RBNZ calls for tax help on investor loans

The Reserve Bank of the New Zealand has taken the unprecedented step of directly calling on the Government to help it control unsustainable inflation in the Auckland housing market by reducing the tax incentives for residential investors.

Facing annual house price inflation of around 20 per cent in New Zealand's biggest city, the central bank also called on the Auckland Council to accelerate and deepen efforts to allow more intense apartment developments around the central city.

The Reserve Bank, which runs monetary policy and regulates banks, warned that valuations relative to incomes and rents were stretched and among the highest in the world. Any correction in prices would threaten financial stability for a banking system with 60 per cent of its loans backed by residential property.

Deputy Governor Grant Spencer said in a speech in Rotorua on Wednesday that the central bank had already put up official interest rates and limited highly leveraged loans to slow house price inflation. It was also considering increasing capital requirements for mortgages for landlords.

This had worked through late 2013 and early 2014 to offset the effects of high net migration and supply shortages, but was now wearing off and was no substitute for more Governmental action to increase supply and limit demand, Spencer said.

"Since late 2014, housing market imbalances have become more accentuated, particularly in Auckland where the supply shortage is greatest," Spencer said.

"This is of concern to the Reserve Bank as it poses a threat to financial and economic stability," he said.

"House prices as multiples of income and rents are already near record levels and further increases will accentuate the risk of a sharp price correction once demand and supply come in to closer balance."

This would put New Zealand's banking system under pressure.

"The resulting contraction in credit would amplify the impact of an adverse external shock to the domestic economy and financial system, making it more difficult to avoid a severe downturn," Spencer said.

Given the Reserve Bank had already taken its own actions to limit demand, he suggested supply-side measures that the Council and the central Government could take. Spencer acknowledged moves already taken through an Accord between the Council and the Government, but called for more measures to intensify development of apartments.

"The Government and the Auckland Council might consider focusing their efforts on simplifying the approvals process and increasing the designated areas for high-density residential development," Spencer said.

Spencer ruled out further use of the Reserve Bank's Official Cash Rate to limit housing demand in Auckland, given consumer price inflation was below the bank's 1-3 per cent range.

He said measures therefore needed to be considered to counter investor-based demand.

"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 untaxed capital gains."

There is no capital gains tax in New Zealand and a proposal by the Opposition Labour and Green parties for such a tax was rejected by voters in last year's General Election, who agreed with the governing National party's view that such a tax would not affect house price inflation.

The Reserve Bank's comments are the most direct challenge yet to the Government's view.

It has previously shied away from commenting so directly on taxation issues.