NZ moves to quarantine negative gearing

When it comes to recent banking/housing policy, our Kiwi cousins across the pond have it all over us Aussies.

Back in April, I wrote about three policy actions being undertaken by the Reserve Bank of New Zealand (RBNZ) and the New Zealand Government aimed at reducing the economy’s exposure to the housing market and improving financial stability. These measures included:

  1. the Open Bank Resolution (OBR) Policy, which seeks to protect taxpayers from funding future bank bailouts;
  2. directing the Productivity Commission (modelled on the Australian body) to undertake an examination into housing affordability, with the stated aim of reducing the economy’s accumulation of debt and exposure to external shocks; and
  3. introducing macro-prudential tools, such as loan-to-value ratio (LVR) restrictions and counter-cyclical capital buffers, in order to moderate future credit bubbles.

Now the Opposition Labour Party has pledged to amend New Zealand’s negative gearing rules in a bid to improve the nation’s housing affordability.

Negative gearing is particularly pernicious in New Zealand as the country currently does not levy capital gains taxes on investment property. Accordingly, property investment provides an ideal avenue for Kiwis to dodge paying tax by socialising some of the holding costs of an investment property and then privatising all of the capital gains upon its sale.

Earlier this year, the Opposition Labour leader, Phil Goff, questioned the merits of New Zealand’s negative gearing rules:

“What we are looking at [changing] is ways [now] that people can socialise their losses and capitalise on their gains. It’s wrong that you can write off all the costs for your rental housing investment against other income and then when you finally sell the property you don’t pay tax on it either… So you [those offsetting rental property losses] end up paying very little tax. And anything that people avoid paying in tax – the rest of you have to pay it for them”.

And yesterday, Mr Goff canvassed a range of measures to reduce property speculation, including disallowing property investors from claiming losses against other forms of income [my emphasis]:

The Labour Party would like to recreate a New Zealand where more Kiwis owned their own home by controlling house prices through disincentives for property investment, and by allowing people to build up money for deposits through schemes like KiwiSaver, Phil Goff says…

Goff reiterated Labour’s ring-fencing policy of not allowing property investors to make losses on rental properties and claim that back against other income in order to minimise tax, as another disincentive for property investment that would help control prices…

“The concern that Labour has is once upon a time 80% of New Zealanders could aspire to owning their own home, that was the Kiwi dream. Predictions are that that will now drop to 59%,” Goff told media in Parliament on Tuesday.

“That means that 40% of Kiwis can never hope to own their own home. That’s not satisfactory in terms of what our Kiwi dream is, so we need to assist with that,” he said…

Labour was looking at ways to control house prices in its broader policy platform, which had not yet been finalised, Goff said. Labour has already expressed support for allowing the Reserve Bank to be able to control maximum loan to value ratios, and use further supplementary prudential tools to help control asset price bubbles.

“The [cancellation of the] depreciation allowance has been one factor there, ring fencing would be another factor, for example,” Goff said.

“The real objective has got to be to try to get more Kiwis owning their own home, rather than being forced to rent if their real desire is to have home ownership,” he said.

“That’s the New Zealand that most of us grew up in, that’s the New Zealand that we’d like to recreate.”

Of course, the Labour party will need to win November’s election if it is to implement these measures.

An important area overlooked by both the Government and Opposition, but which is critical to achieving both affordable housing and greater financial stability, are reforms to New Zealand’s highly restrictive land-use policies, which prevent low-cost housing from being quickly and efficiently supplied to the market. As long as policy makers focus only on the demand-side of the housing market, whilst ignoring the straight-jacket placed on new development, their dreams of achieving the widespread and affordable home ownership of yesteryear will go unfulfilled.

That said, at least the New Zealand authorities are seriously examining ways to reduce their country’s macroeconomic vulnerabilities, most notably its exposure to the housing market. This is in stark contrast to Australia, whose authorities are yet to publicly acknowledge that such vulnerabilities even exist, and resist any proposals to change the status quo (e.g. the Henry Tax Review’s sensible recommendations on property taxation).

In this regard, New Zealand is way ahead of the curve in thinking through how to handle the financial stability aspects of housing/credit cycles.

Australian policy makers could learn a trick or two from our friends across the pond.

Cheers Leith

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Unconventional Economist
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  1. Great article Leith – perhaps the push behind these reforms in NZ is because they don’t have a “once in a century mining boom” to cover up the faults in their taxation and housing systems?

    I think the only way we’ll see a similar move here is after a deflation in house prices – when getting rid of CGT concessions and NG won’t hurt anyone, because those who would benefit are already underwater/bankrupt.

