Economists predict end to property tax perks

Some tightening of tax rules surrounding property is inevitable, ANZ economists say.

In ANZ's weekly Market Focus newsletter, they said that while prices in the housing market may be up, volumes and average days to sell had stabilised in the past few months.

That signified a market that had responded to policy support, but was stabilising and not being driven to excess, Market Focus said.

But it also pointed to comments from the Reserve Bank last week that there was scope for policy changes in areas such as the tax system to help rebalancing of the economy.

Reserve Bank Governor Alan Bollard told reporters that for some years the Reserve Bank had pointed out the need to ensure property investment was not particularly advantaged in terms of its tax treatment.

"Because when it is, that draws extra funds into the housing sector, and the effect of that has been strong demand for mortgages, strong demand for external funding, pressure on the exchange rate, and pressure on the traded sector," Dr Bollard said.

"We don't think that's a good thing. We think it's quite important that people do understand that link between demand for mortgages, beyond what we're saving, and pressure on the exchange rate.

"We believe an appropriate tax change could help reduce that pressure."

Today the ANZ economists said some tightening up in the tax rules surrounding property was, in their minds, inevitable.

"The Prime Minister ruled out a capital gains tax (once again), but we struggle to see how the Government can afford (literally) to continue giving a tax rebate on NZ's biggest investment class, namely residential property," the newsletter said.

Background papers presented to the Government's tax working group had revealed the extent of growth in tax losses claimed on residential property investment in recent years.

In 2008, net rental losses of almost $580 million were reported, a big turnaround from net rental profits in earlier years, Market Focus said.

"IRD and Treasury are unsure whether this is a temporary phenomenon or a new trend that will remain in place in the absence of any policy change."

Associated with that, there had been an "explosion" in the number of active loss attributing qualifying companies (LAQC), rising to nearly 130,000 in 2008 from 63,400 in 2003.

Total LAQC losses claimed over that period, although not all associated with investment property, had risen from $700m to $2.3 billion.

"During periods when the government was running substantial surpluses , such loss claims did not have a material bearing on the overall fiscal position," Market Focus said.

But with the Treasury's latest long term fiscal statement projecting ongoing deficits and net debt rising past 200 per cent of gross domestic product by 2048, "recent trends in rental and LAQC losses claimed cannot go on".

"So while we - as a nation - might be loathe to introduce a capital gains tax on housing or land tax, it would be truly astonishing if we stood by and let the current trends in losses on residential property continue," Market Focus said.

"Otherwise, the onus is on the remainder of the tax payers - via our general tax contribution - to fill the void."

- NZPA