Will Labours Housing Policies Cause A Property Price Crash?

(PR.co.nz) Will the new Labour government’s policies materialise what some already fear and accelerate the property cycle into a crash of unseen proportions? Initially there could be some ‘panic’ decisions by nervous over leveraged, or not so well informed, property investors as they run for the exit and sell up now. However any introduced capital gains tax will have little to zero impact on the housing market because contrary to popular opinion property speculators profits are already taxable.

Labour lobbied support prior to the election on the back of messages to “Crack down on speculators” by introducing a capital gains tax and ‘ring fencing’ losses being claimed by property investors. Whilst on the face of it a capital gains tax sounds like a great idea to stop speculators from banking untaxed profits Labour failed to acknowledge that speculators are already captured by existing tax legislation which clearly spells out that speculators must pay tax on their property profits regardless of how long they own property for.

The Labour party website states “It is time for a fresh approach to make home buyers the priority and crack down on speculators… Speculators will no longer be able to use tax losses on their rental properties to offset their tax on other income, a practice called negative gearing.” However speculators invest primarily for capital gain and are easy to identify because they are transaction investors buying and selling properties regularly. Property investors on the other hand are primarily landlords in the business of buying properties to rent out long term. They primarily claim legitimate losses typically in the first few years of ownership by recouping inadequate rent to cover the total cost of ownership. Property investors typically own their properties for a long time providing accommodation for tenants, whereas speculators are simply in for a quick buck which is already taxable.

‘Ring fencing’ negative gearing will also have zero impact on speculators. ‘Ring fencing’ losses is still a sensible concept to ‘level the playing field’ of the prices paid for properties by property investors and first home buyers but demonising investors as ‘negative gearing’ speculators is naive or designed to mislead. The ‘ring fencing’ of losses will reduce the number of new investors investing in rental properties however it will not cause any mass exodus of rental properties by existing investors because many have owned their rental properties for lengthy periods and the properties are no longer returning tax losses but in fact taxable profits. The large majority of property investors will not be overly impacted by the ring fencing of losses nor will they have to sell their portfolio as a result of such legislation. Nor will Labours policies end speculators from buying and selling properties for a profit, because speculators are already legislated to pay tax on their profits.
Whilst the ‘ring fencing’ of losses will reduce the number of new property investors there’s no chance of this policy inciting a crash in property values anytime soon.

So will Labours plan to create a building boom by increasing the number of properties being built in Auckland by 5,000 affordable homes every year for 10 years crash property values?

Labour also lobbied on the back of it’s proposed building boom including;
+ KiwiBuild programme will build 50,000 high quality, affordable homes over 10 years, in Auckland
+ Partner with private developers, councils and Iwi to undertake m major greenfields and revitalisation projects
+ Establish an Affordable Housing Authority to work with the private sector to cut through red tape and get new homes built fast
+ Dole for Apprenticeships policy will subsidise employers to take on around 4,000 young people for on the job training in fields including building and construction.

Whilst on the face of it this proposed building boom of “high quality, affordable homes” sounds like a great idea, it’s weakness is evident in the statement “partner with private developers to undertake major greenfields and revitalisation projects”. Precisely where and who are these private developers that are expected to build low value high quality housing with low profit margins going to come from? There is currently a, well known, dire shortage of construction workers needed to meet existing demand let alone to meet a 50% increase in current building levels at low margins. Equally the intention to undertake major greenfields projects will first and foremost require significant investment in infrastructure in utilities. Labour proposes to raise the funding for this infrastructure investment through the issuance of private bonds however the new “affordable home” owners will have to pay for the full repayment for this infrastructure cost plus interest.

In respect of working “with the private sector to cut through red tape and get new homes built fast” one must wonder exactly which pieces of red tape will be cut through? Much of the red tape in place that slows down building is in place for compliance and safety reasons, and some of these could only be cut at the governments future peril. Additionally, council process timelines are presently constrained by labour shortages. To speed up the council processes will most likely require more council staff and therefore more cost to all ratepayers.
The ‘Dole for Apprenticeships’ concept in theory delivers 4,000 unskilled youth to help builders meet the need for human resources. These youth are unlikely to provide a rapid solution to the required human resources for the efficient building of the 5,000 new houses per year for the next 10 years that Labour intends to have built in Auckland alone.

So whilst Labours intentions sound grand it is resource constraints that will ensure there’s little chance of a rapid supply of “high quality affordable homes” coming on stream anytime soon.

Therefore the lack of any significant substance to Labours proposed property based taxation amendments, combined with their inability to build adequate volumes of newbuilds mean there is clearly no chance the new governments affordable housing policies could cause a property price crash any time soon. Expect property sales volumes and subsequently prices to climb over the next six months now that the uncertainty of the election result is over and the shortage of supply remains.

Media Release on 20 October 2017 by Kieran Trass Ltd

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