Property tax change is 'inevitable': ANZ

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.

But the newsletter also pointed to comments from the Reserve Bank last week that there was scope for policy changes in the tax system to help rebalance 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," 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."

The ANZ economists said some tightening up in the taxing of property was 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 New Zealand'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.

"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," Market Focus said.

There had been a surge in the number of active loss attributing qualifying companies (LAQCs), to nearly 130,000 in 2008 from 63,400 in 2003.

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

With Treasury projecting ongoing deficits and high net debt, recent trends in LAQC losses claimed cannot go on, the newsletter said.

"So while we, as a nation, might be loath 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," the newsletter said.

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

NZPA