Investment in Property Must Remain Certain – By Tim Manning

Posted on Monday, February 22nd, 2010 at 9:43 am in

 

Close to 70% of New Zealand households own their own homes; Australia has a similar rate of ownership, while the UK is at around 69%, the United States at 65%, France 55% and Germany is below 40%.

So New Zealand has relatively high rates of home ownership. That’s a good thing. Studies have shown that home ownership is a key factor is creating strong communities. People who own their own homes have a vested interest in looking after them. They have pride in their homes and that’s good for our communities and society.

The reason Kiwis invest in property is that they don’t trust the share market or financial sector. The experiences of the 1987 share market crash and, more recently, the finance company debacles have left New Zealanders wary of investments they can’t touch and smell.

The global recession has hurt property prices worldwide and our market has not escaped. But New Zealand property investment remains a great story. It hasn’t done a Dubai and gone belly up. It hasn’t done a Bridgecorp and swallowed up your hard won savings. You can trust property. There’s a solid regulatory framework around it; you have the surety of knowing your investment is protected in good times and bad.

There’s no doubt that the government has to increase its tax take and it has had some powerful brains on the Tax Working Group (TWG) take a look at how to do that. A land tax seems to be off the TWG’s agenda, but property is not out of the woods yet. (Markets hate uncertainty and I’d expect the property market to remain subdued until after the May 20 budget.)

The TWG recommends stopping the practice of allowing depreciation deductions for buildings. Depreciation is when the value of your asset drops over time because of normal wear and tear or when it is replaced by a newer model. In the UK, for example, only industrial buildings are allowed to depreciate under British tax rules. But New Zealand is not the UK and most of us live in wooden houses, many of them decades old, which age in sometimes harsh and usually rainy conditions (especially in Auckland!). You’ve got to be able to claim depreciation on wooden houses.

What would happen if owners of rental properties weren’t allowed to claim depreciation and had to suck up losses from their aging properties? They would have to find a way to cover those losses and the easiest way to do that would be to jack up rents. Not only would that hurt property values, it would also unfairly penalise those on low incomes, who tend to be renters rather than owners.

The government is trying to say that New Zealand Inc. needs more money going into productive activities to increase export earnings and create jobs. That is undoubtedly true. But you can’t expect Kiwi mums and dads to sink their savings into sectors which are unregulated. The finance company experience of the past few years shows the damage that can be done when ordinary people’s investments aren’t protected.

Taxing returns on property won’t end Kiwis love affair with bricks and mortar until there are proven reliable alternatives. The government needs to look at fostering those well before tinkering with the rules around property investment; this alone will encourage Kiwis to invest in other asset classes

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