Action needed on asset bubbles

Action needed on asset bubbles

4 May

High debt levels in the New Zealand dairy industry remain one of the greatest concerns for the banking sector according to KPMG’s Financial Institutions Performance Survey. The New Zealand Manufacturers and Exporters Association (NZMEA) is supporting moves by the Reserve Bank to increase the amount of equity that banks must hold to cover rural loans and suggests further balancing using capital gains and land taxes to move capital from the tax shelters of land and buildings into productive business.

NZMEA Chief Executive John Walley says, “At $47 billion rural debt is not much less than the total size of the NZX. That says something about why our productivity growth is anaemic.”

“In the midst of an asset bubble it is easy to forget that a true value of an asset is based on the revenue it can earn. The bet on a tax free capital gain to deal with excess debt load is a risky practice for the lender and the borrower – policy should be pushing back against this.”

“It is clear that high interest rates did not stop the frenzy so the Reserve Bank’s moves to introduce farm lending capital requirements must be applauded. Limits on borrower loan to value ratios would also be useful and of course these sorts of restrictions must also be applied to other assets classes.”

“The absence of a broad tax base has also played a big part in the rural debt problem,” says Mr Walley. “Without a capital gains or land tax it is possible to capitalise earnings and avoid tax; that simply adds more pressure to the asset bubble driving values well above the capability of the land to fund the borrowing.”

“To balance our economy the tax burden has to be spread across income and assets, and debt growth controls are necessary.”

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