Timely rental tax change may help not harm

Will rents go up if the Government moves against property investors? Unlikely, suggests Peter Lyons, who nonetheless counsels against sudden or radical change.

I was watching the evening news the other night.

The first item showed how shoddy economic arguments can be used to suit vested interests.

The article featured landlords concerned about possible tax changes.

Landlords are worried about not being able to claim for depreciation on buildings and losing the ability to offset losses on rentals against other sources of income.

The Property Investors' Association claims that such changes will cost the average landlord approximately $1700 a year per rental.

It claims landlords will then pass this extra cost to their tenants.

Really? This suggests that landlords have a very benevolent streak.

They haven't charged higher rents because they have had a tax break and want their tenants to enjoy the advantage of cheaper rents as a result.

This doesn't make sense.

Surely, the majority of landlords want the highest possible returns from their property.

They are charging the maximum possible rent that the market allows.

Rents are set by supply and demand in the market for accommodation.

If the Government changes the tax rules on rentals, this does not mean the number of houses and apartments in New Zealand is suddenly going to shrink.

Rents may rise but only as far as the market will permit.

What is more likely to happen is that some landlords decide to sell.

This may make housing more affordable for first-home buyers.

This is unlikely to happen overnight but if government policy can demolish the obsession with capital gains driven by tax breaks this would be a good thing for our country.

New Zealand is at a crossroads. Our economy is very finely balanced.

For most of the first decade of the 2000s we experienced a debt-fuelled housing boom. This drove our economy.

As property owners felt wealthier, they borrowed and spent more leading to full employment.

This created the illusion of increased wealth - allowing people to continue to borrow and spend.

The tidal effect of easy credit on an economy is almost hallucinogenic.

The question we needed to ask ourselves during that period was, where were the new industries?The subprime collapse in the United States precipitated a widespread realisation that much of the developed world had been living this illusion.

Debt-funded asset bubbles, particularly in real estate, had created transitory wealth and prosperity.

New Zealand was no exception.

New Zealand has, however, been an exception in our unwillingness to accept that we have been part of a global meltdown.

We experienced a long but seemingly shallow recession. House prices fell then appeared to recover.

New Zealand exceptionalism appears to have been based on a national psychological belief that residential property is always a winner.

Any downturn will be a temporary blip.

House prices plummeted in the United States, Spain, Ireland and the UK whereas sales volume plummeted in New Zealand.

Vendors were not prepared to sell at a loss unless absolutely necessary.

The huge increase in mortgagee sales suggests this is starting to change.

The announcement by the Government of potential tax changes on rentals may be a tipping point.

Recent statistics show sales volumes for February have halved compared with February 2009.

Unsold housing inventory has mushroomed. Supply greatly exceeds demand.

However, the Government needs to tread very carefully.

A major sudden change in the tax treatment of rentals could precipitate a collapse in the housing market.

The wider implications for the economy would be nasty.

People feel less wealthy when their houses decline in value. They cut spending and try to reduce debt.

This leads to an increase in unemployment and further declines in the housing market.

The process that created the good times can be very brutal in reverse.

Demonising landlords who provide an essential service is pointless and unfair.

The unfortunate fact is that the rules need to change because they distort our economy.

But this change needs to be managed very carefully.

Houses are for workers to live in. Workers produce the goods and services that allow the economy to grow.

House prices should reflect economic prosperity not the other way around as has happened in New Zealand in recent years.

• Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics texts.

 

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