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Frank Newman

Political Promises

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Promises, promises, promises, seems to be the theme of the election campaign to date. Given the uncertainty of the result, the promises have more relevance.

Unfortunately, for property investors some of the promises may not be welcome. Here’s a quick review of the housing policies of the main players.

Labour’s headline is “Crack down on property speculators“. The reference to speculators is misleading. Labour’s policies target residential property investors generally, not only those who speculate on house price rises with the intention of resale. Their two policies that are most likely to affect property investors are:

  • “…extend the bright line test from the current two years to five years. This will target speculators who buy houses with the aim of making a quick capital gain.” It was National who introduced the bright line test which taxes gains made on the resale of investment property within two years of purchase. Labour would extend that to five years. Rather than capturing those who buy with the aim of making a quick gain, the bright line test catches all residential property investors, and those with a second dwelling such as a bach. In effect, it is a capital gains tax if a property is sold within five years of purchase. No adjustment is made for inflation.
  • “….Speculators will no longer be able to use tax losses on their rental properties to offset their tax on other income which gives them an unfair advantage over people looking to buy their first home.” They claim the current law that allows property investors to offset any losses incurred on a rental property against other taxable income is a “loop-hole”. In fact, the offsetting of losses from one taxable activity against other taxable income applies to all income activities, not only property. In effect Labour would make a special case of ring-fencing losses from residential property. Those losses could be carried forward against future income derived from that property – if any – but could not be offset against other taxable income. If there is no future income, or the income is insufficient to cover the losses, they would be lost. In times of high interest rates, losses most commonly arise from high debt but now it is as likely to be because the tenant has done a runner, or the property has been meth’ contaminated.

Labour says that tax treatment would save $150m a year in lost tax revenue, which would then be given to home owners to subsidise the cost of insulation upgrades, double glazing, and heating.

On the matter of a capital gains tax, Labour is merely promising to adopt the recommendations of a tax working group, but has ruled out capital gains on the family home. Labour would set the terms of reference and appoint the panel members to undertake the review. Given the lack of independence, the panel’s recommendation is likely to reflect the wishes of the Labour Party, but with the political advantage of appearing to be expert and independent.

Other policies proposed by Labour include:

  • “Increase 42 day notice periods for landlords to 90 days…” The 42 days notice period currently applies when the property has been sold and the new buyer wants vacant possession, or the owner or a member of the owner’s family wants to live in the property.
  • “Limit rent increases to once per year (the law currently limits it to once every six months) and require the formula for rental increases to be specified in the rental agreement.” Presumably the “formula” could be a reference to any number of factors like increases in the market value of the home, the average rental in the immediate area, or increases in local body rates. 
  • “Abolish “no-cause” terminations of tenancies.” Presumably this means a property owner or manager would need to state why a notice to vacate has been given, and the tenant would have a right to challenge that in the Tenancy Tribunal. The intention is probably to stop unscrupulous landlords giving a tenant notice so they can increase the rent more frequently than the legislation allows.
  • “Ban letting fees”. The letting fee is usually one week’s rent, paid by a tenant to a property manager at the time they sign up for a new tenancy. Given these fees form a significant part of a property manager’s income they would have to recoup the lost income by increasing the management fee they charge property investors.
  • “….ban foreign speculators from buying existing New Zealand homes.” Presumably overseas residents could build a new home, but not buy an existing home.
  • Labour would become house builders via their $2 billion KiwiBuild scheme which promises to build 10,000 homes a year for 10 years. They say “homes in Auckland will be priced at $500,000-$600,000… and outside of Auckland prices are likely to range from $300,000-$500,000. These will be high-quality homes built to modern standards…” Anyone who has bought a section and built recently will be thinking, “Yeah right!” This would not be the first time that Labour has become a substantial property developer, although it is likely to be the first time it’s been done with the intention of under-cutting builders.
  • “Establish an Affordable Housing Authority to work with the private sector to cut through red tape and get new homes built fast.” It is interesting that both Labour and National are promising policies to sidestep the Resource Management Act, but neither wants to deal with the Act directly. As National discovered, attempting to change the RMA attracts a great deal of resistance from greenies and Maori whose interests are firmly embedded within the Act. In my view the market would be able to deliver low cost housing if the regulatory hurdles weren’t so high, then Labour would not need to spend $2 billion of taxpayers’ money on KiwiBuild.

While Labour is proposing significant changes for residential property investors, National isn’t.  There is nothing in their announcements to indicate further measures that would adversely affect property investors.

However, during its time in office, National has already targeted property investment for reform. Few of the changes would have been welcomed by residential property investors.

They have removed the depreciation allowance on residential buildings, which significantly reduced the deductible expenses property investors could claim and reduced the opportunities for negative gearing (which is the so-called “tax loophole” Labour wants to close).   

In this last term they introduced mandatory insulation requirements, the fitting of smoke alarms, and there is currently a Bill before Parliament to limit tenant liability to a maximum of four weeks rent in the event that they cause material damage. The Bill will also clarify the standards and procedures for meth’ testing.

It was National that introduced the ‘bright line’ test, which targets property investors by assuming rental property bought and sold within two years of purchase is was purchased with the intention of resale – and taxes any resale gains as income. Labour would extend the time frame to five years.

National’s only new policy is with respect to urban planning. They will “introduce new..urban planning laws separate from the Resource Management Act (RMA) to encourage more responsive planning, faster development, and better protection for the environment in our growing cities.”

That’s a strange policy and is characteristic of Minister Nick Smith who had previously criticised the RMA and promised major reform, but when the changes were finally made, National had added complexity and hurdles rather than removing them.

New Zealand First would:

  • “Encourage private investment in upgrading rental housing through the taxation system. Owners of rental houses could invest in specified qualifying home improvements and be able to expense them for income tax purposes in the year in which the expense is incurred, including home insulation, solar heating, heat pumps, HRV heating systems, wood pellet and other approved burners, earthquake strengthening, fire, food and other disaster protection.”
  • “Encourage smaller and more affordable houses on smaller sections.”
  • “Remove GST from rates on residential property.”
  • “Ensure that New Zealand’s housing stock is restricted to New Zealanders.”
  • On reform to the RMA New Zealand First would repeal clause 8 of section 2 and remove reference to the ‘principles of Treaty of Waitangi’ and “amend definitions relating to ‘spirituality’ which..has no place in resource consents“.

The Greens would:

  • Remove the obligation on tenants to pay letting fees.
  • Remove the landlords’ 42 days notice option and restore the standard 90-day notice period.
  • Limit rent increases to no more than once a year.
  • Require that the formula for calculating any future rent increase be included in tenancy agreement forms.
  • Set a default of three years for fixed-term tenancies on the standard tenancy form. Landlords and tenants could by agreement vary that term. 
  • Allow tenants the right of renewal on rental agreements once their lease period has ended. This potentially may give tenants a right in perpetuity, although the policy lacks specifics.

The first four of these policies are identical to that promised by Labour.

What is evident from the policies is that if a National led coalition is back in charge it would be pretty much a status quo approach for residential property investors. A Labour lead coalition would result in significant reform to the taxation of residential property investment, and changes to tenancy arrangements. Some landlords will be of a view that what the Greens and Labour are proposing is simply the first instalment of an intention to move towards a more regulated and controlled rental market based on their social objectives.  

Less certain is how much influence New Zealand First would have on either National or Labour; probably not much given the policies most relevant to residential property investors are not “bottom-line” policies. If Winston Peters does hold the balance of power he has said a decision about which party he will support in Government (and the terms of the coalition) will be made by October 12th when the writs with the final election results are returned.