A contributor to our website today suggests an interesting way to make houses more affordable for young people seeking their first homes. The problem, as he rightly observes, is that they are frequently competing at auctions against investors who are intending to recover their expenses in rent. And it is not a fair auction, he argues, because the bidder who intends to operate the house as business can borrow money more cheaply to buy it.
The investor's mortgage is cheaper because the interest is tax-deductible, whereas the young person or couple borrowing to buy a house to live in must pay the mortgage out of their taxed income. It is not fair.
Anybody who has attended house auctions in Auckland will frequently have seen young first-home seekers, often accompanied by anxious parents, outbid by individual investors. There are obviously two ways to remove the latter's tax advantage: remove the interest deductibility on rented houses or make all home mortgage interest tax-deductible, as it is in some countries.
The second option has much to commend it but it would come at a cost to a Budget already in deficit and the revenue would have to be recovered from other taxpayers. There is a better case for withdrawing the deductibility from investors. They may think this unfair because other business investments can deduct their borrowing costs but housing is not just another business.
AdvertisementAdvertise with NZME.
Rental housing is a business providing a service that people would prefer to provide for themselves if they could afford to. When competition from the business is making it harder for them to afford it, the business should not have a tax advantage.
If the removal of interest deductions discouraged residential property investment, lowered prices for first-home seekers and forced established home-owners to look for more productive uses of their savings, the country could be better off socially and economically.
Three years ago the Government removed tax allowances for depreciation of buildings for exactly that reason. At that time it was also expressing confidence that the end of the long boom and the deleveraging of household debt - not to mention the collapse of property-based finance companies - was bringing about a change in personal investment habits that would transform the economy.
It did not happen. Neither the recession nor the loss of depreciation allowances has discouraged residential property investment. House values in Auckland dropped only 5 per cent during those years and regained their 2007 levels last year. If the Government still wants to change investors' preferences it may have to do something more with its taxation.
It seems to have set its face against an effective capital gains tax, though it did not make an issue of Labour's commitment to just such a tax at the last election. Clearly capital gains are no longer a sacred cow to the electorate; when the gains are realised they are a form of additional personal wealth like income and the recipients of gains should pay their share of tax.
The present Government finds the details of taxing capital gains too complicating. It should not have the same difficulty removing mortgage interest deductibility. It can do it for all mortgages taken out the day after this year's Budget. An immediate consequence might be that rents will go up to cover the costs but the tenants might find they have a better chance at the next house auction. The hurdle we are placing in front of first-home seekers is far too high for couples on average incomes. Their plight demands some new ideas. This one is simple and worth a try.