IMF warns NZ on household debt levels, proposes better CGT, land tax; Says RBNZ should have DTI tool; NZ$ overvalued

New Zealand needs to target housing supply bottlenecks, redirect savings away from housing – with a better capital gains tax, increase research and development support, and further liberalise trade opportunities, according to the International Monetary Fund (IMF).

In town over the past couple of weeks for the fund’s latest review of the New Zealand economy, IMF officials in Wellington on Tuesday said the economy has a favourable outlook, given solid economic expansion in recent years.

However, housing-related macro-financial vulnerabilities are expected to increase in the near term, they said. “A root cause of these vulnerabilities is a demand-supply imbalance in the housing market, especially in Auckland, which has resulted in a house price boom and overvaluation, and high levels of household debt.”

Authorities have taken steps to enable more housing supply, they acknowledged. However, “even with these measures (which could be broadened) the resolution of demand-supply imbalances will take time, and vulnerabilities should be contained with macro-prudential policies in the meantime.”

They also warned that:

  • New Zealand household debt levels pose a risk to the economy, particularly if there were a large global economic shock,
  • The New Zealand dollar is “moderately” overvalued – perhaps by about 3%-4%,
  • The Reserve Bank needs to have a debt-to-income ratio tool in its macro-prudential regulation kit,
  • Bank balance sheet resilience should be strengthened and that New Zealand bank reliance on external funding should be addressed, although this is partly mitigated by offshore borrowing either being in NZD or fully hedged,
  • More efficient property taxation is required, for example a land tax.

Household debt of particular concern

New Zealand’s high household debt levels were of particular concern to the IMF officials, under a scenario that a large global economic shock hits. Figures out yesterday from the Reserve Bank of New Zealand showed household debt to disposable income rose to a record high of 168% in the latest quarter.

Potential shocks would most likely come from developments in “large economies,” they said. China is still at risk of a hard landing, due to medium term risks of high leverage in its financial sector, the officials said.

In relation to household debt, the IMF recommended the Reserve Bank is given a debt-to-income ratio tool for its macro-prudential kit. This would not need to be used now, the officials said, but it would signal a desire to stop growth in DTI ratios, and stabilise it – ratios needed to be more stable in five years time, they recommended.

New Zealanders also needed encouragement to stop investing in housing so much, relative to other asset classes, the IMF officials said.

While New Zealand does have a capital gains tax, they recommended extending the government’s bright line test out another few years. This would help “at the margins” to discourage so much housing investment they said.

How about a land tax?

More efficient property taxation was also recommended – for example the introduction of a land tax. Taxes like this should be considered to help fund investment in housing infrastructure, the IMF said. Without going into detail, the also suggested local council funding should be addressed and broadened from the current rates-led model.

Local council funding restrictions could be creating growth bottlenecks, they said.

“Measures, such as the Auckland Unitary Plan and the Housing Infrastructure Fund, should be complemented by a comprehensive reform of urban planning legislation and measures to support local infrastructure financing. The latter could include some central government funding (given wider agglomeration benefits, more efficient property taxation, and user charges,” the IMF said.

Other recommendations included:

  • Unexpected government revenue windfalls should be saved away.
  • Tax bracket creep should be addressed – and the government has the fiscal room to do so
  • Govt should consider implementing a deposit insurance regime, although IMF officials stressed they understood the RBNZ’s position that this can weaken self and market discipline and that NZ does have other options, including tweaking the existing open bank resolution regime.

Meanwhile, on the government’s proposal to raise the Superannuation age from 65 to 67 between 2037 and 2040, the IMF officials said the proposition dealt with a time frame slightly further out from where they had been assessing the economy.

The IMF in general has recommended governments push superannuation ages out in line with rising life expectancies, they said. “Most super plans are not sustainable in their current form.” It was good to manage changes in the Super age gradually and in a forward-looking manner, they said.

Productivity growth a concern; Unemployment near natural rate

New Zealand’s low productivity growth remained a concern, officials said. While there was no silver bullet, government had identified a number of areas to work on, they acknowledged. Encouraging innovation and interconnectedness should be a priority, they said. This could potentially be aided by New Zealand’s high net migration rates, they said.

Net migration levels were surprising, the IMF officials said, mirroring the Reserve Bank’s admission in February that growth was higher-than-expected. However, New Zealand’s strong fiscal position provided the room to accommodate the needs from strong population growth, they said.

The economy is reaching full capacity, with unemployment near its natural rate, the IMF said. Inflation meanwhile is expected to head back towards the Reserve Bank’s 2% target band mid-point.