Cutting landlord tax breaks will push up rents, Treasury study finds

Thursday 31st December 2009

Removing existing tax incentives for landlords emerges as a costly option for renters that would raise house prices and reduce the supply of housing stock, according to a simple model for assessing housing policy changes, published on the Treasury website.

One of our four working papers published by the Treasury on Christmas Eve, "A Simple Model of Housing Rental Ownership with Policy Simulations" has no status as a policy-making document, but is nonetheless a clue to the way the lead economic advisory agency's thinking is developing.

The paper's primary conclusion is that rates of home ownership are a relatively meaningless policy target, despite the fact that they have been falling and are often cited as evidence of a growing economic problem.

By far the most significant beneficial impacts for New Zealanders, whether renters or homeowners, would come from substantial reductions in the cost of building a home, and lower real interest rates.

However, the impacts achievable from reducing tax incentives available to landlords are relatively minor and potentially bad news for the renting population.

Landlords typically pay no tax on capital gains upon sale of properties they own, and are able to deduct the cost of mortgage interest payments against rental and other income.

The model, developed by Treasury economist Grant Scobie and Andrew Coleman from the Motu economic consultancy, suggests it would be "necessary to reduce the size of the tax concession by 29% in order to increase the owner-occupancy rate by 1% in the medium term...or by approximately $1200 per year per property."

"If the tax concession was reduced by this amount, rents would increase by 1.5%, house pricews would decrease by 0.6%, the quantity of rented homes would decline bty 3.6% and the total quantity of houses would decline by 0.25%, equivalent to some 4000 houses.

"The increase in owner-occupancy rates and the increase in the welfare of those who buy would therefore come at the expense of a decrease in the welfare of those who rent."

However, owner-occupancy rates would also be expected to rise if subsidies for home-owners were increased while lowering rents, raising house prices and increasing available housing stock. "The distributional implications for those who rent and those who already own homes are clearly different, yet the effect on the owner-occupancy rate is the same."

These outcomes supported the view that "the owner-occupancy rate is a very poor measure of the state of the housing market".

Meanwhile, a further working paper on levels of household debt suggests concern over debt levels and recent falls in house prices are overdone.

While New Zealand households hold a large part of their assets as residential property, increases in the value of that property have more than outstripped the growth in gross indebtedness, which rose from 33% to 149% of average disposable income between 1982 and 2007.

"Due to the faster growth of assets, net wealth grew from 319% of disposable income in 1982 to 430% by 2002 and 604% in 2007," the Household Debt in New Zealand working paper says.

The paper estimates that although very small numbers of households can be deemed to be "at risk" by spending more than 30% of their disposable income to service debt while also experiencing negative equity owing to falling property rises, around 8000 families were in this situation in 2008, up from about 6000 in 2004.

Businesswire.co.nz

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