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Tax changes will affect house prices

If the top rate of income tax is lowered house prices will fall 14%, along with the number of willing landlords, Westpac predicts.

Wednesday, December 16th 2009, 12:00AM 12 Comments

by Jenha White

The government has been considering aligning the top income tax rate with business and trust rates all at 30%, as part of the current overhaul of the tax system being headed by the Tax Working Group.

Westpac research economist Dominick Stephens says the rental property sector as a whole claims more in tax deductions than it pays in tax.

He says the price of property - both owner occupied and rental - partly reflects the tax benefits conferred upon the owner.

"If the tax benefits change, so will the price," he says.

Westpac used its Investment Value of Housing model based on a median property in New Zealand currently worth $350,000 to estimate the impact of potential changes to the tax system on house prices.

Stephens says tax reform would change both house prices and rents and it is hard to predict which would move most.

"We have assumed that one-third of the adjustment to a tax change would come about via higher rents and two thirds of the adjustment would come via lower house prices."

He says if the top rate of income tax was reduced to 30% then the house price of a median property would decrease by 13.60%, rent would rise by 6.80% and there would be a higher rate of home ownership.

"Bottom-end houses would experience the biggest price decline and there would be an increase in price dispersion between the top and bottom end."

He also says the annual cost of becoming a leveraged landlord would increase, resulting in higher rents.

Landlords receive a tax rebate for losses on their rental properties at their marginal rate of income tax.

Stephens says if the marginal rate of income tax changes, so does the size of the rebate.

"For example, consider a landlord who is taxed at 38% and loses $20,000 per annum from owning a rental property. At present they get a rebate of $7,200 each year (0.38 x $20,000).

"If the top rate of income tax were 30%, the rebate would be just $6,000 per year (0.3 x $2,000). The annual net cost of becoming a leveraged landlord would instantly increase by $1,200 so fewer people would be willing to do it."

He says less demand would cause house prices to fall and fewer willing landlords would mean higher rents.

"Lower house prices and higher rents would make home ownership both more attractive and affordable, so home ownership would be higher than if the tax changes remained unchanged."

Westpac has also made a prediction on the effects of potential property taxes to be brought in by the government.

Stephens says a land tax of 0.5% would reduce house prices by 4.40% and land tax of 0.5% combined with income tax of 30% would reduce house prices by 16.90%.

If a capital gains tax of 10% was introduced it would reduce house prices by 15.70% and risk free rate of return with tax applied on 6% of equity would reduce house prices the most significantly by between 26% and 34%.

There are no specific numbers for ringfencing but it is predicted that it would also reduce house prices.

 

 

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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Comments from our readers

On 18 December 2009 at 2:50 pm Laurence Sherlock said:
If if if if if!!! "Goodbye National, goodbye NZ for some"
If all these Tax Law changes were introduced Professional Landlords like myself who derive all their income from rental cashflow would buy out the amateur Landlords, more property ,more cashflow ,more capital gain overtime, simply more.The banks may stop saying we are rent reliant and look at professional Landlording as a career,there has always been more security in owning rental property than there has ever been in having a job.
On 18 December 2009 at 2:52 pm Laurence Sherlock said:
If if if if if!!! "Goodbye National, goodbye NZ for some"
If all these Tax Law changes were introduced Professional Landlords like myself who derive all their income from rental cashflow would buy out the amateur Landlords, more property ,more cashflow ,more capital gain overtime, simply more.The banks may stop saying we are rent reliant and look at professional Landlording as a career,there has always been more security in owning rental property than there has ever been in having a job.
On 18 December 2009 at 3:50 pm nevvy said:
Rents rising and house values falling does not sound like a re election winner for National,which ever way one looks at it.
On 18 December 2009 at 5:09 pm R Stewart said:
I seem to remember before the last election that National said they loved property investors, yeah right.
On 18 December 2009 at 5:15 pm Tony said:
Cant see it happening it would break the banks literally and renters as well most properties would be dumped ?what would be the reason for doing the Governments job for them by way of housing renters BAD CALL?
On 18 December 2009 at 8:41 pm Rachele said:
As if that is going to scare real investors off. Even when property investing back in the 70s and 80s wasn't popular you still get great capital gains.
On 18 December 2009 at 8:53 pm Andy Holler said:
First, a majority of the banking business relies on the NZ mortgage market. Second, a major part of New Zealander have their money in housing - why, because it is one and has been the best retirement fund there is. Nothing has been better and more secure than housing ownership. If this model is attacked then the electorate will not respond in kind. What should be done is to fine tune a existing well working system not with taxes but with intensives for young couple to get on the real estate lather as soon as possible.
On 18 December 2009 at 9:12 pm M said:
This would seem to mean that "younger" professionals will have more disposable income and can buy more (cheaper) houses - assuming there are enough tenants.