  2. This is important. Such “heresy” will spread here if it is shown to work over there (and it will).

  3. I could be wrong, but I believe that tax is payable on properties in New Zealand. It depends upon an interpretation of the ‘intent’ surrounding the original purchase. ie: if bought as an investmnet, any gains must be declared as income and taxed at the marginal rate. So a ‘CGT’ is actually in place. But enforcemenet is lax, and the community in NZ readily accepts that lying about the intent is part of the property game. An alternaive solution should be to impliment a Stamp Duty ( also not applied in NZ),a Land Tax, and remove Negative Gearing, as well as a comprehensive CGT on all property, thereby removing the ‘interpratation’ loophole. But the encumbant Government has all but ruled most of those out!

  4. Terry McFadgen

    I beg to disagree-not that it matters because there is not the remotest prospect of Labour being elected any time soon.I have four problems with the proposed policy:
    1. It denies deductibilty for real, out of pocket cash losses contrary to the basic principles of any sensible tax code.(NZ removed depreciation on buildings last year)
    2. By raising the cost of capital for property investors it must raise rents or drag down values.Values are declining gently and don’t need a push into unchartered territory.Beware unplanned consequences.
    3. If more downward pressure on prices is needed there are two much better mechanisms-the Core Funding Ratio requirements of the RBNZ which it can use to lift LVRs, or a capital gains tax.
    4. Consider how weird this one off policy would really be-I can leverage myself to buy gold or pork bellies or equities, and get a deduction for all interest.But if I leverage up to buy a socially useful asset-shelter-I cannot.

    This proposed policy does not fix the real problems which are twofold-lack of effective taxation of gains on housing(no cap gains tax) and overvaluation resulting from a near global bubble in house prices.
    PS Janet-tax is only levied if the NZ authorities can establish that the house was acquired for the purpose of resale.

    • Quite, Terry; and the IRD is up against a multitude of interpretaions, and plain old deceit, and in that regard 🙂

    • Terry. The way I am reading Goff’s proposal, losses resulting from interest payments and costs outweighing rental income could not be applied against other forms of income, namely wages and salaries. Instead, any losses would need to be carried forward and used to offset future gains if/when rental income outweighs costs.

      I strongly support this form of tax treatment for all forms of investment, not just housing. Negative gearing does not improve housing supply or rental availability if, as is the case in Australia, virtually all rental properties are pre-existing dwellings. Instead, negative gearing inflates home prices and results in would-be owner occupiers being forced onto the rental market. It is both inequitable and inefficient.

      The Hawke Labor Government in Australia quarantined negative gearing between July 1985 and September 1987, and there was absolutely no discernable impact on rental costs.

      I agree with you that quarantining negative gearing would reduce housing demand and precipitate a correction of home values. But so what? Using the same reasoning, the NZ Government should not free-up the supply-side as this would also make homes more affordable and cause prices to fall.

      Bad policy is bad policy.

      • Terry McFadgen

        I agree that negative gearing does not improve supply as such-but removing it(or,as you rightly point out, reducing its present value by ringfencing) must impact either rents(up) or value(down).The first is undesirable and the second potentially dangerous unless managed with great care.My main point is that there are much better tools to achieve the desired end result than ad hoc tax changes with unclear consequences.An all encompassing cap gains tax would be a very good place to start as NZ Treasury favour.The pollies are too scared.

        • Capital gains taxes have proved useless to prevent house price bubbles. There are plenty of nations with worse bubbles than NZ, that DO have a CGT.

          The ONLY policy that HAS prevented bubbles, is sufficiently elastic supply of land for new housing, to meet demand shocks.

          Note that the Korean bubble of the late 1980’s occurred in extremely WEAK conditions of credit; the tradition was to save most of the price of your first home. For years, young Koreans delayed marriage and kept saving, while house prices rose faster than they saved – and national savings levels boomed as a result.

          So what caused the price bubble? Korea enacted their “green belt” policies.

          Someone needs to write a book on house price bubbles, with all the evidence for each.

  5. If there is ANYTHING the pollies are too scared to do, it is liberalise the supply of land. “Green” religion is too deeply embedded, and every existing home owner will blame the government when the prices drop. This is why NO government has yet liberalised land supply in spite of all the evidence. If they never do, the future belongs to heartland USA cities that do not have urban growth constraints. If you are an international investor, consider this VERY seriously.

  6. ceteris paribus

    In a society where so many average citizens are locked out of modest housing ownership by price, “negative gearing” is regarded as the new pinnacle of “government welfare bludging”.

    Run cover on yourself by telling family and friends that you make your money through gambling or illegal abalone diving.

  7. Run this by me again
    You are praising the NZ authorities for
    1 a policy which lets them think they can avoid supervising their banks (instead sticking it to the AUSTRALIAN taxpayer if the Kiwis set the haircut high enough on parental support for their banks)
    2 an Inquiry that will have as much effect as the equivalent one in Australia in 2003, and
    3 something that is part of Basel III that NZ isn’t even involved in the dewing of?
    This is their policy innovation?
    You’re easily impressed

  8. Can we have some articles on something else besides housing? Is nothing else happening in our economy?