Editorial: Blunt words Government can't ignore

Reserve Bank deputy-governor Grant Spencer. Photo / Mark Mitchell

Reserve Bank deputy governor Grant Spencer could hardly have been blunter in taking the Government to task over its response to Auckland's overheated housing market. Much of what he said was not new, but there was a heightened degree of alarm about a level of house-price inflation which, he said, meant "an eventual market correction is likely to be disruptive to financial stability and the economy".

Mr Spencer spoke damningly of the Government's almost exclusive focus on the supply side of the equation. He argued convincingly that much more needs to be done to reduce demand.

The Reserve Bank's strong words are a response to the re-emergence of housing pressures since last September, the product of record migration levels, low interest rates and more aggressive lending by banks. The reduced effectiveness of its own loan-to-value-ratio restrictions has also contributed.

Mr Spencer was unequivocal about where responsibility for the pressure lay. The proportion of houses bought by investors had, he noted, increased to nearly 38 per cent in February from 33.8 per cent in September 2013.

These people are responding to a tax system that says borrowing and buying houses is the most sensible form of investment. Inland Revenue and the Government like to deny this is so, but Mr Spencer derailed that notion. The Reserve Bank would, he said, like to see fresh consideration of policy measures to address "the tax-preferred status of housing, especially investor-related housing".

The central bank's prescription for taking the heat out of the market has two demand-side planks. First, it clearly wants the Government to introduce a capital gains tax. The increasing presence of investors in the Auckland market was, said Mr Spencer, "being reinforced by the expectation of high rates of return based on untaxed capital gains".

Second, it wants to curb bank lending to residential property investors. Neither policy is a silver bullet, but both make total sense as part of a package to dampen the market. A capital gains tax would deter investors, and less money would be available to drive up prices.

Mr Spencer also suggested ways to tackle the supply side of the equation. The Government and the Auckland Council were urged to focus on streamlining the approvals process and increasing the designated areas for high-density residential development. This is because the Government's much-touted Resource Management Act reforms would take years to be felt in new supply. Mr Spencer might also have mentioned that, as has already proved the case, there is a time lag in providing supply. And programmes involving grants to first-home buyers are counter-productive because they encourage demand to run even further ahead of supply.

A rational response to Auckland's market would focus on reducing the excessive demand and increasing supply. Since 2010, when depreciation writeoffs on property were removed, the Government has effectively ignored the demand side of the equation. Mr Spencer has clearly indicated that this is no longer tenable.

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