KEY POINTS:
The Finance Minister has found few supporters in Parliament for his wish to restrict the tax losses that may be claimed on investment property. His suggestion deserves a better response. Something must be done about the house price inflation that has driven interest rates and exchange rates to levels the economy cannot sustain, and there are not many options.
Residential property is an extremely attractive investment in this country because not only is real estate always a safer investment than almost any perishable product but it is not normally taxed on resale gains and those gains alone make it worthwhile. It need not produce profits from rent and the losses the owner carries from mortgage costs, maintenance and other expenses can be fully offset against the owner's income from other sources.
National's finance spokesman, Bill English, argues that property investment is no different in this respect than any other business venture but Dr Cullen replies that other investments cannot attract 100 per cent loan finance on propositions that are unlikely to turn a profit until they are sold for a capital gain. He also points out that operating losses on rental properties were not fully tax deductible until 1992 and that the housing market has been a problem ever since.
It is a problem that has already unbalanced the economy to a degree that the Reserve Bank has had to resort to perverse but desperate intervention in the foreign exchange market for the sake of non-dairy exporters who cannot live with the rising dollar. Those interventions seem to have had little effect, except to hand hundreds of millions of dollars to foreign institutions at below market rates and pay them the highest interest rates in the developed world.
But do not blame the bank for the gamble that failed to scare kiwibond holders. It has few other weapons and it knew the high dollar is only a symptom of the problem. Even as he splashed more dollars into the market governor Alan Bollard called for more rigorous taxation of housing investment to burst the bubble that has defied all his interest rate rises.
A capital gains tax, even with an exemption for owner-occupied homes, was treated as political dynamite in this country long before a significant number of voters owned second homes. These days it would hurt a much greater electorate, as would Dr Cullen's suggestion to limit the income tax concession.
The effects of reducing the tax deductibility of investment property losses would be felt by tenants as well as second home owners. Rents would rise as landlords lost the bonus of offsetting losses against tax, although their warnings are disingenuous in that they would have us believe they currently give all the benefit of that to tenants. No one should doubt landlords are asking what the market will bear for properties; there is no social good involved in their pricing. However, the house resale market would fall as people bailed out of highly geared properties. This is not a recipe for political comfort and it is courageous of Dr Cullen to advance it.
It deserves better than the response from the Government's allies, Peter Dunne who is "far from convinced" it would work and Winston Peters who says his party is against more taxation in principle. The tax change would work, probably too well for Mr Dunne's comfort, and Mr Peters' principle is merely a knee-jerk.
Those newly investing in rental properties for their tax implications must wonder if the benefits are too good to be true. They are certainly too good to be sustainable in an economy groaning from the three, linked pressures of a housing price bubble, high interest rates and extremely high dollar.