Those who have "saved" using property will have taken a hit in taxes over the passed 10 years and will now take another hit on property.

Time to vote another way for personal gain.
On 19 December 2009 at 1:45 pm Ian Thompson said:
Bring it on! Lower house prices and higher rents is a real investors dream. I have always invested in positive cashflow properties, never for tax perks.
On 19 December 2009 at 9:33 pm stephen said:
House prices are way over valued, pushed up by cheap easy money, foolish lenders lending to foolish people. At this point in time it is not wise to invest for capital gain as all your doing is thinking the future will be the same as the past, its herd mentality. Shares, Forestry, Deer Velvet, Ostridge Eggs, Kiwifruit...the biggest one of all, housing! Facing facts the tax base is about to be broader & whatever the target the end result is reduced consumer demand. Its all very well blaming National, but heres the best bit folks, once National increase taxes, Labour will certainly not be keen to reverse the tax changes needed to repay increased Govt debt!
On 20 December 2009 at 10:24 am Niraj said:
I do not quite agree with the logic here. I believe that the diminishing returns from the rental (investment) properties are only a marginal loss out of your total net gains. The net impact is definitely positive which means that people will be left with more cash in hand and ultimately with more demands for newer/better houses. Also, given that there are hardly any investment options in NZ, the extra cash will have a direct impact first on demand for houses.

Am I missing a point here?

Cheers,
NJ
On 20 January 2010 at 11:08 pm scott Mackenzie said:
Well John Key, I believed when I voted for you that you were a man of your word and obviously you are not enjoying your time in the hot seat. For this government to even consider the changes they want to make around rental property laws with regard to tax breaks is to say the least career suicide for National. Property will still come out on top. My wife and I own three rental properties and work in professional jobs and long hours, we are being penalised for planing for our retirement shit how does that work. We have earned everything we own, and now when we are just getting ahead, the government can pay for my retirement stay in an old folks home i wont be.

thanks National.
Commenting is closed

 

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Lender Flt 1yr 2yr 3yr
ANZ 5.19 4.05 4.05 4.49
ANZ Special - 3.55 3.55 3.99
ASB Bank 5.20 3.89 4.05 4.39
ASB Bank Special - 3.39 3.55 3.89
BNZ - Classic - 3.49 3.45 3.99
BNZ - Mortgage One 5.90 - - -
BNZ - Rapid Repay 5.35 - - -
BNZ - Std, FlyBuys 5.30 4.45 4.35 4.55
BNZ - TotalMoney 5.30 - - -
China Construction Bank 5.50 4.70 4.80 4.95
China Construction Bank Special - 3.19 3.19 3.19
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 5.95 - - -
Credit Union Baywide 5.65 4.75 4.75 -
Credit Union North 6.45 - - -
Credit Union South 5.65 4.75 4.75 -
Finance Direct - - - -
First Credit Union 5.85 3.99 4.49 -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 4.80 4.95 -
HSBC Premier 5.24 3.54 3.54 3.69
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 5.15 3.18 3.18 3.20
Kainga Ora 5.18 4.04 3.95 4.39
Kiwibank ▼5.20 ▲4.20 4.30 4.64
Kiwibank - Capped - - - -
Kiwibank - Offset 5.15 - - -
Kiwibank Special - ▲3.45 3.55 3.89
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 5.70 4.25 4.15 -
Pepper Money Near Prime 5.64 - 5.44 5.44
Lender Flt 1yr 2yr 3yr
Pepper Money Prime 5.18 - 4.98 4.98
Pepper Money Specialist 7.59 - 7.39 7.39
Resimac 4.50 4.86 3.89 3.94
RESIMAC Special - - - -
SBS Bank 5.29 4.85 5.05 5.49
SBS Bank Special - 3.39 3.45 3.89
Sovereign 5.30 ▼3.89 ▼4.05 ▼4.39
Sovereign Special - ▼3.39 ▼3.55 ▼3.89
The Co-operative Bank - Owner Occ 5.15 3.49 3.59 3.89
The Co-operative Bank - Standard 5.15 3.99 4.09 4.39
TSB Bank 6.09 4.35 4.25 4.69
Lender Flt 1yr 2yr 3yr
TSB Special 5.29 3.55 3.45 3.89
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.34 4.15 4.09 4.49
Westpac - Offset 5.34 - - -
Westpac Special - 3.39 3.45 3.99
Median 5.34 3.99 4.07 4.39

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