{"id":112589,"date":"2021-02-12T16:38:05","date_gmt":"2021-02-12T16:38:05","guid":{"rendered":"https:\/\/precoinnews.com\/?p=112589"},"modified":"2021-02-12T16:38:05","modified_gmt":"2021-02-12T16:38:05","slug":"hamish-rutherford-a-longer-bright-line-test-risks-rewarding-investors-for-locking-out-buyers-for-longer","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/hamish-rutherford-a-longer-bright-line-test-risks-rewarding-investors-for-locking-out-buyers-for-longer\/","title":{"rendered":"Hamish Rutherford: A longer bright-line test risks rewarding investors for locking out buyers for longer"},"content":{"rendered":"
OPINION:<\/strong><\/p>\n The pressure on Finance Minister Grant Robertson to “do something” to address soaring house prices has become intense.<\/p>\n While housing affordability has been building as an issue for a generation, the recent sugar rush<\/span> of ultra-low interest rates has left Labour further behind the curve on an issue it campaigned on improving in 2017.<\/span><\/p>\n But Labour’s commitment to avoid any meaningful tax reform means that solutions he might be about to reach for could make the situation worse, at least at the margins.<\/p>\n This week Robertson promised “bold action” on housing but all we know so far is that it will include initiatives related to both demand and supply.<\/p>\n When it comes to supply – building more of them – the Deputy Prime Minister said initiatives would come as part of May’s Budget.<\/p>\n On demand – tipping the scales one way or another for buyers – Robertson indicated something could come this month.<\/p>\n Although he hinted at help for first-time buyers, his options for targeting investors are few, largely because he painted himself into a corner on tax.<\/p>\n Having already ruled out a capital gains tax while Jacinda Ardern is Prime Minister, when Labour announced a new high-earner tax bracket (39c in the dollar over $180,000) just before the election, Robertson spent the entire day insisting there would be nothing else.<\/p>\n Even though he assured NewstalkZB’s Heather du Plessis-Allan- in no uncertain terms – that there would be no change to the bright-line test, since then Robertson has confirmed that this is under consideration. Such a move appears likely.<\/p>\n <\/p>\n If the aim of the change is to relieve pressure on house prices climbing, he should look elsewhere. If anything, it will do the opposite.<\/p>\n The bright-line test for residential property was not a new law when National established it in 2016, but a way to enforce existing law.<\/p>\n With a few exceptions, if you buy then sell a home (that isn’t your main home) within the period of the test, you pay income tax on the gain.<\/p>\n National set the test at two years, aiming mainly at those speculating on quick gains on newly developed properties. Labour extended it to five years shortly after entering coalition.<\/p>\n Robertson has confirmed he is seeking advice on a longer period again, with talk around Wellington that it could be extended to 10 years, or possibly more.<\/p>\n Although the longer the test is, the more people will be caught by it, the bright-line test has an unintended consequence which becomes more severe the longer it is applied.<\/p>\n Any form of capital gains tax tends to see investors hold on to assets that they would not otherwise want, but the bright-line test will create a perverse incentive not to sell in the final years of the test.<\/p>\n If the test was extended, it would only apply to houses bought in the future, but imagine if recent experience – and a longer test – was to apply today, what it might mean for people thinking of selling inside the period.<\/p>\n Between the end of 2013 and the end of 2020, the median house price across New Zealand rose from $426,500 to $749,000 according to the Real Estate Institute of New Zealand, a gain of around $322,500 or 75 per cent.<\/p>\n Using those values and that period, if a 10-year bright-line test applied, the seller of this theoretical house would be liable for a tax bill of $100,000-$125,000 (depending on the seller’s marginal tax rate).<\/p>\n But what if the seller decided not to sell, but to hold the property for the remaining three years of the 10-year test? Waiting the remaining three years would mean the tax would not have to be paid, meaning the investor would be $30,000-$40,000 better off a year, even if house prices flatlined during that period.<\/p>\n Robin Oliver, the former deputy commissioner of Inland Revenue and Tax Working Group member, regarded as a leading expert on taxation in New Zealand, warned this week that such a change would not bring down house prices.<\/p>\n The test would encourage investors to simply hold on to the houses they own longer, meaning few would be available for sale to potential buyers.<\/p>\n “I think it will have the exact opposite effect to what the Government is hoping for,” Oliver told the Herald. “The benefit from not selling is enormous.”<\/p>\n This lock-in benefit exists under the current five-year test, as it did under the initial two, but the longer it is extended, the more intense the payoff for holding out becomes.<\/p>\n If the purpose is to simply inconvenience investors, then it achieves a little bit. But if the purpose is to bring houses to the market for people who might want to live in them, it does the opposite.<\/p>\n