Tightening tax rules threaten housing investment

Following the Reserve Bank’s (RB) hiking of the official cash rate yesterday, it highlighted that investigations into other ways to cool the housing market are underway.

Friday, March 9th 2007, 12:00AM

by The Landlord

By Andrea Milner

RB governor Bollard said the bank was working with other government agencies to tighten the tax rules applying to housing investment.

It is also looking at ways to change bank capital requirements to moderate the housing cycle, he says.

The housing market has so far been relatively impervious to the RB’s attempts to rein it in, because over 80% of mortgages are fixed rate mortgages. This shields borrowers from the effects of an OCR move in the near-term.

While a law change to block investment property owners’ ability to offset losses on their properties against their tax liability on other income is being mooted, such supplementary stabilisation measures are more of an issue for the next housing cycle, not the current cycle, says Westpac research economist Dominick Stephens.

“Work on developing a policy could be six months away, and then implementing the policy will soak up even more time. In the meantime, the RB will be setting the OCR as normal.”

“We don’t think that supplementary instruments will have any bearing on monetary policy settings this year at all.”

The Reserve Bank may also change the amount of capital banks have to put aside to back up any mortgage loan.

Stephens says the capital adequacy measures being considered are part of a wider banking supervision work programme designed to bring New Zealand into line with international banking regulation norms set out in the Basel 2 agreement.

The suggestion involves requiring banks to hold more cash in times of strong housing lending. In turn, that would impose a cost on bank lending, meaning banks would have to charge higher mortgage rates to cover their costs.

One consequence of requiring banks to hold more cash is that the money sits “dead” in the system, Stephens says. “A cost is imposed on borrowers and bank shareholders, without being a benefit to anybody.”

“Economists call this a ‘dead weight loss’.”

By comparison, using the OCR encourages more savings at the same time as it discourages borrowing, he says. “The OCR is a more efficient instrument, as it helps deal with a number of problems at the same time: excessive borrowing and inadequate savings.”

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