Alan Dudson examines the real reason house prices are too high, and what should be done to change that.

Twenty to 30 years ago every married New Zealander had the opportunity to buy a home for their family. Sadly, this is not the case today. For many families, owning their own home is now no more than a dream.

Why? Simply, there is a flawed tax system that favours the rich and punishes the poor.

Today, home ownership is just over 50 per cent, whereas 30 years ago it was a healthy 85 per cent. Previously, Governments helped lower-income families with cheap funding through the Housing Corporation or Maori and Island Affairs. Not any more.

We now have a tax system that favours the investor over any family wanting to own a home of their own, regardless of price. It makes it nearly impossible for those wanting to buy their own home to compete against an investor in the housing market.


Any investor in residential real estate, as of right under our existing tax laws, can deduct against their rental income the costs of rates, insurance and maintenance, plus all interest charges on their mortgages. This applies to all property whether it is residential, commercial, retail, industrial or farms. An investor has the huge advantage of being able to gear his or her portfolio to pay little tax on their investments and deliberately offset any further loss against other earned income.

For many of these investors their sole purpose is to keep on buying more and more properties and mortgage gearing their property portfolio so they pay little, if any, tax. They are legitimately avoiding paying tax on their incomes. These investors own up to 45 per cent of the houses in New Zealand. There is little housing stock for families to buy and when it comes on the market it is expensive and the investor will always have the advantage.

Let us look at this another way.

An investor creates little if any wealth for New Zealand, whereas the tenant paying rent must have a job or jobs to pay the rent and is actively contributing to the nation's wealth or GDP.

Most investor owners care little for maintenance on their properties. Their whole purpose of ownership is capital gain.

We see this in many of the old brick suburban shop buildings that are earthquake prone and owned by investors who care little for those working within these buildings or for maintenance on these buildings.

But the worst scenario is this. A family which does not own a home rightfully feels disenfranchised from society. They are the underprivileged, who feel that New Zealand is letting them down. Their only hope is to find relief in the successes of the All Blacks or the Silver Ferns - or to move to Australia, where housing is more affordable and incomes are higher.

A property investor can buy a house in Auckland for, say, $600,000. A bank will probably lend the investor 90 per cent or more of valuation, particularly if he has other properties to leverage against.


From annual rental received, say $32,000, the investor can deduct rates, insurance and maintenance, as well as all interest costs on the mortgage, virtually eliminating any tax on income received.

Not a bad investment considering such a small deposit and capital gains of at least 6 per cent to 8 per cent a year - say $36,000 to $48,000 a year, tax free.

It certainly beats working.

Compare this to a young couple trying to purchase a home for themselves and their children.

Say they also buy a house for $600,000. They will be asked by the banks for a deposit of 20 per cent or $120,000, with a loan promised for the remaining $480,000. So they have to find a deposit of $120,000 and interest payments of say 5 per cent on the loan of $480,000, say $24,000, plus rates, insurance and maintenance.

All this has to be paid out of income from salary or wages after tax has been deducted. To raise a deposit, most would need a family which has the funds to be able to help them.

So where to from here? Like all Western countries, New Zealand must have some form of capital gains tax. On all investment properties this should be assessed at least every five years.

More important is to take away the tax advantage to investors being able to deduct interest against their investment income on all property investments.

What would this do for New Zealand and New Zealanders?

It would do what any sensible tax system should do.

It would reward those working hard and punish those contributing very little to the country's wellbeing.

It would flood the market with thousands or tens of thousands of houses for sale. It would immediately lower the cost of housing dramatically and enable thousands of New Zealand families to buy their own homes.

The best savings plan any family can have is saving for a mortgage-free home of its own. This, coupled with a compulsory retirement plan, would see all New Zealanders feeling much better about themselves and able to look forward to their retirement - not in Australia but in New Zealand.

As property prices decrease, borrowing becomes easier and cheaper. At the same time, costs saved must be channelled into compulsory savings.

For many reasons, all New Zealanders should be compelled to pay a percentage of their income into a national superannuation scheme.

It is extremely important to reward those who work hard and save, whether they are salary or wage earners or owners of businesses or farms. It is imperative that these people are protected because they are the future of New Zealand and they are the ones that create New Zealand's wealth.

It is important that a fair tax system benefits these people.

Under the present tax laws those who are paying their tax are subsidising the wealthy property investor paying little or no tax.

It is the investors in real estate who are paying little or no tax that are accumulating huge wealth.

In Auckland it is not uncommon for residential real estate investors to own five, 10, 20, 50, or even 100 houses. We have been told we have one commercial property investor who has achieved his wealth in exactly this way and is now worth $1 billion.

It is incredible that successive Governments have allowed this rort to continue for so long. Incredible, as it also impinges on so many other issues in our society.

Any Government must take notice. All that is needed are a few simple changes in our tax laws.

Simple? Very simple.

Alan Dudson is an Auckland accountant who has worked in construction and property sales and development.