Budget 2010: Property prices may fall because of tax changes

Photo / Paul Estcourt
Photo / Paul Estcourt

Property prices may fall as a result of today's budget, but it is harder to tell if rents will go up as landlords try to make up for paying more tax on property investments, according to analysts.

A surprise in the budget was that a move to stop depreciation on buildings extended to commercial buildings as well as residential rentals.

Michael Shaw, a tax partner at Deloitte, said some owners of industrial properties would feel hard done by as properties like meat works did depreciate in value. The Government argued that it should no longer allow depreciation on buildings because they appreciate.

Shaw said it was hard to tell if rents would rise as investors tried to make up for the extra tax they had to pay. But he said big landlords included councils and charities, which were not taxed. Also, the Government was a large landlord.

"If a landlord could put up a rent, wouldn't they put it up now?" he said.

The more interesting question was would property prices fall as investors off load rental properties.

There could be more properties put on the market that have to be sold quickly. "That may reduce prices."

Listed property trusts were also affected by the removal of depreciation on buildings but many trusts were portfolio investment entities (PIEs), and would enjoy a drop in the PIE tax rate from 30 per cent to 28 per cent on October 1, said Shaw. The corporate tax rate also drops from 30 per cent to 28 per cent on April 1 next year.

AMP Capital Investors head of investment strategy, Jason Wong, also expected the price of property to fall, but said it was difficult to estimate how much.

New developments may not go ahead, he said.

It was hard to know if the changes in the budget would affect the price listed property trust traded at on the share market as the changes in the budget were about 50/50 priced in before it was released.

AMP Office Trust rose 1c to 73, Goodman Property Trust rose 1c to 96 and ING Property Trust was unchanged at 74.

Home builder Milestone Homes said it was grateful for clarity provided by the budget but said residential property was one of the few sectors driving the economy.

"If the government is serious about boosting productivity and prosperity, curtailing property investment is not the answer."

The Government said people with one investment property would better off in the budget, which also reduced income tax. But people with two, three or four properties would not be better off.

The Government is planning to change the regime for qualifying and loss attributing companies so that both profits and losses flow through to personal income. Shaw does not expect the changes to work and said ultimately the Government may end up stopping losses from property investments being applied to personal income.

REINZ say they do not expect the Budget tax revisions to have a significant long-term effect on house prices or rents.

"What people can afford to pay for their accommodation determines the market value of rental properties, not artificial deductions which could only be exploited by some investors because of their particular circumstances," REINZ national president Peter McDonald said.

Deloitte tax expert Mike Shaw said changes to building depreciation property were a "backwards step", especially for industrial buildings that reduced in value.

"It is incomprehensible that the Government is moving to deny depreciation deductions on assets that reduce in value," Shaw said.

"All this will achieve will be to reduce investment into this productive part of New Zealand's economy," he said.

- NZPA with NZ Herald

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