Capital Gains Tax and its effect on a slowing market

Prendos registered valuer Gordon Edginton gives his property predictions for the coming months, and tells us how he sees Labour’s new Capital Gains Tax impacting the market.

The media have been reporting it for some time now: Auckland has officially become a buyers’ market. Real Estate agents are seeing longer selling times and wider choice for buyers. This is resulting in more deals falling over, less pressure for purchasers to make a decision and more volatility in pricing.

“Over the medium term we can expect property activity in Auckland to be low and slow,” says Gordon. “House prices will remain flat for some time, with a slight downward bias to pricing – especially in the vacant section market where there is an over-supply of sites in some developing areas.”

However, Gordon still believes market conditions remain stimulatory, saying there are many factors that continue to encourage increased market activity.

“We are continuing to enjoy record low interest rates and, while migration levels are waning, they are still strong. This, combined with the ongoing housing shortage and rising cost of renting, means New Zealanders still see property as a solid investment.”

Gordon says government intervention intended to tackle Auckland’s housing issues and shortage of affordable homes has had mixed results.

“LVR restrictions will remain in place as they have had a profound effect on slowing investment. Speculation has stalled due to the five year bright line test and other tax changes, and money coming out of China has also reduced – meaning that sector of market activity has slowed. These changes, as well as some relaxing of lending rules by banks, are resulting in more first home buyers entering the market.”

Aucklanders are seeing increased housing choice availability thanks to the large amount of intensive housing underway. These properties sit at a slightly lower price point, as they (and particularly the land they’re on) are smaller in size. However, when it comes to Kiwibuild, Gordon agrees with the majority of commentators that it has been a failure.

“The so-called ‘affordable’ Kiwibuild homes are still out of reach for many New Zealanders. The cost is simply too high for the less well-off among us who are struggling to get a deposit together for a three bedroom home. Instead, the government should focus on building social housing, as this is where the need really lies.”

So what is Gordon’s opinion of Labour’s new Capital Gains Tax? He believes it will ultimately have a negative effect on the housing market.

“Capital Gains Tax will have a detrimental effect on both residential and commercial investment property. The proposed use of the marginal tax rate of 33% for most is extremely onerous and would see investors quitting property in their droves. While this will potentially result in less competition for new home buyers, it will also impact the economy. These are significant asset classes that enjoy enormous dollar investments from both local and overseas purchasers. The increased tax rate will result in oversees investors reducing their holdings and being far less likely to invest here. Local investors, too, will exit the market – decreasing available rental stock, reducing rental construction and causing rental prices to rise further.”

Gordon says the result would be assets becoming less liquid, or harder to sell, which is likely to drive prices down and see a lower level of transactions. This could also reduce construction investment as a result.

“All in all, I believe Capital Gains Tax will simply make housing problems worse. Investment will decline, housing availability will be made worse and investors will desert the market. It would be far simpler for the government to extend the bright line test from five to seven years.”

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