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Tax reforms to put brakes on house prices
The dream of first home ownership will be made easier by Prime Minister John Key’s likely tax reforms, say economists.
In a speech to Parliament yesterday, Mr Key indicated the Government would change the way property was taxed. A land tax and comprehensive capital gains tax were ruled out, but a tax realignment and changes to depreciation write-offs for properties are expected.
Massey University property group professor Bob Hargreaves, who compiles a quarterly Home Affordability Report, said tax reforms would put a brake on rising house prices – but they would not become affordable for average families and young Kiwis for some time.
“Unfortunately no. Home affordability is not going to be great as we go into 2010,” Mr Hargreaves said.
The recession had slashed house prices last year, but most of this had already been reversed.
Meanwhile, interest rate hikes expected later this year would make home ownership dearer, Mr Hargreaves said.
There was currently also a housing shortage, he said.
But the tax realignments indicated by Mr Key were likely to take the heat out of the property market.
The price of cheaper homes had risen rapidly in the past 10 years as investors raced to buy them for tax benefits, he said. Investors had frequently outmuscled would-be owner-occupiers in that market.
“There will be less encouragement for investment, for people to buy rental properties, than there has been.”
But in the short-term, the whole housing market would slow down with buyers and sellers uncertain of what exactly Mr Key planned to do, Mr Hargreaves said.
New Zealand Institute of Economic Research principal economist Shamubeel Eaqub was optimistic that tax reforms would slowly improve home affordability as investors left housing markets.
In recent years, taxes had been set up to have a steep jump to the top personal rate, making property investment lucrative as a tax break, Mr Eaqub said.
Investors had bought houses to save on taxes, making it harder for people who wanted homes to live in.
By realigning taxes to remove this incentive to invest in property, house prices should come down, he said.
But borrowing money was difficult in the current environment – although most of this was because few households were looking for loans, he said.
And tight credit, including a large deposit requirement, had its advantages, sheltering families from risk, he said.
Mr Eaqub even had relatively good news for renters. Rents might not increase as much as expected even as investors left the low-end housing market, he said.
Rents had not changed much when investors entered the market during the past few years, suggesting landlords and investors were two different groups. The loss of investors from the market should not affect the number of landlords offering rental properties by as much, he said.