Claw-back law proves boon to local market

Press, 24 September 1983, Page 21

Claw-back law proves boon to local market

Property reporter Christchurch real estate agents who opposed last year’s interest claw-back provision on investment property are wondering if they might have been a little short-sighted.

They report that the commercial market began to improve about four months ago and is now fairly buoyant, particularly in the middle price range. The reasons include the requirement that deductions for interest payments on money borrowed to buy in-come-producing property be assessed for income tax at sale if sold within 10 years of purchase. The provision, introduced in the 1982 Budget and later made law, was part of the Government’s assault on tax avoidance. While it has achieved that object, it has also encouraged a higher turnover rate in the property market which may have in inflationary effect.

A real estate agent specialising in investment flats has said that prices had risen “over the last few weeks about 20 per cent.” Most of those buying were doing so not because they were attracted by landlording as a business proposition but because they expected to profit from capital gains. “Prices have begun to rise quite sharply as people see that there is a return there,” he said.

He said that the market was well supplied with flats because owners were selling sooner rather than later to cushion the impact of the interest claw-back provision.

Because the tax bill grew each time a return was made and the deductions claimed, investors were tending to sell quickly or to hold on for the full 10-year term after which they were no longer liable to repay, he said.

“There is pressure to sell up within two years when only one return might have been made rather than wait.”

Mr Peter Cook, of W. E. Simes and Company, Ltd, attributed the more buoyant market to the fact that property was becoming more attractive as returns in other areas were eroded.

“It is common sense to look for alternatives if your income on $lOO,OOO has been reduced from 17 per cent to 12 per cent,” he said, referring to the reduction in interest rates on deposits and loans. Most of the commercial activity in Christchurch was generated by small investors buying up older buildings in the $200,000 to $500,000 price bracket, suitable for restoration. Mr Cook said that the trend began five months ago as people anticipated investment patterns and Government policies.

The claw-back provision had persuaded owners to sell before the tax disadvantages became significant, he said, and predicted that the effect would become more pronounced in the next five to 10 years. Mr Morgan Long, of Ford and Hadfield, Ltd, said that the easing of interest rates had produced a renewed interest in property investment. The returns in Christchurch at between 10 per cent and 11.5 per cent were higher than those in Auckland where the yield tended to be only about 8.75 per cent.

“The retail area particularly has been fairly buoyant for some time,” he said. Mr Long welcomed the listing of property-invest-ment companies on the stock exchange, saying that it would bring increased confidence and sound judgment to the market.

The president of the Canterbury District Law Society, Mr C. E. W. Averill, said that Christchurch’s solicitors were a little busier with conveyancing work than last year but doubted that the increase was significant. He agreed, however, that there were more investment properties on the market because of the claw-back provision. He also said that there was “a little more optimism in the air.”