The Government is unlikely to be able to deliver on its housing promises without implementing a capital gains and land tax along with its other measures.
At the same time, its ban on foreign buyers is unlikely to affect housing affordability.
Those were two key conclusions from a team of International Monetary Fund (IMF) economists who have been in New Zealand for annual consultations with the Government and business as part of the IMF’s regular monitoring of the New Zealand economy.
The team found that the country was enjoying a strong economic expansion which it expected top remain strong.
But it said managing housing risks had been challenging.
Affordability concerns had become more pressing, especially for first home buyers.
It listed a number of initiatives the Government had taken to address housing affordability:
- The Kiwbuild programme
- The Urban Growth Agenda which aims to address planning and infrastructure issues.
- The extension of the Brightline test to five years.
And it noted that the Tax Workling Group was considering possible additional reforms including a broader capital gains tax on real estate investment and land tax reform.
“These reforms are complementary, and the success of the housing policy agenda will depend on well-co-ordinated progress on all fronts,” the IMF report said.
“We see tax reform as part of the picture,” said the IMF Mission Chief, Thomas Helbling, who was speaking at a media briefing on the report.
“It’s not just about capital gains tax.”
Helbling said Kiwibuild would help but also by building infrastructure and looking at zoning issues; then housing supply could be addressed.
“But we also think that eventually more systematic land taxation could increase the incentives for property to be turned over for denser and probably more efficient land use.
“It’s really about the mix in the sense that they are ambitious goals and I think for success progress on all fronts will be needed.”
But Helbling argued that one Government housing policy might not only have little impact but could scare off foreign investment in New Zealand.
This is the ban on foreign house buyers.
“The measure is unlikely to be temporary or targeted, and foreign buyers seem to have played a minor role in New Zealand’s residential real estate markets recently,” the report said.
“If there are bans, you may worry about the signal,” said Helbling.
“Foreign direct investment, trade, commerce abroad involves various dimensions including housing.
“I find it difficult to assess, but that is one thing perhaps to worry about.”
And he also challenged two other policies that are still at the ideas stage in Wellington.
The Tax Working Group has been asked to look at a progressive company tax.
“There could be a reason to tax very large corporations differently, but I think that is something that is not relevant for New Zealand,” he said.
“When we talk about very large corporations I think we have a different size in mind.”
And he said tax policy was less helpful for new startup companies because typically they didn’t have a profit.
He also questioned proposals to separate the prudential supervisory role of the Reserve Bank from the Bank.
“Why fix it, if it is not broken,” he said.
“Establishing a new institution is a huge fixed cost.
“There are arguments in favour of such a move; there are arguments against such a move.”
But what will please the Government about the report is that not only does it forecast ongoing growth but it also says the strong fiscal position provides space to accommodate the needs from strong economic and population growth.
“With the country’s strong fiscal position, there is no need for faster debt reduction beyond that outlined in the 2017 Half Year Economic and Fiscal Update,” the report says.
“Stronger structural revenues, such as from higher-than-expected population growth, should be used to increase spending on infrastructure and other measures that would strengthen the economy’s growth potential.”
The biggest risks the IMF sees are external — tighter global financial conditions, structurally low growth in advanced economies, a significant slowdown in China, and more protectionist and inward-looking policies.
“Household debt remains high under the baseline outlook and would amplify the impact of large downside shocks, notwithstanding recent improvements in its risk structure after macroprudential policy intervention.
“Such shocks could also trigger a disruptive housing market correction.”
Obviously, none of this will be new to Finance Minister Grant Robertson, but he noted the IMF’s overall endorsement of the economic direction in a statement issued in response to the report.
“The IMF was positive about the Government’s policy agenda, with fiscal, monetary and prudential policy settings considered to be broadly appropriate,” he said.
“This IMF Statement follows recent positive reviews from the major credit rating agencies of our Government’s economic plan and different priorities,” he said.
His biggest political concern should be the scepticism that the IMF has about the Government’s house building programme which will not address demand (through taxation) in this term of the Government.