Economist backs levy suggestion

The concept of a mortgage interest rate levy to slow the housing market has been endorsed by a banking economist.

BNZ chief economist Tony Alexander said it was important to debate research by the Treasury and the Reserve Bank on a mortgage levy.

The debate should focus on policies which would advance the export sector rather than just attack the housing market, he said. But he doubts it will become a reality.

"Do I think it would be a good thing for the economy? Yes, I support it. Do I think this will happen? No," Alexander said, noting that the concept would be detrimental for the housing market, investors, buyers and banks.

The idea of the levy was raised again this month by senior economist Bernard Hodgetts at the Real Estate Institute's annual conference.

Mike Hannah, the Reserve Bank's head of communications, said Hodgetts' speech was off-the-record.

Former institute president Howard Morley said he was surprised by the concept and had never heard of it before Hodgetts' speech. Real estate officials said last week they wanted the idea discussed openly because it could have such a drastic effect on the housing market.

Alexander said the way the levy would work was that when a person took out a fixed-interest rate mortgage, that borrower would pay the bank's interest rate plus a fixed-rate levy which the Reserve Bank could vary as it does the official cash rate.

That levy could be 0.25 per cent or 0.5 per cent on top of the fixed rate.

This would mean that when the Reserve Bank needed to tighten monetary policy, it would hit all borrowers rather than the 18 per cent on floating interest rates. "This would mean they would not have to increase the official cash rate quite as far in order to get restraint on the economy and this means the exchange rate would be pushed up to a lesser extent than happens at the moment," he said.

Robin Clements of UBS New Zealand said the levy sounded like a sensible option and although the idea was not dismissed outright when it was first raised, there were a number of questions about potential disintermediation, enforcement and the power to impose such a levy.

Shamubeel Eaqub, economist at Goldman Sachs JBWere was less enthusiastic about the idea.

"It would be an inefficient and difficult to use tool. The Reserve Bank's revisiting of the mortgage levy may suggest that they feel more may need to be done to cool the housing market."


What it does

* A mortgage levy would be imposed on fixed-interest housing loans.
* At times of rampant housing growth, the levy would penalise borrowers.
* A loading would be placed on fixed-rate borrowings.
* Borrower would pay interest rate plus a fixed levy.
* That could be just under 1 per cent above floating rates.