Landlords have come out today all guns blazing against the collection of tax reforms suggested yesterday by the Tax Working Group. Property Investors Federation Vice President Andrew King described the changes as an "orchestrated attack" that would unleash a mass exit from the industry.

This in turn would create rental property shortages that would drive up rents and slam house prices lower, King warned in this Anne Gibson article in the NZ Herald.

King denied that property investment had a tax advantage and said the NZ$500 million of losses reported on NZ$200 billion of residential property assets in 2008 was a one-off because of high interest rates. He even went so far as to complain about the NZ$200 fee he had to pay to attend the Tax Working Group's conference in Wellington last month.

I also attended that conference and couldn't help but notice the increasingly concerned tone of his questions as the day wore on. It appeared to dawn on him through the day that property investors were about get hit by a train in a very dark tunnel as New Zealand's policymaking elite decided enough was enough.

It was sort of amusing to watch the squirming begin. It was like watching someone who had just been caught speeding on an open stretch of a quiet country road. 'What me officer?'

The facts are clear.

* There was NZ$213 billion invested in residential rentals in 2008 and they generated losses for tax purposes of NZ$500 million. That reduced tax receipts by between NZ$150 million and NZ$200 million.

* Losses reported to the IRD from Loss Attributing Qualifying Companies (LAQCs) more than tripled to NZ$2.258 billion in the 5 years to 2008.

These vehicles are often used by professionals earning salaries to buy rental properties and offset the losses from these highly geared properties to reduce their regular taxable income.

About NZ$800 million of those losses are directly related to rental property investments, the IRD estimates There's more detail on that here.

* The amount of income declared by trustees of family trusts more than quintupled to NZ$10 billion between 2001 and 2008 as many wealthier New Zealanders set up family trusts to shelter assets there on a 33 per cent rate so they didn't have to pay the 39 per cent top personal tax rate introduced in 2000 (and since cut to 38 per cent). There's more detail on that here.

* Less than half of New Zealand's top 100 income earners actually pay the top personal income tax rate.

* PAYE taxpayers without children who have not been clever enough to set up a family trust or LAQC that invests in rental property are paying massively high and unfair tax rates.

The top 10 per cent of PAYE taxpayers now pay a net 76 per cent of tax, once the effects of various benefit payments and Working for Families are taken into account.

* The percentage of taxpayers on the highest income tax rate of 38 per cent has risen to 9 per cent from 5 per cent when the rate was imposed in 2000, and is expected to be over 25 per cent within a couple of decades.

* Taxpayers in New Zealand will pay more income tax on average than those on equivalent salaries in Australia until they get to a threshold of NZ$240,000.

* New Zealand has the highest rate of graduates who are living and working overseas in the developed world. OECD figures show 24.2 per cent of New Zealand-born graduates now work in other OECD countries. Here's the link to the research.

It shows that there are 166,854 New Zealand born graduates working overseas. To show how much of an issue this is, Australia has 116,513 graduates working overseas and its overall population is 5 times larger than ours. Around 3 per cent of Australian-born graduates work overseas.

New Zealand's landlords need to understand that their drive to reduce their personal tax bills and target tax-free capital gains has distorted both the economy and the government's finances. It has also pumped up a bubble in the housing market and the combination of unaffordable housing and an unfair tax system is driving away our best and brightest.

Landlords are being selfish and short sighted. They can't see past the end of their capital gains-obsessed noses into the likely future of the New Zealand economy if nothing is changed.

They will end up retiring with their bricks and mortar, but will have to watch their grandkids grow up in another country by Facebook and Skype. Is that what they really want? Do we really want to be a nation that aspires to be nation of landlords?

The world will not end if these new property taxes are imposed. The denial of depreciation on buildings as a taxable expense, the RFRM tax and a 0.25 per cent land tax would raise around NZ$3 billion, which represents around 1.5 per cent of the value of those NZ$200 billion of residential property assets. Landlords made at least NZ$100 billion worth of capital gain over the last 8 years. They can afford it.

Land prices didn't rise when the last land tax was removed in the early 1990s and they continued to rise through the 2002 to 2008 period when councils were increasing their land taxes at near double digit rates. I'd be surprised if house prices fell much on all of this, given the deep love many investors have now for residential property, regardless of the business sense of any investment. If they were irrational before, they'll stay irrational.

Some people point to one economist's forecasts of a big drop in house prices and a rise in rents if the income tax rates are equalised and a land tax is imposed.

Westpac issued this report in December forecasting a fall of up to 16.9 per cent in house prices and an 8.4 per cent rise in rents if income taxes are equalised at 30 per cent and a 0.5 per cent land tax is imposed. Here's the full version here.

I don't buy this argument. As we've seen over the last year home owners (whether they live in the house or rent it out) are very reluctant to sell anything for less than they think it's worth. The market simply freezes rather than clears. Unless an external party such as a bank intervenes to force the issue through a mortgagee sale. This is something I learned (!) after making my 30 per cent house price prediction (now revised to a 15 per cent fall).

This psychological thing is irrational but real. Former ASB economist Rodney Dickens talks about it more in this piece.

Also, we are unlikely to get a 0.5 per cent land tax without the ability to defer until sale or a high NZ$50,000/hectare threshold to avoid hitting farmers, foresters and Maori Trusts.

At best the collection of tax changes possible in this budget are likely to drag prices down only slightly (less than 5 per cent is my pick). Prices are likely to fall further overall, but for other reasons such as higher unemployment, higher interest rates and a lack of affordability. I also doubt rents would rise much.

They are governed much more by incomes. There is some elasticity for people to either downsize (going to a smaller, cheaper rental) or to move in with friends, families when higher rents are demanded. We've seen some of that in the recession.

An era is ending for the property investors. They need to accept the glory days of tax-free capital gains driven by credit-fueled speculative fervor are over. They need to get back down to the business of making sustainable yields on rental properties with real people in them.

It's time to pay the ticket Mr King.

Bernard Hickey