Recently, respected economist Tony Alexander released an article identifying 16 points that he suggested spell the end of mum-and-dad investment in New Zealand.
With election year upon us, and many of Alexander’s points linked to government policy, in this article I reflect on Alexander’s points and my own thoughts on the state of residential investment.
Tax policy downturn
Undeniably, the flow of enthusiastic new property investors seeking to equip themselves with the skills to succeed in property investment shrunk to a trickle as successive governments used tax policy to dampen enthusiasm for property investment.
This culminated in the blunt-force step Labour took to remove interest deductibility and has never really recovered, even after National restored the deductibility. I think people’s trust in the system was broken. If fundamental pillars of the tax system, such as interest deductibility for income-producing assets, could be pulled from one sector, what could we trust?
As Alexander points out, loss ring-fencing remains and is also linked to interest costs. With deductibility back but interest rates increasing, tax losses on debt-funded property remain ring fenced from offsetting against other forms of income.
This ring-fencing is a terribly unfair and hated policy.
Wealthy investors with profits from rentals can add a loss-making investment and reduce the tax on their rental profits, but a new investor buying a debt-funded property is prevented from offsetting their loss against their salary.
It’s just not fair and should be scrapped.
When given the chance at the last election, National did not repeal this hated rule targeted only at residential investment, perhaps now is their chance, but it will need us all to call for it!
Alexander also makes the point that other forms of investment, such as KiwiSaver, are attracting people’s retirement saving.
Opportunity cost
Whilst this is true, property investment is unique in that it remains a leveraged investment with banks lining up to lend against the security of the asset being purchased and this offers opportunities just not available in other asset classes.
In my mind, Labour’s policy of introducing a limited capital gains tax at a time when there is no capital gain, will not put many off. Even if it happens, which it won’t, capital gains tax is a derivative of money made and profit realised so the glass remains half full, not half empty.
A wealth tax, on the other hand, would be far worse because it would be levied on asset values that are unrealised but this does not appear as a policy of either of the two major parties.
One need only drive around the larger cities in NZ to see evidence of Alexander’s point that there has been a proliferation in terrace housing, and it’s true that increased supply of housing limits price increase and capital gain.
But, property investment at the individual level is very focused on the micro level rather than the macro level.
Local experts
Mum-and-dad investors get to choose what they buy and where. They are active in the existing property market and are not developers. They can choose to invest in property that is not terrace housing, they can focus on their own area, buy on the right side of the street, in the right school zone, with the right sun aspect, with a granny flat that offers a second income.
My point here is that some of the fun and skill in investing is picking a property that will grow in value despite the macro-economic issues, such as a proliferation of terrace housing.
Property investors understand that property price growth is linked closely with population growth and they know how to recognise the factors that make a particular suburb grow in value.
Yes, there are challenging policy setting now, but property investment is a long game. Government policies can change and worms can turn, if you are there for the long term and are able to ride out the bumps in the road, property investment can still offer long-term wealth creation for everyday Kiwis.