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Andrew Little’s newly announced policy on negative gearing demonstrates a lack of understanding of how the housing market works and will hurt the people it is trying to help, experts say.
By Miriam Bell
If Labour Party leader Andrew Little wanted to generate headlines and attract attention with confirmation that the Party will get rid of negative gearing, he has succeeded.
Reaction to Little’s announcement yesterday has been fast and furious with critics saying rents will be driven up and querying Labour’s definition of investors.
Little has defended the policy, insisting it will help more people into home ownership and prevent speculators from driving rents up.
But Gilligan Rowe & Associates director Matthew Gilligan said Labour’s policy is a resounding fail on the supply front and shows that Labour doesn’t understand supply and demand.
Most investors are smaller investors – so called “Mum and Dad” investors – and it is those investors who will be affected by the policy, not bigger investors, he said.
“If you take the liquidity, which negative gearing gives, away from small investors, it will simply undermine them.
“They are not going to be able to sub-divide and build and increase supply; they are not going to be able to renovate run-down properties and improve the housing stock. This will have a big impact on supply.”
Not only will the policy undermine smaller investors, but it will force many out of the market completely, Gilligan said.
“Maybe not now when interest rates are low, but as soon as some economic disruption causes rates to go up. Investors who need the cash back to keep on going will become insolvent and leave the market.”
In his view, it is bigger investors who will then step into the gap and buy up the properties that become available.
“Removing negative gearing won’t impact on bigger investors who have high liquidity and lots of equity. This policy just opens the door for them to swoop in and buy more.
“This policy is regressive and will lead to a further distribution of wealth to those who already have it. It will impact most on the very people who Labour is trying to appeal to, who support Labour.”
Ultimately, the policy stemmed from a lack of knowledge or understanding about the way the housing market works, he added.
Many critics of Labours’ policy have pointed out that there is a lack of clarity over who exactly the policy, which Little said targeted speculators, will impact on.
Withers Tsang partner Stephen Tsang wanted to know exactly what Labour’s definition of an investor is, as well as who qualifies as a property speculator.
“Are they all investors apart from Mum and Dad investors – and who are they? Little seems to be implying that all investors are speculators which is simply not the case.
“Conversely, there is no difference between Mum and Dad investors and other smaller investors.”
It is necessary to look at where the policy starts and where it ends, he said.
“Little seems to think that in removing the tax incentive in property investment it will level the playing field for first home buyers.
“But does Labour want people to save for their retirement, which many people do via property. If so, why should they be treated differently to first home buyers?”
For Tsang, Little has not done a good job of conveying what the policy will achieve – particularly as he has made assumptions about its impact on the housing market with little evidence to back them up.
“Does he want to depress the market and get people to sell? But what will that do to rental stock? And what is the solution to that in the interim? Where do those people go to live?
“It seems a kneejerk reaction to the housing affordability problem which is intended to generate headlines and votes and appease those feeling left out of the housing market.”
The details of the policy are sketchy so it’s hard to speculate how it would work in practice, but ring-fencing property tax losses in such a way could be problematic, he said.
“Instituting a capital gains tax might be more straightforward, but that is not a Labour policy this election. It is interesting to think about why that might be.”
The idea that negative gearing is a tax loophole is in itself problematic for some commentators.
Economic commentator Michael Reddell said that there is, in fact, no loophole or subsidy for property investors in the existing tax system.
‘There is simply a conventional comprehensive income tax system at work. If you lose money on one activity, you can offset it against gains on other activities.”
Given this tax system, Reddell said he was at a loss to understand the economic logic behind Labour’s proposed policy.
“Presumably it will still be okay to set up a small sideline business which makes losses for several years in the establishment phase, and to offset those losses against labour income? But not for residential investment properties?
“Even though setting oneself up as the owner of an investment property, renting a house to tenants, is a small business. In fact, it is a way that many people get into business, taking risks to get ahead.”
He was sceptical as to how much difference ring-fencing in the way proposed might make.
But he too said the change was likely to disadvantage people starting out in the rental services businesses, including “Mum and Dad” investors, rather than those who are better-established and have larger equity.
Continue reading this article at the original source from Landlords.co.nz
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