Landlords have already become so afraid of a capital gains tax that an industry leader says they are bowing out of the market.

David Whitburn, president of the Auckland Property Investors Association, said prospective residential investors were spooked by Labour's 15 per cent tax proposal.

"It's to the point that they're calling me saying they were thinking of buying but now they definitely won't," Whitburn said.

Data in the past few weeks suggested some landlords were keen to buy again, perceiving this winter to be the bottom of the market. But Whitburn said he knew of five landlords who now would not buy.

One couple would probably buy rental property in Australia and leave New Zealand, Whitburn said.

"Then we lose $120,000 a year in incomes and their tax and the talent. I'm bored of that. Too many of my friends are in Singapore, Australia and London but they don't see New Zealand as an exciting place."

The 2006 Census showed New Zealand had 1.4 million dwellings of which 388,272 were rented. Using the REINZ $350,000 median, the country's rental stock could be worth $135 billion.

Business and tax experts said Labour's idea was unworkable and landlords would easily escape it.

Ernst & Young tax partner Aaron Quintal said New Zealand's tax system was admired internationally and he opposed Labour's plans to tax investment property at 15 per cent at the point of sale.

If any property tax is to be introduced, he favours a land tax, floated last year by the Tax Working Group at 0.5 per cent and applying to all properties. Owners of the Auckland region's 443,200 homes would have to give the Treasury an extra $443 million if they were subject to a 0.5 per cent levy.

Capital gains tax could be easily avoided by a variety of means, Quintal said. Simply not selling was the most obvious.

"Most tax experts in New Zealand are against it because it acts as a disincentive to selling properties so you get what economists call the lock-in effect: people choose not to get out of assets they otherwise would. So it does the opposite to what's intended."

First-home buyers would be further barred from the market and landlords would hold properties in trusts, Quintal said.

Geof Nightingale, a PricewaterhouseCoopers tax partner, said the new regime would be too complicated to manage and would fail New Zealand when most needed.

"When people sell at lower prices, it doesn't raise a lot of revenue so at the very time of a stagnating economy with dropping PAYE and GST, capital gains tax gives up the ghost," Nightingale said.

John Shewan - Tax Working Group member, landlord and PricewaterhouseCoopers chairman - criticised multimillionaire landlords who qualified as state beneficiaries because of tax losses. Nightingale said about 9800 families were identified in this category before last year's tax reforms.

Shewan has been concerned about the tax take imbalance and said the $200 billion tied up in residential rental property was four times the capitalisation of the NZX yet resulted in negative tax.

Australia, Britain and the United States all have capital gains tax but collection is based on the owner's own tax rate, not a flat figure like 15 per cent.

Property Council chief executive Connal Townsend said the introduction of a broad capital gains tax would harm the commercial property sector and have an effect on the retirement savings of all New Zealanders.

"New Zealand businesses need policy decisions that will hold down the cost of doing business and increase the country's economic competitiveness," he said.

Prime Minister John Key attacked the tax due to be announced next Thursday, saying it would take New Zealand "screaming backwards" and was an envy-based move.

But other leaders back the introduction of the tax.

National Distribution Union general secretary Robert Reid has called for housing affordability studies to consider a capital gains tax "on all properties except the family home".

RENTAL PROPERTIES
* North Shore: 18,291
* Auckland City: 52,944
* Manukau: 28,311
* Waitakere: 16,224
* Papakura: 4512
* Tauranga: 11,022
* Hamilton: 15,396
* Wellington: 23,652
* Christchurch: 36,825
* Dunedin: 11,763
* Total for NZ: 388,272

Source: 2006 Census