REINZ questions whether CGT will improve housing affordability in the long term

Following  announcement on 21 February from the Tax Working Group that it recommends the Government introduce a Capital Gains Tax (CGT) from 1 April 2021 at an individual’s marginal tax rate, the Real Estate Institute of New Zealand (REINZ) is questioning whether implementing a CGT will improve long term housing affordability.

Bindi Norwell, Chief Executive at REINZ says: “In the short-term there may be some initial relief in house price affordability as investors look to sell their property to avoid paying CGT. This may create opportunities for first home buyers.

“However, in the long term it’s likely to push house prices up as people look to invest more money in the family home, as there will be less incentive to invest in rental properties or other forms of investment e.g. equities.

“This will also have a flow on effect for the rental market with fewer rental properties available for tenants, thereby further pushing up weekly rental prices when they are already at an all-time high.

“The report even recognises that any impact on housing affordability could be small, therefore, we question whether all of the administrative burden and cost to implement GCT is worth it? Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing.

“Interestingly, when we look at the impacts of CGT globally, the most recent country to introduce CGT in the OECD was South Africa. Whilst CGT wasn’t the only impact on South Africa’s housing market, house prices there increased by 139% in the first six years* following CGT implementation indicating that the tax did nothing to improve housing affordability. We believe introducing CGT in New Zealand may have little impact on improving affordability long term,” says Norwell.

“We’re also disappointed that the rate of CGT is an individual’s marginal tax rate and that there will be no reduction in the rate such as is seen Australia and the US. This means that New Zealanders will effectively be paying a much higher rate of capital gains tax than individuals in other OECD countries.

“However, it is positive to get confirmation that the Tax Working Group has recommended that the family home is excluded from CGT and that the calculations of gains are not to be retrospective. Additionally, it’s great that some relief in the form of rollover provisions for small farms and businesses has been proposed,” concludes Norwell.

* Data sourced from the First National Bank of South Africa Repeat Sales House Price Index