With all that has been said regarding the proposed CGT recommended by the tax working group, one thing seems to have been overlooked.
Even if the proposed changes are implemented, rental property ownership will still be a great and unrivalled investment.
Let me give you an example of a couple who I have recently helped to finance an investment property.
Mark and Fiona have a family home in Wellington that has only a little debt on it.
While they both have Kiwi-saver accounts for their retirement, they don’t have any personal savings to speak of available to invest in other areas.
By using the equity in their home, they were able to borrow 100% of the purchase price of a rental property for which they paid $600,000.
At current interest rates, the rental income from the property covers the cost of the interest and other associated costs such as property management fees, city council rates and insurances.
So in other words, Mark and Fiona have an investment worth $600,000 which will grow in value over time, without putting in any cash and which doesn’t require any contribution from their pockets in the short term.
When interest rates rise in due course, they will have to contribute to or ‘top up’ the property as the rent won’t be enough to meet all the costs.
Lets say that this top up is $200 per week somewhere down the track. (their interest is currently fixed for terms of between 1 and 4 years)
This would mean that Mark and Fiona would then have a commitment of $10,000 pa to their property investment.
If they invested $10,000 p.a in the bank, they would get interest on $10k.
If they invested $10,000 p.a in shares, they would have $10k of shares growing in value and/or producing income.
Instead, by investing $10,000 in property, they have a $600,000 asset which is growing in value.
The growth on this asset is many times greater than what could be achieved without the leverage enjoyed from property.
Even though the gain on the property value would be taxed when the property was sold, this would also be the case with the gain on any other type of investment such as shares or managed funds. (Only art would be exempt under the current proposal.)
Because of this, I can see a lot of people hanging onto their properties and don’t see investors leaving the market enmasse.
I also see that people considering property investment will still buying after weighing up all the pro’s and con’s.