The Unassuming Economist

The IMF’s latest report on New Zealand says that:

“Context

The new government’s housing policy agenda focuses on direct supply initiatives, tax
policy changes, and restrictions on home ownership by nonresidents. Addressing declining
housing affordability has become a policy priority (…).

• Supply initiatives. Under the KiwiBuild program, the government plans to build 100,000 affordable houses over 10 years (about one third of average annual residential building authorizations) for first-time homebuyers. After initial financing of NZ$2 billion, the program would be sustained through the sales of completed houses.

• Addressing other supply constraints. Besides the KiwiBuild program, the Urban Growth
  Agenda aims to increase the availability of developable land and the supply response to higher house prices by addressing regulatory, planning and other policy constraints, including the underfunding of locally-provided infrastructure.

• Tax policy changes. To dampen property speculation, more residential property sales will be subject to capital gains taxes, as the related bright-line test has been extended from a two-year to a five-year holding period. Residential properties other than main home acquired after March 29, 2018 will be subject to capital gain taxes if disposed of within five years of acquisition. The government also proposed to limit negative gearing from rental properties, such that the deductibility of net losses from property investment (and interest costs) from other taxable income would be eliminated. A Tax Working Group is considering possible additional reform, including a broader capital gains tax on real estate investment and land tax reform.

• Restrictions on nonresidents’ real estate purchases. A proposed ban in a draft amendment to the Overseas Investment Act is scheduled for a parliamentary vote as early as late June 2018. Under the amendment, all residential land would be re-classified as “sensitive land,” which would require approval for foreign buyers under tighter qualifying criteria.

Staff’s Views

The housing policy agenda appropriately focuses on closing key gaps on the supply
side and in the tax system. While demand-side drivers have stabilized, they remain robust, and improved housing affordability ultimately requires a stronger housing supply response. These measures are complementary, and the success of the housing policy agenda will depend on well coordinated progress on all fronts. While the large scale of the KiwiBuild program can provide the certainty needed to redirect builders’ incentives toward lower-price housing and adopt new, more cost-effective building technology, the direct market intervention by the government also comes with risks to the budget and risks of crowding out private housing supply and market distortions more broadly. The Tax Working Group should also consider raising land taxes, which are efficient and would increase the recurrent cost of holding land, thereby encouraging its (re)development.

A ban of residential real estate purchases by nonresidents is unlikely to improve housing affordability significantly. The proposed draft amendment to the Overseas Investment Act would be a capital flow management measure (CFM) under the IMF’s Institutional View (IV) on capital flows, as it would introduce discrimination based on residency and thus limit capital flows by its design. Its use would not be in line with the IV. While macroeconomic and macroprudential policy settings are broadly appropriate, available data suggest that foreign buyers appear to have played a minor role in New Zealand’s residential real estate markets recently. And in its current design, the CFM is unlikely to be temporary or targeted. The broad housing policy agenda above, if fully implemented, would address most of the potential problems associated with foreign buyers on a non-discriminatory basis.

Authorities’ Views

The authorities concurred that restoring housing affordability required a focus on
strengthening supply and lowering tax distortions. They noted that measures to intensify
competition in land markets via the Urban Growth Agenda would not be sufficient. Direct
intervention, through the KiwiBuild program, was also required. On tax policy, while the extension of the bright-line test to five years for capital gains taxation on non-primary residences is now in place, a wider set of reforms are being considered to the tax treatment of residential real estate investment. This includes ring-fencing negative gearing on investment properties. The Tax Working Group has been directed to consider whether a system of taxing capital gains or land (not applying to the family home or the land under it), or other housing tax measures, would improve the tax system.

The authorities disagreed with the assessment that a ban on residential real estate
purchases by nonresidents, if implemented, would be a CFM under the IV. They emphasized
that the ban must be assessed holistically, taking into account the broader social, economic and political context. Declining housing affordability and greater inequality have become a major concern, which has lowered approval of globalization and immigration in New Zealand. Given the central role that home ownership plays in New Zealanders’ sense of well being, the government has taken steps to ensure that housing prices will be shaped by domestic market forces. If the government had not committed to extend its domestic screening regime for sensitive New Zealand assets to residential land, it would not have been able to secure the public’s support for additional international trade agreements. The authorities noted that the proposed screening regime will allow nonresidents to obtain consent to acquire residential land where they are committed to reside and become tax residents, in New Zealand; where their investment will increase housing supply; or where they will develop the land for other purposes (such as commercial premises). They also think that the new regime will help ensure that foreign direct investment flows into the productive economy rather than unproductive speculation. Finally, the authorities do not consider this measure to be a CFM; it will only have a limited effect on aggregate capital flows or the balance of payments, and it will have no material impact on the broader direction of or the openness of New Zealand’s economy.”