By removing one of the tax benefits of property investment, it ought to reduce the price, Brian Fallow writes. Photo / Doug Sherring

 

Poor old landlords. More than 90,000 of them have invested in businesses that are running at a loss.

And now the Labour Party proposes to ring-fence those losses, denying landlords the normal ability to offset them against other taxable income.

A chorus of indignation and scorn has greeted Andrew Little's policy announcement on negative gearing last Sunday.

The Property Institute predicts a rapid reduction in properties for rent. But fewer houses for rent - even if that is the effect - does not mean fewer houses; it just alters the ownership split between owner-occupiers and investors.

By removing one of the tax benefits of property investment, it ought to reduce the price it is rational for an investor to pay for a property, and which a would-be owner occupier has to outbid.

 

Prime Minister Bill English says "taxing housing" would mean fewer houses when we need more houses. He must know that the number of chippies, brickies and sparkies thrown out of work by such a measure would be zero.

And the Taxpayers Union says rents would rise, inviting us to believe that landlords don't already charge what the market can bear, as determined by tenants' incomes, and over $1 billion in taxpayer subsidy from the accommodation supplement.

Yet shorn of its emotive language about speculators and loopholes, what Little was saying is essentially that rental properties should provide physical shelter to the people who live in them - not a tax shelter on their owners' other income.

Labour would use the revenue gained from ending negative gearing to fund grants for home insulation and heating, he said. "Homeowners and landlords will be able to get up to $2000 per dwelling to pay for up to 50 per cent of the cost of insulation upgrades and double glazing that meet or exceed the current building code, or of the cost to install a clean, fixed form of heating."

 

 

The contrast between the tax treatment of investing in housing, on the one hand, and saving through bank deposits or managed funds, on the other, is stark.

It helps explain why we have extraordinarily stretched house prices, and household debt levels, relative to income; why the Reserve Bank reckons households collectively spend more than their income; and why banks have to import about 28c in every dollar they lend.

Debate about the housing crisis is bedevilled by a kind of sterile and reductive competition.

"That's not the problem, this is the problem," people say. "That won't fix it, we have to do this other thing." As if we were allowed only one problem and one solution.

The fundamental problem is, of course, an imbalance between the supply of and demand for housing. That is, the number of dwellings on the one hand and the number of people needing somewhere to live on the other.

That excess demand is going to persist for years, and while it does, it will exert upward pressure on house prices and rents.

But the question is how far they have to rise to frustrate the excess demand and clear the market.

In that context, the supply side is not how many dwellings there are, but how many are put up for sale or rent. And the demand side is not the number of people in need of housing, but how much they are able and willing to pay.

That depends on several factors, including what is happening to incomes, interest rates and Reserve Bank restrictions on access to credit. It also depends on the tax rules.

We can't afford to be too conceptually pure and punctilious about changing tax laws in a way that might reduce the upward pressure from investors on house prices.

The risks in the status quo are just too high.

Labour's plan


• Stop investors from claiming losses on rental properties as tax deductions against other income
• Use tax savings to subsidise heating and insulation
• Extend the bright-line test, to automatically tax capital gains on most properties that investors sell within five years of purchase

- NZ Herald

Brian Fallow: Shelter is for people, not tax

 
 
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