Government should revisit tax, migration policies to ease housing, Reserve Bank's Spencer says

The Reserve Bank is looking at introducing more stringent macroprudential tools before the end of the year but would be helped if the government chose to revisit the impact tax advantages on residential housing and migration policies are having on the demand side, deputy governor Grant Spencer says.

Speaking to the New Zealand Institute of Valuers in Wellington, Mr Spencer reiterated that the Reserve Bank is looking at new loan-to-value ratio (LVR) restrictions targeting investors and debt-to-income (DTI) limits on mortgage lending, adding that the bank is also considering a housing capital overlay as part of a wider review of lenders' capital requirements. New LVR restrictions could be operating by the end of the year, whereas a DTI would need Finance Minister Bill English to sign off on the new tool and a period of consultation before it could be implemented, he said.

Boosting supply and development capacity was "paramount" in addressing the housing shortage that was pushing up prices, but "it is also important to explore policies that will keep the demand for housing more in line with supply capacity," Mr Spencer said. "Two areas for consideration include tax and migration policy."

Last year's introduction of a bright line test for housing investors, which meant they would have to pay a tax on a capital gain if they didn't hold it for more than two years, had curbed short-term speculation, but "consideration might be given to further reducing the tax advantage of investing in residential housing," he said.

On migration, Mr Spencer said the 160,000 net inflow of long-term and permanent migrants over the past three years had stoked demand, and "there may be merit in reviewing whether migration policy is securing the number and composition of skills intended" which could ease some of the imbalance over time.

Earlier this week Prime Minister John Key indicated his support for the Reserve Bank to introduce new LVR restrictions to quell some of the investor demand for property. Housing Minister Nick Smith has previously said he wants to skew the market in favour of first home buyers, though ministers have resisted calls to enact policies that bring down prices, instead preferring a slower pace of increases.

The Reserve Bank hasn't been able to raise the official cash rate to stamp out demand for property as globally low interest rates mean international investors are attracted to the relatively high returns in New Zealand, stoking demand for the kiwi dollar and keeping a lid on imported inflation.

Spencer said the bank's monetary policy has to have regard for financial stability concerns, but "the global environment is likely to keep interest rates low for some time yet," meaning it will have to rely on macroprudential tools to contain the "growing risk to financial stability as the current housing market reaches new extremes."

"There is a clear risk that  high house price inflation could lead to a further deterioration in the household debt-to-income ratio," he said. "While low interest rates have helped to contain debt-servicing ratios for New Zealand, high and rising debt levels leave households very vulnerable to any future increases in interest rates or deterioration in economic conditions."

Spencer said a one percentage point rise in interest rates for new buyers would increase their proportion of income going on to a mortgage by about five percentage points.

The introduction of the first round of LVR restrictions in late 2013 had reduced the amount of highly leveraged mortgage lending to about 12% of banks' residential loan books from 21%. The second round of restrictions focused on investors.

"The Reserve Bank considers rising investor participation tends to increase the financial stability risks relating to the household sector in severe downturn conditions," Spencer said. "Evidence from the UK and Ireland shows mortgage default rates significantly higher for investors."

(BusinessDesk)

RAW DATA: Housing risks require a broad policy response