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Capital Gains Tax - Is it time to sell the rental?

Capital Gains Tax - Is it time to sell the rental?

For decades owning a rental property has been an aspiration for many New Zealanders. After all where else can you safely invest? A generation were caught out by the 1987 share market crash and most have been too afraid to step back in. With leverage, preferential tax treatment(s) and limited housing supply, it has proven to be a good bet for the most part.

Now the potential for a Capital Gains Tax (CGT) is about to throw a cat amongst the pigeons, not to mention the recently introduced rental housing Warrant of Fitness, adding further costs, alongside tighter lending rules to investors (LVR restrictions) and a cooling housing market. So what is likely to happen to the residential investment property market and the share market should a CGT be adopted?


Firstly the property market,


All things being equal, increasing taxes on residential investment property decreases the expected return and attractiveness of the investment. This will be a bonus for first home buyers looking to enter the market; as landlords exit. First home buyers and landlords often tread on each other toes when it comes to the types of properties they invest in. A CGT will definitely tip the odds in first home buyers favour.

One ‘pro’ to property owners will be what is called the “Mansion Effect”. As owner occupied properties are to be exempt from CGT, there will be an incentive to increase the value of your own home, rather to buy an investment property. Why buy another house and be taxed, when you can add another storey, a pool or just simply buy a bigger family home, all of which are tax free? This will make the higher end homes more expensive and the lower end more affordable.

 

Now the share market,


As mentioned above, an increase on the tax of an investment reduces the return and the attractiveness of the investment. This too will be the case for the New Zealand share market. However, when we look closer at the size of the respective markets; it may play out a little differently. The total value of property in NZ is 1.09 trillion NZD (RBNZ June 2018). The value of residential investment property is approximately $360 Billion (Stats NZ 2016). The entire value of the New Zealand share market is $141 billion (as at 20/03/2019), implying the share market is less than 40% the size of the residential investment property market. With landlords selling and the playing field being levelled from a taxation perspective, it is highly likely the some of the $360bn tied up in houses will make its way to the share market.

Some commentators believe that CGT will not be passed on to the share market or KiwiSaver at all.

“It appears shares and KiwiSaver will not be a part of the ‘first round’, and the focus will be on residential property investors. At least this is what Labour will take to the next election.” Mike Taylor – CEO PIE Funds.

          Jeremy Sullivan - Investment Adviser. MBA. BCom. AFA - Hamilton Hindin Greene Ltd


If this were to be the case the playing field will not have just been levelled it will have been firmly tipped in favour of the share market & KiwiSaver. A lot has changed in the New Zealand share market since the 1980’s. Today the share market is highly regulated, full of quality, robust businesses: Auckland Airport, Meridian Energy, Ryman Healthcare to name a few. Further, it is one of the highest yielding markets in the world, making passive income all that much easier. With interest rates so low, property falling out of favour and a wall of money from KiwiSaver and (potentially) property investors, perhaps it’s time to give the share market another look.

Is it time to sell the rental? That depends on your outlook, goals, objectives and risk profile. One thing is for sure, there are certainly a number of clouds gathering on the horizon for property investors.

This article was written by Jeremy Sullivan – Investment Adviser (BCom, MBA, AFA) at Hamilton Hindin Greene Ltd. The article represents general information and does not constitute personalised financial advice. If you would like to know if the investments mentioned are suitable for you please contact your investment adviser. A secondary disclosure statement is available free of charge by going to www.hhg.co.nz or by calling 0800 10 40 50.

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