Editorial: Ending rental tax breaks a brave move

Labour's plan to remove tax breaks for property investors, announced by leader Andrew Little on Sunday, is a risky but welcome move.

The party is proposing to end negative gearing, which allows investors to claim losses on their rental properties as tax deductions on other income. In normal circumstances, losing money would not be seen as good business practice. But in a rapidly rising market, big capital gains from reselling properties can outweigh these nominal losses. For this reason, negative gearing is often seen as at best an incentive to invest in housing and at worst a prime cause of demand-driven house price inflation.

Labour proposes to phase out the practice over five years, so that rental property losses can only be applied to other income from residential housing. It says it will use the estimated $150 million gained in extra taxes on grants for insulation and heating.

Little has been at pains to portray the plan as a direct attack on big property speculators, foreign owners and high-income earners, although Labour's own figures do not exactly support him. They show about 91,000 taxpayers declared rental losses in 2015, creating $149m of tax breaks.

The party emphasises that about $60m was captured by the top 10 per cent of income earners. But that still leaves $89m for the rest of the property-owning classes, including tens of thousands of the so-called mum and dad investors who may well be thinking of voting for Labour this September.

Little argues that most mum and dad investors don't even use negative gearing - or if they do, they use it for only a few years until their modest property portfolio starts to make a profit.

Even if that turns out to be the case, it still represents a huge political risk for Labour. Despite the party's rhetoric, there is no easy distinction between the "fat cats" who are cutting first-home buyers out of the market and the "honest battlers" who are doing the same thing on a smaller scale as they save for their retirement.

However, the arguments from Labour's opponents need to be taken with a grain of salt too. The Property Investors' Federation estimates that the move would increase the cost of providing the average home from $6184 a year to $10,293, a rise of $79 a week. The Property Institute and National's campaign chairman, Steven Joyce, claim this could lead to higher rents and fewer rental properties. That might happen in the short runbut with a five-year lead time, the market could adjust.

If some landlords decided to quit, their properties would become available to other buyers, either as new landlords with lower expectations of capital gain or as grateful owner-occupiers.

Either way, the shake-up should take some heat out of property prices and provide a more sensible financial platform for the rental market. It falls short of a comprehensive capital gains tax, which Labour bravely took into the last election, but that is understandable.

Little has decided, probably correctly, that ending this tax break will be hard enough to sell as it is.