Rental property value 'overinflated'

BY CATHERINE HARRIS

As the Budget looms, landlords and a university researcher claim that a key figure which has been used in the argument about rental investment is wrong.

Instead of $200 billion tied up in property, the figure is thought to be less than half that, they say.

In tomorrow's Budget property investors are expected to lose certain tax "privileges," such as the ability to depreciate their property's value.

Supporters argue changes are necessary to redirect New Zealanders away from property and into the productive sector.

However, Property Investors Federation vice-president Andrew King says the Tax Working Group's contention that too much money – $200b – was tied up in property investment was "overinflated".

Research out of Auckland University's Retirement Policy and Research Centre has found the amount invested in rental property was closer to $60b to $80b.

The mistake is thought have to occurred by taking 2006 census figures for the number of dwellings owned by residents or held in a family trust and assuming the remaining 37 per cent was rented.

But the centre suggests that less than 20 per cent of dwellings were private rental investments. Some were holiday houses or second houses. Another 4 per cent were state houses.

Centre co-director Michael Littlewood said the $200b figure had come from a footnote to a consultant's report and had been elevated beyond its purpose.

"When I saw that number I thought, `That doesn't look right'."

The federation's own estimate of $78b was reached by multiplying the number of rental units by Quotable Value's average value for houses in the lower quartile. This recognised that rental properties were usually worth less than the national average.

Mr King said that if one assumed that investors had on average about 40 per cent equity in their properties, the value of the rental property market dropped to $31.5b – "well less than the NZX market capitalisation of $55b or the $61b invested in managed funds".

He said property investors were "extremely worried" about the Budget and felt under attack from other parts of the investment community.

He said the Tax Working Group had made "tonnes of mistakes" and that the $200b error also threw out the amount the Government was expected to collect by removing depreciation.

About 250,000 people owned a rental, a small proportion compared with the 1.3 million who invested in KiwiSaver, which provided incentives for people to join, he said.

"It's amazing that we seem to be the ones as portrayed as everything that's evil and wrong with our economy," Mr King said. "It's just rubbish."

The chairman of the Tax Working Group, Prof Bob Buckle, said there were various estimates on the size of the property market "but to be quite honest, it's not the central point".

Changes in investor behaviour dating back at least 10 years were the key concern, he said.

"Particularly when the top personal rates, PIE rates, trust rates, company rates, became non-aligned, that opened up all sorts of incentives pertaining not just to the property market but elsewhere as well."

Meanwhile, in more research out yesterday, the Retirement Policy and Research Centre said the proportion of money New Zealanders had put into housing was not out of line with other Western countries.

It drew on a recent Treasury paper that showed less than 50 per cent of all households' assets were in housing of all kinds including holiday homes and rentals.

"Whether 45 to 50 per cent of all assets in housing is too much is another question," Prof Buckle said.

RING-FENCING 'EASY TO AVOID'

Accountants say any move by the Government to "ring-fence" rental property losses could be easy to circumvent.

A similar attempt in the 1980s saw taxpayers simply structure their tax affairs differently, said Craig Macalister, tax director of the New Zealand Institute of Chartered Accountants (NZICA).

"It didn't deliver the policy outcomes the Government of the day anticipated."

It is estimated that rental losses claimed against personal income cost the tax system $150 million in 2008.

Budget watchers believe the Government might restrict claims to future rental income as part of a crackdown on perceived tax advantages in the property sector.

But Mr Macalister said clamping down on only one form of investment often opened another loophole.

Restricting the tax benefit of rental property losses could have ripple effects including forcing house prices downwards.

He said the institute supported a simpler, more equitable tax system and recognised that capital assets were undertaxed.

"If the Government wants to address that, it should apply tax changes across the board and not single out rental properties."

- © Fairfax NZ News