Negative gearing to go under Labour

Over the weekend, Labour Party leader Andrew Little confirmed that, as party MPs have long hinted, negative gearing rules will be removed under a Labour government.

He told The Nation that it was not fair that investors with investment properties should have a tax advantage and that, as there is no need for negative gearing, it will go if Labour wins in September.

Labour’s position is motivated by the belief that removing negative gearing will impact on property speculators rather than long term rental property owners and this will help to slow down house price growth.

But NZ Property Investors Federation executive officer Andrew King does not believe that will be the case.

He said that removing negative gearing would mean that a large amount of rental property owners would no longer be able to afford to provide rental accommodation.

It would have a far worse effect than a capital gains tax, he said.

“Rental properties cost a lot to buy and to maintain and, compared to the cost of the property, the rental returns tend to be low.

“Negative gearing essentially allows rental property owners to deduct a third of their expenses. Without that many rental property owners simply won’t be able to cover the necessary costs.”

This would lead to a rise in rent or the sale of a rental property and, potentially, the loss of that property from the rental accommodation pool.

Neither of these things are good for tenants, particularly in places like Auckland and Wellington where there is already a shortage of rental properties, King said.

“Removing negative gearing is only likely to increase the demand for rental properties and make it harder for tenants.”

He added that, at one point, negative gearing was removed in Australia but it was quickly reinstated after the negative effect this had on rental supply and prices became apparent.

However, the practice of negative gearing is considered to be far more pervasive in Australia than it is in New Zealand.

Despite this, tax specialist Terry Baucher said that, if negative gearing was removed in New Zealand, it would be very significant.

“It would increase the tax take and it would force a rationalisation of the property sector – particularly for those who can’t maintain a property without getting a tax fund via negative gearing.”

In his view, wiser investors would have sufficient equity and would be aiming to be cash flow positive anyway so they would not feel the impact of the change as much.

But negative gearing is one way for many people to get on to the property ladder, so removing it would impact on many aspiring investors, he said.

“It would also impact on investors who are very highly geared and, potentially, those with small portfolios. It would be these investors who would be the casualties.”

For investors, the impact from the removal of negative gearing would depend on how heavily geared they are.

Massey University tax expert Deborah Russell said that if an investor has a decent property investment they should be cash flow positive and making a profit anyway.

If that is the case, then removing negative gearing won’t have an impact on them, she said.

“It is only people who have borrowed heavily to get an investment property for capital gain and may not be cash flow positive who it will effect.”

The property market is not delivering the social outcomes needed, so it is necessary to try and hold back property prices a bit, Russell said.

“But removing negative gearing won’t slow the market down on its own. It is just one of the tools that need to be used to do that.”

Read more:

Election 2017: what investors need to know 

Tax proposals target landlords – NZPIF