Mr Key wondered whether Labour expected house bidders to turn up to auctions with their passports.
Mr Key tried to suggest that British builders working temporarily on the Christchurch rebuild would be prevented from buying a house under the policy. But Labour finance spokesman David Parker said that was not the case, although the property would have to be sold once a temporary resident left the country.
Finance Minister Bill English said yesterday one of the problems with the policy was that no one knew for sure how much housing stock was bought by foreigners.
In Auckland, where almost 40 per cent of the population was born overseas "a lot of the people who are perceived as foreign buyers are actually New Zealand residents and New Zealand buyers".
Trade law specialist Daniel Kalderimis of Chapman Tripp told the Herald that on an initial reading, the policy could breach the most-favoured-nation treatment article of New Zealand's free trade agreement with China, though not the article on national treatment.
The most favoured nation clause says that any favourable conditions China or New Zealand offers to third parties for investment activities must be offered to New Zealand or China as well. That means that any exemptions for Australians from new house-buying rules should also apply to Chinese.
But neither China nor New Zealand gave away rights under the national treatment clause to establish investments in each other's country that might be on a different basis to its own investors.
That means that conditions between Chinese and New Zealand investors can differ.
Mr Kalderimis said the policy could also breach at least three other trade agreements, with Singapore, Malaysia, Taiwan and the Asean countries, but that would depend on what exclusions and exemptions had been written into annexes.
Unlike the China agreement, the national treatment clauses in the Malaysia, Taiwan and Asean deals extend to the establishment of investments in party countries.
If the policy were implemented and it was in breach of a trade deal, an affected investor could trigger the disputes procedure.
In that case the issue would be determined by independent arbitration outside the country, not by New Zealand courts.
Chinese MP proud of housing policy
Labour's first Chinese MP, Raymond Huo, says he is not only proud of the party's new housing policy, he helped initiate it.
He said he had had no negative feedback from the Chinese community. And he said the policy would benefit Chinese residents in New Zealand.
"I'm very proud to be one of the members involved in the policy initiative," said Mr Huo, in his second term as an Auckland-based list MP.
He said the policy was not anti-Chinese. It was designed to push foreign speculators out of the market. "At the same time it is designed to help local investors, including Chinese and other ethnic investors."
The policy would prevent foreigners not resident in New Zealand from buying residential property here. They could buy land and build within a year or buy from a new housing development.
He had been encouraged by Chinese in New Zealand "because they regarded themselves as Kiwi New Zealanders - they do not regard themselves as foreign speculators".
He said Act leader John Banks was scaremongering by suggesting the policy was aimed at Chinese.
