already a very real issue in Auckland – where house prices have made it almost impossible for more recent investors to cover their outgoings – and it will become a serious issue in other parts of the country in the years ahead. Investors will simply abandon the market because they can’t make money on their investment and because the Government is hitting them with more and more rules and costing them money that they’re not making.
This matters. Forty percent of Kiwis rent and we need to anticipate, and plan for, enough rental properties to meet that demand as our population grows. Currently, almost 90 percent of that rental housing is provided by the private sector – but if we make it too hard for investors, that responsibility will fall back on the state, which is simply you and I, as taxpayers. The cost of this would be in the tens of billions of dollars and would rival Covid 19 in its economic impact.
Make no mistake – this is the real rental crisis which is looming just over the horizon and continually hitting property investors with rules which treat them as if they’re short-term speculators is a sure recipe for disaster.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
