Property investors told: Worried about CGT? You've only yourself to blame

Friday, 8 March 2019

Property investors who are worried about the prospect of a capital gains tax are being told they may have only themselves to blame.

The Tax Working Group has recommended a broad capital gains tax be introduced from 2021, on most investment assets.

While the Government hasn't committed to adopting the policy, it has left some property investors worried.

In many parts of the country, rents are low compared to property prices. In Auckland, it's common for property investors to get yields of 3 per cent on money invested in housing. That's before expenses are deducted.

* Capital gains tax: Tax Working Group announces support for capital gains tax, cuts to income tax

* Tax Working Group may prove a frustration for Labour**

Graeme Fowler: 'Capital gains investors overall tend to sell at very random times without any real thought or logic.'

For 116,000 investors around the country, the cost of owning property is more than the income earnt.

Many are left relying on capital gains to make the investment pay - and so the prospect of paying 33 per cent in tax on profits is hard for some to swallow.

Economist Shamubeel Eaqub said if they had instead looked for properties that provided better cash flow, the prospect of a capital gains tax would be easier to swallow.

One investor, Graeme Fowler, agreed. He said he would guess at least 70 per cent of investors were chasing capital gains and relied on prices going up to get ahead.

'Investing for capital gains is more like speculating. The investor buys a rental property with the hope that it will increase in value. If that does happen, they will often refinance the property and buy another one with the exact same intention.'

He said many investors, particularly in Auckland, did not think about what the property would generate in rent when they bought.

Some were left with only enough weekly rent to cover the interest on the bank loan, 'plus hopefully a little left over for rates and insurance'.

The Government has not said whether it will adopt the Tax Working Group's proposals as policy.

'Often there's nothing left over for any maintenance. If interest rates went up 1 per cent or 2 per cent from the low where they are at now, these investors would have negative cash-flow.

'The problem with this strategy is that because they choose to use interest-only mortgages, the debt against the property will always remain the same. Their only hope is that prices increase so that at least on paper they appear to be better off. Their focus is often on looking for small parts of the city they think will go up in value more than others. '

He said most of the investors following this style ended up selling earlier than they should and regretting it later.

'Already I'm hearing of investors wanting to sell now, especially in the likes of Auckland and Queenstown. They are afraid that prices may drop and are also afraid of the potential capital gains tax.

'Capital gains investors overall tend to sell at very random times without any real thought or logic. These include when prices start to go down when cash-flow investors like to buy more, interest rates go up, change of government policies, and also if prices have gone up - they like to sell and take the profit.

'Or other investors like myself, we invest for cash flow and whether house prices go up or down is of no importance. In the past when I've bought rental properties, I make the assumption that the property will go down in value after I buy it, so I need to make sure I buy it well, and also that it has good cash flow.

'So when the property gets paid off in full in 20 years or so, the value of the property is of no importance. Whether it has gone up, down or is exactly the same value as when I bought it 20 years ago, doesn't matter. Only the cash flow is important.. CGT doesn't affect a cash flow investor; as we don't ever intend to sell. Whether the government introduces it or not doesn't concern me, however it will concern a lot of capital gains property investors.'

Economist Cameron Bagrie, of Bagrie Economics, said it was an adjustment that was going to have to happen to capital gain-chasing investors, anyway.

'I think some residential investors have become very dependent on the capital gain, and expectation of continued capital gain has been one factor driving rental yields in some regions to unsustainable levels. Now that the capital gain has disappeared in some regions and capital losses are appearing in Auckland, and you wont be able to offset the losses against your primary income to get some tax relief because those losses are being ring-fenced, a few are going to hit the eject button and sell.

Eaqub said the impact of a tax was being overstated.

'People are making a big thing of it. If you hold a property for say 30 years then the impact of a capital gains tax even at, say, 30 per cent tax rate would only be 3 per cent on current price. There's far too much teeth-gnashing on something that will only affect future capital gains. '