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Capital gains tax won't move money from housing, claims BNZ economist

BNZ economist Tony Alexander has rejected the argument that a capital gains tax would result in additional money being invested in productive assets.

Monday, July 18th 2011, 12:00AM 3 Comments

by The Landlord

"Most of the money used to purchase investment properties is borrowed. That means the absence of buying a house does not free up something like the average house price of $350,000 for investment elsewhere," he said in his Weekly Overview.

"The amount may only be $50,000. Plus, this money can in fact only be "freed up" and made available for other investment in the case of a house which was going to be built not being built. If the freeing up simply involves an investor selling then of course someone else is buying so all that happens is debt shifts from one owner to another."

Alexander did say that reducing the incentive to acquire rental property would mean less borrowing, meaning lower interest rates than would otherwise be the case resulting in a lower barrier to productive investment being undertaken, though even this wasn't clear cut.

"The problem there though is that although in theory this link sounds good, in practice the level of interest rates is rarely found to be a substantial determinant of business capital spending levels. It is confidence in the future which matters more."

He also argues that the introduction of a capital gains tax wouldn't result in improved housing affordability, as other stronger policies such as reducing the ability of local authorities to charge developers levies would also need to be in place.

The bank has also released its latest BNZ-REINZ Market Survey.

The survey was unable to discern any visible trend on whether investors were becoming more or less active in the market.

 "For three months in a row now the number of agents feeling more investors are entering the market has roughly matched the number feeling that there are fewer investors."

The survey found a net 1% of agents felt there were fewer investors in the market, a figure that was in stark contrast to the net 30% that feel there are more first home buyers in the market.

"This is the fourth month in a row during which this result has been positive and the latest result is reasonably well above June's net 19% of agents feeling more first home buyers are around."

In summation the report said the survey results point to evidence in most of the country of more buyers in the residential market, though they tend to be first home buyers rather than investors.

"In most of the large centres  prices are perceived to be rising and in those centres buyers are more likely to capitulate to transact than sellers. But there remain some notable areas of weakness outside the main centres."



« Tax plans hit property investorsRents at two-and-a-half year high, but OCR set to rise »

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Comments from our readers

On 18 July 2011 at 3:38 pm PropertyInvestorCentre said:
Well said Tony, my sentiments exactly. The average property investor isnt going to go invest in business to the same degree they do in property, banks simply won't lend to the same dollar level to them unless there is some good security on offer (ie. property) Those that do think investment in productive business will increase by making property investment less attractive, are simply ignorant to the reasons why people do invest in property compared to business or other investment types.
On 19 July 2011 at 10:12 am Paulk said:
Agree with Tony's thoughts. A portion of second home buyers are not professional investors but simply looking at retirement income in view of possible changes to Nat Super etc. Others choose property because they have not got the desire or inclination to invest in business. I could go along with a CGT but surely any losses suatained must logically be deductible and if ringfenced to future properties, then a property investor selling for less than he bought is hit twice. He loses heads or tails!
On 23 July 2011 at 11:28 pm Andy said:
Nice to see someone with some degree of power agree with us... Especially a bank. Well said Tony.
Commenting is closed



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