Reserve Bank's Spencer calls on govt to rethink housing tax

Reserve Bank's Spencer calls on government to rethink tax status of housing investment

By Jonathan Underhill

April 15 (BusinessDesk) - The Reserve Bank has urged the government to take another look at a capital gains tax on investment in housing, allow increased high-density development and cut red tape for planning consents to address an over-heated Auckland property market.

Deputy governor Grant Spencer said in a speech to the Rotorua Chamber of Commerce that housing market imbalances "are presenting an increasing risk to financial and economic stability" in New Zealand, one of the few advanced economies that hasn't had a major house price correction in the past 45 years.

He said there was "considerable scope" to streamline approval processes for residential developments and a need for a more integrated approach to planning and funding of new infrastructure, some of which may be delivered via amendments to the Resource Management Act.

“The proposed RMA reforms have the potential to significantly improve the planning and resource consenting processes," he said.

The government and Auckland Council could also focus on increasing designated areas for high-density housing, because building more apartments was "the best prospect for substantially increasing the supply of dwellings over the next one or two years," Spencer said.

Annual house price inflation in Auckland reached almost 17 percent last month and the central bank has estimated the city faces a shortfall of between 15,000 and 20,000 properties to meet population growth as the country experiences record migration. Spencer said today there were "practical difficulties" in attempting to use migration policy to mitigate Auckland's overheated housing market and with inflation so tame, there was little scope for monetary policy to provide assistance. However, there were measures that could counter the growth in investor and credit based demand for housing, he said.

"The Reserve Bank would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially housing investment," he said. "Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market. Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on un-taxed capital gains.”

The central bank imposed restrictions on high loan-to-value home loans in October 2013, which had helped to moderate housing pressures and they had improved the resilience of lenders' balance sheets. Still, market pressures began to re-emerge in the fourth quarter last year. With the current overheated housing market in Auckland, it would not make sense to remove these restrictions in the near term. To do so would invite a further surge in credit-based demand for housing. The LVR policy would be "removed or modified as market conditions allow," he said, without giving details.

The bank is also consulting on a new asset class for residential investment mortgages that will attract a higher risk weighting than owner-occupier mortgages, which Spencer said was "consistent with the international evidence showing larger loan losses for investor loans than for loans to owner occupiers during periods of housing market stress."

"A new asset class will see a greater consistency of treatment for investor mortgages across the banks and ensure that investor loans have capital backing consistent with their higher risk," he said. "A well-defined asset class would also facilitate the introduction of macro-prudential policy and the bank is currently reviewing some options."

Spencer said macro-prudential tools alone wouldn't be enough to alleviate Auckland's housing market constraints.

"Such tools are not a panacea – their impact is inevitably smaller than the main drivers of the current housing market imbalance,” he said.

(BusinessDesk)

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