‘Worst in the world’: NZ’s recent property tax backflip is a warning to Canberra

Tinkering with property taxes drives investors out of the market – it’s just happened in New Zealand and now Canberra is looking at a very similar picture.

Auckland in New Zealand. After abandoning property tax changes, the city is now among the most expensive in the world for renters. Picture: iStock

Experts are warning the government’s review of property tax concessions could make housing affordability worse, with New Zealand’s recent failed attempts to do something similar cited as an example of what could go wrong.

After the NZ government cut tax incentives for property investors three years ago, the volume of investment funds entering the residential market halved. And as the supply of rental property evaporated, rental prices soared.

The attempt to change New Zealand’s version of negative gearing – and its capital gains tax regime – were widely seen to have backfired and a new government has since progressively reversed the original changes.

However, the Treasury in Canberra is now assessing the same tax territory with a review of negative gearing (where property investors can declare losses against tax) and Capital Gain Tax incentives (where property sellers can get taxes halved if they hold the property for more than a year).

While Anthony Albanese has distanced himself from the review – insisting it is an internal move by Treasury – tax changes around property investment are highly sensitive, especially as the ALP’s Shorten-era election loss was significantly due to unpopular plans to restrict investor tax incentives.

As Ray White group chief economist Nerida Conisbee: “The current tax incentives ensure we have enough rental housing, if you cut those incentives you only have to look at New Zealand to see what may happen – New Zealand is now the least affordable rental market in the world.’’

Other economists will argue that negative gearing tax breaks push property prices higher, but the crux for Treasury is that the vast majority of commercially available rental accommodation is financed by Australians who have done their numbers on the basis of existing tax breaks.

About one in three Australians live in rental property, the vast majority of this property is owned by private investors.

Put simply, making property investment less attractive will drive investors out of the market. The only question is the degree to which they will flee and that in turn depends on conditions at the time. In New Zealand the reform measures were imposed as prices were falling and interest rates were rising – exacerbating the blowback from investors who cut their funds in the NZ market from $21bn in 2021 to just $11.8bn in 2024.

Sceptics will also suggest the NZ reforms would have worked if they had been given more time to percolate through the system. The same thing was said when Paul Keating reversed his short-lived attempt do close down negative gearing in Australia 1987 – we will never know.

But we do know that in Australia just now that while interest rates are steady there are signs of slowing price growth in Sydney, and in Melbourne prices are actually going backwards. Melbourne prices are now down 1.6 per cent over the last 12 months according to CoreLogic.

Indeed Victoria is a test case of what happens when investors face tax changes – a recent string of new state-based property taxes has triggered an investor exodus from the state prompting Kelly Ryan of the Real Estate Institute of Victoria to suggest “investors are leaving the Victorian market right now like nothing we have ever seen before”.

Ironically, investors are leaving Melbourne even when the city has a vacancy rate of less than 2 per cent.

As property adviser Anissa Cavallo wrote in The Australian earlier this year: “Melbourne is growing in greater numbers than any other state and is on target to overtake Sydney as the largest city.”

Like it or not, the rental market is run by investors who depend on the current tax regime. If the terms change, then investor behaviour changes quickly, as Victoria is finding out the hard way.

On our national stage, the picture would very likely play out the same way, except this time investors would not have the option of simply moving their property investments to a different city, many would just exit the market altogether.

Originally published as ‘Worst in the world’: NZ’s recent property tax backflip is a warning to Canberra