Falling house prices - who benefits, who hurts?

Personal finance writer Mary Holm answers your property and finance questions.

Q: Watch our real estate market now begin a downward spiral. Severely reduced sales, caused in my opinion by the Government fiddling with the natural market.

There was a recent report on TV on a day of eight auctions in Auckland where not one of the properties sold. The realtors here in my resort town have recently admitted that the local market is dead — an unusual occurrence at this marketing time of summer/autumn.

The Government has restricted foreign buyers, threatened a capital gains tax, and earlier increased the bright line test from two years to five years.

The real estate market is a very sensitive barometer of our economy. It has now reacted, and will fall further before more fiddling is necessary for recovery. In the meantime, huge losses, unemployment and bankruptcies will follow.

We are running our country with ignorant fools who could never run a company profitably.

Imagine the damage that will follow in coastal beach resorts, towns and villages. For example, the Coromandel Peninsula will suffer hugely, because of the 50:50 spread of permanent and non-resident ownership. Imagine the huge amount of small businesses that will fail in these areas.

Watch this space.

Mary: Let's not get carried away here — for several reasons:

• House prices are still rising nationally, although they are dipping in Auckland.

Across the country, median prices increased 6 per cent from February 2018 to February 2019, says the Real Estate Institute. It was a tale of two regions, with Auckland prices down 0.6 per cent but prices elsewhere rising a healthy 9 per cent.

It's true, though, that sales volumes are down — with February sales nationwide 9 per cent below last year. In Auckland, the drop was 18 per cent, while elsewhere sales fell 7 per cent. And there's a tendency for prices to fall after sales numbers fall.

• Even if prices do fall around most of the country — we've seen it all before several times in recent history as our graph shows. And we survived.

True, some people fare badly when house prices fall and markets slow down.

Obviously real estate agents hurt, but many of them have done extraordinarily well in recent years, so hopefully they have some savings or can get other work.

Others who might get caught are those who bought an investment property recently and are forced to sell at a loss.

But they took on a risky investment — no doubt hoping for big gains. If you invest like that, you must be prepared for bad luck sometimes.

Homeowners for the most part just don't sell if prices fall. And if they have to sell — perhaps because they are moving — with any luck prices will have fallen in the new place too.

In your town, most people will probably just hold on to their properties.

The bach owners will keep coming there for their weekends and holidays, and keep spending at the local businesses.

The real estate agents might even see a bit of action if prices become more affordable for some.

A fall in house prices would be great news to many people struggling to get into their first home.

Maybe it's their turn.

Tax impact

Q: I have been a landlord for more than 50 years, and owned the same rental property for nearly 30 years. My own home has increased in value from $20,000 to $1.5m in 45 years. For a landlord who owns a property for, say, 30 to 40 years, the capital gains tax would be based on almost the total value of the property. The tax could be almost 33 per cent of the property value. Is this how it would work?

Mary: Yes, if you are in the 33 per cent tax bracket — with taxable income over $70,000. But that's not shocking really. People who earn salary or wages above $70,000 pay 33 per cent tax on that money. Still, facing a tax that big would make it difficult for a landlord to sell their rental property and buy another of similar value — if, say, they moved to another town.

In it for gain

Q: I can't understand the fuss about the proposed capital gains tax from residential property investors. Under current legislation, those who invest with the intention of making a capital gain are taxed on the gain at their marginal rate anyway, so nothing new for them.

Therefore, for all other investors, any such gain would be an unexpected windfall, of which they will only have to share a maximum of 33 per cent with their fellow taxpayers.

It certainly can't be justification for increasing rents. First, they weren't expecting the gain anyway, and second, it will have no effect on their cash flow while their house is being let.

Or could it be that most investors have bought in the hope of a capital gain but just haven't let on to Inland Revenue?

Mary: You make an excellent point. The trouble is, as everyone knows, the present law is difficult to enforce.

It seems that some landlords claim they didn't buy with the intention of making a gain, but planned to hold the property until they died. However, circumstances changed so they sold. Hmmmm. Under the proposed changes, at least everyone would know where they stand.

Fair enough

Q: Ten years ago I wrote to you saying how I enjoyed being a residential landlord. I still do, and will continue to do so if and when a capital gains tax comes in.

Presently we pay tax on our rents and I will be very happy to also pay capital gains tax on future sales of the properties.

Some of your correspondents say a CGT will take away their hard-earned savings.

However, any proposed tax would not come into force until a couple of years time.

So their fabulous capital gains over the past 10 years are safe as houses. Plenty of time to decide if rental property is part of your future savings plan.

Is it so terrible that if in the future you make a $100,000 gain on an Auckland rental property you would only receive $67,000 on the sale of that property?

Do the words fair and equitable need to be considered?

Perhaps you feel more of the tax burden needs to be shouldered by those less fortunate than yourself?

Perhaps you were always in it for the capital gain and should therefore be paying tax anyway?

I agree with the Tax Working Group that any future capital gains tax should be across the board.

If I'm happy paying the tax so should others fortunate enough to be in a position of making these financial decisions.

May: Good on you. And you're not the only landlord who thinks the proposed tax would be fair.

A recent Horizon Research poll found 44 per cent of adults support introducing a CGT, and 35 per cent are opposed — the rest were neutral or didn't know.

Unsurprisingly, the numbers were different for landlords.

About 66 per cent of landlords without a mortgage and 74 per cent with a mortgage were opposed. But still, that leaves quite a number not opposed.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her latest book is "Rich Enough? A Laid-back Guide for Every Kiwi", and her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected]. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.