CGT IS DEAD – WHAT’S NEXT FOR THE PROPERTY MARKET?

By Ashley Church

Now that the proposal to introduce a capital gains tax (CGT) has been firmly rejected, what’s likely to happen next? Obviously, I can’t anticipate every detail of this Governments future approach to property, but I can reasonably confidently fill in some broad strokes:

CGT is dead for a generation
Jacinda Ardern’s commitment not to introduce a CGT while she is Prime Minister is pretty clear. Admittedly, that might only be for another 18 months, but the Nats are even less likely to entertain the idea, so, regardless of who is in government, the concept of a capital gains tax is probably off the table for at least nine years and possibly as long as 20 years.

But other tax changes are still underway
Yes, the CGT is gone, but the Government is still committed to ring fencing tax losses on investment properties, which is arguably even more damaging to investors since it affects their annual cashflow. The legislation formalising this has yet to become law but Finance Minister Grant Robertson has made it clear that it will be backdated, so expect it to apply to the 2019-20 tax year and beyond. National has also been suspiciously silent on this matter, which suggests that they won’t reverse the legislation when they’re back in office.

Other compliance measures will also increase costs
The Governments Healthy Homes legislation becomes operative, for investors, on July 1, 2021 and will set minimum standards for heating, insulation, ventilation, moisture control and draught-stopping in rental accommodation. To be fair, most of these minimum requirements are reasonable and overdue, and while it’s possible that a future government may extend the requirements to cover all homes at some point in the future, for now, the new rules only affect investors and rental properties.

And new initiatives to tax undeveloped land are possible
At the same time as she made her announcement to dump CGT, Ardern alluded to “other things” which the Government could do to “improve the fairness of the tax system”. She specifically singled out land speculation and indicated that the Government was also working on ways to counter land-banking. Putting aside the fact that this, again, demonstrates government confusion over the difference between making the tax system “fairer” and using it as a tool to address a political issue, her concern is well founded in bigger cities like Auckland, but less relevant in other parts of the country where land supply isn’t a problem. It’s also difficult to know what the Government could actually do, in practice. Any measure which introduced a tax penalty, on the sale of undeveloped land, would constitute a form of capital gains tax – something Ardern has explicitly ruled out – and there’s an argument that such a tax could actually amplify land-banking rather than eliminate it because it would act as an incentive to hold on to land rather than sell it. The simplest solution to land-banking would be to apply punitive annual differential rates to undeveloped land, with those rates increasing for land that was close to major centres, but this would be a measure for a Council, not the Government, so again the steps which could be taken are limited.

All of which will cause rents to increase
Even without a CGT, rents can be expected to continue increasing because of the imposition of the other costs which I’ve outlined, in particular, the ringfencing of tax losses which will represent an ongoing cost to landlords, will force many investors to seek to recoup these losses through increased rent.

And house prices will remain flat for a few more years
On top of all of this Auckland prices will continue to be relatively flat for a few more years, and may even decline in some areas. Parts of the country where house price growth is still strong will also come off the boil over the next 18 months.

But there’s good news for those with patience!
If you can endure the challenges above, and hang on in the market for a bit longer, your patience will be rewarded. The next cycle can be expected to start, slowly, probably sometime between 2021 and 2022, with house prices increasing more rapidly until the peak of the next cycle which will be in around 2026 or 2027. If the experience of the previous four cycles is a guide, house prices can be expected to increase by between 75 per cent to 100 per cent over that time and your faith in your property, whether it be your home or an investment, will continue to prove to be well founded.

– Ashley Church is the former CEO of the Property Institute of New Zealand. He now writes on behalf of OneRoof.co.nz