Capital Gains Tax could dent house prices and push up rents

Rents could rise and house prices fall if the government goes ahead with a capital gains tax, says the Tax Working Group.

The group, which today released its recommendation for a CGT to be applied on assets such as land, shares, investment properties, business assets and intellectual property.

Any gains on the sale of these assets would be added to the seller's overall yearly income and be taxed normally at realisation – meaning a CGT would only take effect when it becomes law.

Other assets – such as the family home, cars, boats and art – would be exempt from a CGT.

As part of its work, the group looked at the impact on the housing market.

It said that while theory suggested that extending capital gains taxation would increase the ratio of rent to house prices due to either rents rising or house prices falling or a
combination of both New Zealand's constrained supply would limit the impact on rents.

Modelling suggesting there would be rent rises but it was difficult to predict given the number of unknown variables.

Get ready for the biggest asset sell off in New Zealand history. Real estate, stocks, everything will go before a new capital gains tax becomes law. If you’re planning to buy a home you’re in luck. The real estate market may drop 30% or more. The NZ stock market will crash too.

— Kim Dotcom (@KimDotcom) February 20, 2019

It also looked at the impacts of similar tax changes on housing markets in other countries like including Canada, Australia and South Africa but did not find significant rent rises.

"The group has not observed significant increases in rents relative to prices in those countries - to the contrary, rents actually fell relative to prices.

"While there are only a small number of examples to observe, there is no evidence of a general rise in rents or a fall in prices following the implementation of capital gains taxes."

But on balance the group said it expected the extension of CGT would lead to "some small upward pressure on rents and downward pressure on house prices.

"These impacts are likely to be small in relation to the impacts of more fundamental housing policy initiatives, such as the Government's KiwiBuild programme."

OneRoof editor Owen Vaughan said the recommendations weren't surprising given recent conversations around the tax advantages property investors enjoy.

However, he noted it would add to uncertainty in the market.

"If the Government decides to adopt the proposals, then we could see some investors quickly withdraw from the market," Vaughan said.

"In the short term this could put pressure on the rental market, which the group acknowledges in its report.

"The group concludes that market pressures will constrain attempts to push rents above what landlords are already able to set, and that tenants will find home-ownership more affordable than renting as a result of a lowering of house prices."

He said this was consistent with other countries.

"That's the experience in other countries with similar forms of capital gains tax, but recent polls suggest that the Government will have job convincing Kiwis that the changes are nothing to fear, especially in the shadow of falling house prices in Australia, even though the triggers of the chaos there are nothing to do with capital gains tax."