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Property Owners 'Landed Gentry'?

I was recently reading an article about Susan St John and Terry Baucher’s latest call for a harder taxation regime for all residential property in New Zealand. (Yes, harder than the myriad of changes we have already had.) 

These chardonnay liberals are promoting the annual taxation of equity in residential property (private homes and investment property) with an implied rate of return (called a ‘Fair Economic Return’). They are bitterly disappointed that NZ did not consider bringing in an accruals-based capital gains tax, and spend much of their time maligning property as an asset class to the government and left-leaning press. Despite the biggest changes to NZ property taxes in a hundred years, this pair of academics still think tax is the major cause of house price inflation and inequity in New Zealand. They want more! 

These authors bemoaned in their working paper, and I quote, “Accumulated fortunes in real estate enable and entrench a landed gentry, whose incentives to work and contribute in a meaningful way are blunted”.  Wow! Read that through a couple of times and try not to laugh. But then consider: the government listen to these types, and the media love to quote them. It’s a problem.

To manage the housing market with tax policy, is flawed policy. While the housing problem is most certainly multi-faceted and in part demand-driven, tax is not the problem. The problem is predominantly supply, or a lack thereof. If there are too many houses, prices fall, and everyone gets one to live in. It’s as simple as that; just go have a look at the American property market.


The ‘landed gentry’, blunted by their fortunes

According to Baucher and St John, due to property owners’ real estate fortunes, their incentive to work and contribute in a meaningful way is blunted. (Hold this up to the light and read between the lines; that’s pure socialist envy talk.) Do you think they have paused and considered what will happen if they make being a landlord so unattractive through tax, that we stop doing it in any great number? 

Ministry of Business Innovation and Employment stats tell us the government currently provide about 4% of housing. They tried to build 100,000 houses in their first term, and found out how hard it is (they pretty much built nothing that the previous government hadn’t already started). If they keep beating up landlords who are good at creating and managing housing, if they keep attacking them with negative rhetoric and taxing them harder and harder, what happens when we landlords start to give up? I suppose this is what they want – the government to centrally provide everything, and we get our “equal” share. But would they prefer landlords to make nothing, rather than landlords continuing to provide and increase supply? What’s more important: creating supply or closing the wealth gap?

To Baucher and St John, I want to say property investment and being a landlord is meaningful, hard work. Landlords are not a gold-plated class of oligarchs, fox hunting in the morning and sipping champagne in the afternoon funded by ill-gotten (untaxed capital) gains. Investors are actually, on average, middle New Zealand mum and dads trying to create a retirement income and provide for their kids. And what landlords do is essential work, addressing one of the government’s biggest problems they face in society: housing. And yet they are attacking landlords with change after change, and stooping to name calling.  

Academics may opine that we are not ‘contributing in a meaningful way’, but tell that to all the architects, planners, builders, roofers, tradespeople, mortgage brokers, property managers - is what they are doing not considered ‘real’ work? They are all in the supply chain of housing.  But these guys just look at the investor at the end who borrowed and paid for the product, and vilify them. They are not recognising who organises and funds the entire supply chain to produce the house – it’s the investor’s money that kicks the process off.  Then it’s the investor who manages the housing stock in perpetuity. Yet somehow what they do is not meaningful? And economists in their surreal world call housing investment “unproductive”. To all of them I say: try living without landlords in society, fixing the houses and revitalising them each time tenants move out.  I say this attitude that housing investment is unproductive, not meaningful, is at the heart of our troubles with housing supply, and the government need to take another path.


Fixing our housing problem

The government need to treat investors and developers as the solution, not the problem. Supply is the long-term solution – and it comes from developers and investors. You need both.

The investors buy the assets from the developers. If the government continue to make it too hard and annoy property owners (the “landed gentry”) with uncommercial tenancy laws and rifle taxes on property (e.g. interest non-deduction, which is manifestly unfair), then the housing crisis gets worse, not better, because as an industry we will increasingly sit on our hands and wait for a more commercial government. 

Instead of vilifying and blaming property investors to deflect the issue away from government, I suggest Labour, academics, and the like do the following:

1. Stop worrying about what investors get, and look at what they actually do for NZ. They supply and manage housing, an essential service. They are one of your most important suppliers. Look after and help them, and you will get more supply. If you really encourage supply with good zoning and infrastructure on tap, you will see developers build too much stock and oversupply the market. (Arguably this is happening in Auckland at present.) Oversupply is the answer to the government’s problems: rents drop and so do house prices. Everyone gets a house.

