Reserve Bank house-alert speech proves catalyst for government action

Prime Minister John Key all but conceded that pressure from the Reserve Bank for concerted action on rampant Auckland house prices was one of the main catalysts for the government's weekend announcements about tightly applying tax law on trading in residential property.

At his weekly post-cabinet press conference, Key said that while the government had been "kicking around" ideas for taking the heat out of what some believe is an emerging residential property bubble in the country's largest city, the decision to act was made "about four or five weeks ago."

That timing coincides with the April 16 speech by the central bank's deputy governor, Grant Spencer, entitled "Action needed on housing imbalances" and calling for focus on the "tax-preferred status" of residential property investment.

That speech was widely interpreted as a call for a new capital gains tax but the government was taking advice from Inland Revenue and the Treasury by that stage on more tightly applying the existing provisions of the Income Tax Act, which treat the proceeds of trading in residential property as taxable income at the taxpayer's highest personal income tax rate.

But Key said the government wasn't forced into action by the Reserve Bank deputy governor's comments.

"It's an ongoing thing. They dovetail in together," he said of the central bank's speech and its action in last week's financial stability report to implement new, higher loan-to-valuation ratio lending restrictions on residential houses bought inside the Auckland Council geographical boundary.

"The fact he gave the speech didn't make us go and do these things. I don't think that's the right order. But it's fair to say we've been having discussions with them and thinking about these things. In the end what happened was that we got to the point where we said, 'look, we're either going to do something in the budget on housing or we're not and, if we're going to do it, we'd better get on with it."

With final budget decisions required about a month ago and "sustained price increases quite a bit faster than we would have liked," Mr Key said the government also "started having discussions with the Reserve Bank about the speech. What would be some alternatives? They came up with the LVRs for investors. We thought this would add to and complement that," Mr Key said.

He gave the impression the IRD was not a major supporter of introducing the new "bright line" test, which means proceeds from a property sold within two years of purchase will be treated as taxable income unless it's the family home, an inheritance, or a sale caused by a relationship breakdown.

Advice in 2010 proposed a five-year bright line but the IRD did not favour that and had recommended a two-year test against preference among cabinet ministers for a three-year test, said Key, who said the government did no polling on the issue before its decisions.

Opposition parties have leapt on the tax announcements as evidence of a belated u-turn on the government's part and an effective admission of a housing bubble fear in Auckland , where the medium house price rose 17.7% in the year to April, according to latest Real Estate Institute figures, with most of that increase since last September's general election.

Mr Key said he did not expect the measures to have so much impact on house buying behaviour that it would either "deflate" the Auckland housing market or put the brakes on demand for new homes or apartments bought "off the plan" and often resold.

However, it was clear large numbers of New Zealanders were "either deliberately or otherwise very ignorant of the tax law" as it currently stands over income from trading in property and the latest changes should change public understanding.

The tax announcements were "no silver bullet" for limiting Auckland house price inflation but were expected to have some impact. Reserve Bank governor Graeme Wheeler said last week its new LVR rules for property investors should take between 2-4% ofromcurrent house price inflation figures for the city.

The decision to require non-residents to hold both a New Zealand IRD number and bank account was as much to comply with new international money-laundering rules as with slowing down house price inflation, although it would also provide "perfect information" about the amount of residential property being bought by non-residents – a measure that he warned would include New Zealanders living offshore and buying property at home.

(BusinessDesk)