Published on: 2019-02-22

Hamilton low-end renters, mum and pop investors likely losers on capital gains tax


David Kneebone, General Manager of Lodge City Rentals, says the Government’s proposed capital gains tax announced today could negatively affect two sectors of Hamilton’s community the most.

“The first sector of Hamilton’s community who will likely feel the biggest negative effects from the imposition of a capital gains tax is renters.  That’s because rental property owners – most of them being mum and pop investors - will have no other option than to pass along the costs of such a tax onto tenants.

“And while renters at the top end of the market – most of whom are professionals with solid incomes - will be able to absorb increases, families in lower-cost rentals will be adversely affected as they don’t have disposable income to spare,” explains Mr Kneebone.

He says a further consequence of the tax in Hamilton could be increased pressure on community housing and other community services helping the disadvantaged.

Kneebone says over the past ten years or so, Hamilton’s rents have not kept pace with house prices.  But he predicts this will change as the capital gains tax comes into force.

“There’s a lot of talk about rental affordability across New Zealand.  But the fact is that rents in Hamilton city have increased at a far slower rate than house prices, resulting in lower yields for investors.

“For instance, the median house price has increased around 75%-80% over the past ten years, while the median weekly rents have increased only 35-40% over the same period.

“I think we’ll now see this change,” says Mr Kneebone.

Within the past few years, rental property owners have come under new regulations and compliance obligations which increased costs and lowered rental incomes.  These included new insulation standards, the requirement to adhere to the Healthy Homes Guarantee Act, a ban on letting fees and the inability to claim depreciation on residential property investments.

Additionally, “ring fencing“ regulations are on the way.  These will preclude owners from claiming losses from their rental investments against other income.

“Being able to claim these losses is particularly important for rental property owners in years when they undertake refurbishment or redecoration, which can tip their investments into loss that year,” explains Mr Kneebone.

He says all these regulations plus the added burden of capital gains taxes may have the unintended consequence of discouraging owners reinvesting in their properties.

“We’ve seen landlords doing their best to absorb all these new costs, but the costs of a capital gains tax could be the straw that breaks the camel’s back.

“The vast majority of landlords are mum and pop investors who’ve worked hard all their lives to save and buy a few properties to supplement their average incomes.  They often hold onto properties that don’t make much income from rents, while planning to make a significant capital gain from a future sale.  That advantage is now taken away,” says Mr Kneebone.

Looking to the future, Kneebone says a capital gains tax could serve to change the culture of how Kiwis invest in New Zealand.

“Investing in property is a cultural norm for us as New Zealanders.  A capital gains tax will force us all to rethink where we invest in the future.  Property may not be the first go-to,” he says.

He also predicts a further ripple effect of the new tax will be an increase in demand for residential properties at the top end of the market.

“The Government’s proposal will not impose capital gains on a person’s primary residence.  So, what we could see is landlords selling up their rental properties and putting that money into a bigger, more expensive home for themselves,” he says.

Kneebone says his team is taking a wait-and-see approach to how the imposition of a capital gains tax will play out.  He says the Government’s promise of redistributing tax by administering lower taxes in other areas provides some hope that overall repercussions on the community may not play out in the worst-case scenario.

“Something our team is keeping in mind is - just because it doesn’t work in practice, doesn’t mean it won’t work in theory.”

Lodge City Rentals is Hamilton’s largest property management company (by property volume). David Kneebone, shareholder and manager of Lodge City Rentals, has worked in the industry since 1997.