2. Stop disrespecting investors. You get no respect or buy-in from our industry by pelting us with insults and labels; you just look like envious socialists playing the blame game. And the attitude pervades through public policy. Creating scapegoats (investors) for what is a problem caused by successive governments’ under-investment in housing, is nasty.  Calling us tax cheats, alleging our “real motivation” is untaxed capital gains, demonstrates the government does not understand investors’ business model and intentions at all. (We can’t retire on capital gains; we retire on cashflow, which is taxed.) If you really can’t live with the gains being untaxed, then damn well step up and go to the election on a CGT platform; get permission to do it.

3. Instead, make it easier for developers and investors to succeed, and you will get more supply.

a. Immediately seek consultation with our community on how you can assist us to solve the housing supply problem.

b. Immediately look at how successful the Auckland Unitary Plan has been at reducing land costs in Auckland, by allowing multi-unit sites and high-density housing. (Splice a million-dollar section into 10 units, replacing one McMansion. Land cost dilutes 90%, houses get cheaper.) All cities and towns across NZ need this zoning change now. I know, because I am a developer building to rent, and the zoning rules in small towns and most cities come from the 1960s, where everyone gets a quarter acre section. Times have changed; zoning needs to keep up.

c. Immediately assist landlords with rolling back the no-cause 90 day termination notices you abolished. This makes it nearly impossible to manage anti-social tenants, and makes me (and others) very, very picky with tenants, amplifying your emergency housing problems. Do they not see the link? 

d. Continue to ramp up and forward-fund infrastructure. (Brief accolade here to Labour. They inherited a hopelessly rundown national infrastructure from successive National and Labour governments’ under-investment in housing infrastructure. They have pledged $3.8b to infrastructure, and more, and it’s already helping small towns and cities. I’ve seen it first-hand.) Keep doing this and spend more building sewers, stormwater, telecommunications, and all infrastructure. Upgrade roads and public transport. This is the best investment in the future of NZ housing supply.

e. Don’t charge developers a development contribution that exceeds the cost of their actual pro rata share. All this does is encourage developers to land bank and sit on the land undeveloped because they feel like they are being taxed through the back door with exorbitant development levies. If you want supply, do what they did in Australia and forward-fund the 20 years of future development infrastructure. Charge developers a pro rata and fair connection fee as they connect to the infrastructure. There is talk at the moment of doubling development levies and there’s consultation going on about it. Quite simply, if this happens, many developers will just sit on their hands, and this will undermine supply. Moreover, developments that do proceed will simply pass the cost on to the buyers. Government needs to socialise the cost of forward funding, with a long-term scheme socialising the cost over the total potential number of connections. Not slam the current developers in a tax grab.

f. Stop with infusing ideology into Resource Management Act reform. It seems the government’s main agenda coming out of their initial work in this area is implementing He Puapua and Iwi rights into land development and the environment concerns. I thought this reform was about cutting red tape? They have lost perspective here.

g. Repeal interest non-deductions. Otherwise, when interest rates go up, you will send cashflow poor investors broke. This is because a rise in interest rates will no longer trigger tax relief, smashing the cashflow of fixed income households. The damage that will be done to supply by taxing the net yield (i.e. income before interest costs), rather than the net cashflow, won’t be seen until the phased in non-deduction rules bite in the 2025 and 2026 financial years, 3-4 years away. A downturn like this will inevitably stall investment in housing and reduce supply.  

h. Understand that the rough end of the tenant pool is now toxic to private investors, due the removal of the no cause tenancy termination. Labour made this rod for the government’s back because they don’t understand the housing market. Their emergency housing demand is blowing out. One of the reasons is because landlords are under-supported in the tenancy tribunal, and now without the ability to remove a tenant with ‘no cause’, most landlords won’t touch tenants with social problems. It’s just too hard. So it rebounds on to the government and will continue to do so, until tenancy laws are made more commercial. This is directly caused by these tenancy rules. I speak from experience in my own portfolio, and from listening to clients.


There is no one simple or specific cause to problems of housing affordability, lack of supply, and wealth inequity.  But it’s obviously not tax that causes all these problems. It’s cheap money, loose lending practice, and a desire to benefit from leveraged gains, which unleveraged investments (like stocks) don’t benefit from. Take leverage and cheap money away, you crash supply and make it worse. The government and their academics would do well to think about this paragraph. But hey, don’t let the facts and commercial feedback from the community get in the way of baying for CGT, equity taxes and the like (@Susan and Terry). Never mind that these taxes have not stopped house price inflation in countries overseas, like Australia and the UK. Is it so hard to see this?

Matthew Gilligan
Gilligan Rowe and Associates