The panicky measures by the Government to address the Auckland house market may have some unintended consequences, but should provide at least a little breathing space

By David Hargreaves

If you were to assess the Government’s announcement on new taxation measures around housing in the manner of a teacher doing a report card, you might say: “A pleasing change of attitude has been noted recently, but continued effort is needed.”

It is great that public pressure has forced a Government that was becoming dangerously irresponsible in its inaction to do something. But, personally, I’m always a little bit nervous about anybody doing the “right” thing for the “wrong” reasons.

In this case, attempting to tighten up some of the rules around property investing is the “right” thing to do. But the Government is so clearly doing it for the “wrong” reason – namely that its polling of the electorate will have shown it that the public has gone very toxic on National’s non-action on the scorching Auckland house market.

The Government can deny all they want that they’ve panicked. But, they’ve panicked.

So, because these new measures have been done essentially to get the public off the Government’s back, rather than because the Government thought they were a good idea, the worry would be that the new plans might not work as intended. As the famous American baseball star turned accidental philosopher Yogi Berra once remarked: “If you don’t know where you are going, you might wind up someplace else.”

It is to be hoped that serious thought goes into these measures before the first of them are introduced on October 1 (same date of course as the planned introduction of the new Reserve Bank measures) and that any changes that might be necessary are made before the introduction.

Hopefully with some thought, any risk that these hastily put together (for the wrong reason) proposals will backfire, can be removed.

So, in looking at what has been announced, it seems clear enough that extra money for the Inland Revenue Department to follow up on property speculators was always intended – but the two-year sale clause has been hastily dropped in. And I would imagine that the moves on foreign buyers were also late to the party.

To deal with the two-year thing first, I actually agree with the Prime Minister that this should not be seen as a capital gains tax. It is an attempt to clarify the very wooly situation around the current rules and the question of “intent” and whether someone is a property trader or not.

On one level the idea of date-stamping, and saying that if you’ve sold a house (other than your primary residence) within two years you are a trader is good because it is a line in the sand. The whole “intent” thing is fraught with problems since it supposedly suggests that the IRD knows what was in your mind when you went out and bought a property. Somehow I doubt that.

I do see problems with the new arrangement though.

As others have already said, there is the potential that people who had planned to put properties on the market within two years will now wait – therefore putting a bigger squeeze on supply. Also, there may be some who now rush out and buy properties before October 1. More squeeze. It is a risk, although as I will discuss later, the fact the Government is planning action might just encourage people to hold fire in the housing market as well.

But on other practicall difficulties,  I wonder about the situation in which people buy a property intending to hold it for more than two years but are forced through circumstance to sell earlier. For example one or other of the buyers (assuming a couple) loses their job. Or one of them dies (the announcement made mention of ‘deceased’ estates, but I’m not sure if that specifically covers the situation where a partner dies and the surviving partner has to sell). Previously it would have been easy for people in both those cases I’ve just cited to state that their “intent” had not been to trade the property on – but now of course they may be confronted with an IRD holding the “two year” rule in their faces.

And finally on this, does the new two year rule mean that the IRD will, in effect now drop attempts to prove “intent” and simply just focus on properties sold within two years? The Government says that’s not the, ahem, intent, of these rules, but it might be what happens in practice. Therefore it may now become the thing that property speculators can confidently flick houses two years and one day after they bought them, knowing that the IRD will simply go after the within-two-years sellers and leave them alone.

As I say, there will be denials that this is going to happen, but I reckon it will – since intent was always a devilishly evasive concept. And this would actually be wrong. In some respects the current rules do work in IRD’s favour because of the vagueness of them. It means they can chase someone up who sold a property 10 years after buying it. But you have to think from now on they won’t bother.

So, I think this new rule may have unintended consequences and won’t actually, in itself, have much of a positive impact at all beyond perhaps some immediat shock factor. I think this part of the new proposals is probably the most cynical and political part of them.

I’m far more enthusiastic on the moves on foreign buyers. The Government has argued black and blue against either collecting more information on them, or taking any action against them – and now it is doing both.

We have to wait, with interest, to see what happens with the plans for a withholding tax, (and you do get the impression that this measure is SO in its infancy that the final shape of it may well be changed, and it might not happen). But the plans to force offshore buyers to get IRD numbers and bank accounts are a very logical and practical step.

At last, some useful information can now be gathered on the numbers of offshore buyers, where they are buying and why etc.

As many people have been saying till they are blue in the face, if you don’t know who’s buying and why, then how on earth can you be expected to come up with the right policies to control the housing market?

The really good thing about all these new proposals is that they actually demonstrate both to local and offshore buyers that this Government can actually be pressured into taking action that will crimp speculative buying – and to that extent, particularly foreign buyers, might now get nervous that these moves will be a forerunner for further expanded measures later – as I think they should be.

In this case the Government being seen to act, with the possiblity of more ahead if there is more pressure from the public, is probably more important than anything that is actually physically implemented.

So, I would say that these announcement, when coupled with the RBNZ moves, will actually stifle the Auckland house market over the next few months. And a pause for breath would be a very good thing.

But I still think there needs to be a more measured long term response worked out. And that does include looking at things like restrictions on foreign buying and levelling the investment playing field within New Zealand to hopefully encourage an attitude that sees Kiwis at least considering other asset classes for investment. At the moment it is still a no-brainer that all our money is pumped into houses. And whatever your point of view, having all of your eggs in one basket is a hell of a risk.