A better tax system for better renting

There are a number of things that come up when people discuss how to improve the experience of renting in New Zealand. We usually talk about what changes we can make to our residential tenancies laws and norms, to provide for longer, more secure tenancies, better quality housing, and housing which is more affordable. Such measures would undoubtedly help.

But the rental life is not just the result of inadequate and poorly enforced tenancy legislation, important as this is. It’s the result of deeper, structural factors that determine how our housing market operates.

In New Zealand, owning has substantial tax benefits. Homeowners have a tax advantage over tenants, because they have a place to store their money where it can’t be taxed.  As the Morgan Foundation put it in their recent report, which backgrounds their argument for a comprehensive capital income tax:

 …[Compare] the tax liability of two owners of capital – one a house, and the other a bank deposit of equivalent value. Both receive a benefit, the home-owner deploys the house for own-use, while the deposit owner receives interest. Only the deposit owner is taxed on that benefit however. That is anomalous and unfair.

This is the idea of taxing imputed rents, something touched on my interview with Shamubeel Eaqub  and my post comparing subsidies to state tenants and to homeowners.

What might happen if the tax system was not biased in favour of owners? What if property ownership were taxed, in the same way that other assets are taxed? The rental market might look a lot different.

For one, if property didn’t have a special tax-free status, some people wouldn’t own so much. Owning property wouldn’t be so profitable. Some people might sell up. This would be a good things for house prices. It would be good for the economy too. People would be more likely to put their money into businesses that actually make or do stuff – businesses that provide jobs.

Homeowners would still buy, because some people will still want their own home. Landlords might buy too – but they’d be a different type of landlord. We would see landlords who own for the rental income, rather than as a place to keep their money. We might see fewer landlords overall, but larger scale landlords.

These different type of landlords would likely be a good thing. Currently, if your rental home is sold from above you, you have just 42 days to leave – and this happens a lot in overheated property markets like Auckland. Landlords who are in the business for the rental income rather than because property’s a great place to put money, would have different motivations. They wouldn’t be flipping properties, so they wouldn’t need their tenants to leave in a hurry. They’d want a steady income, so they’d be more likely to offer the secure tenancies, autonomy, and housing improvements that so many tenants are asking for.

Sometimes we look at other countries for inspiration on how we can improve conditions in our rental market. In this Listener article, a number of German laws which benefit tenants are explained: tenants can make alterations to their homes, and sometimes live there for decades. However, the fact that those rights exist probably has something to do with the different motivations that landlords have in Germany, which are entirely different to New Zealand: as Geoff Simmons explained recently, house prices are relatively stable and there is a tax on property values.

Making a difference to tenants may require more than just adjustments to our tenancy law.