NZ govt has scope to lean against housing imbalance, IMF says

Tuesday 10th November 2015

The New Zealand government's strong fiscal record, which saw it generate an operating surplus in the 2015 financial year, gives it enough leeway to increase spending on infrastructure to offset slowing economic growth and lean against the supply imbalance in Auckland's housing market.

The International Monetary Fund recommends the government allow short-term stabilisers such as a depreciating currency to take the edges off slowing economic growth, while accelerating investment in infrastructure and housing, it says in preliminary findings after a two-week visit by officials. IMF assistant director of Asia Pacific Chikahisa Sumi told a briefing in Wellington the government has a "very strong fiscal position" and can stimulate activity through spending on infrastructure as the economy slows.

"If you spend wisely in high-quality infrastructure, then that can solve many other issues at the same time," Sumi said. "Infrastructure investment in the areas of say transportation or some housing/land supply-related areas can go a long way to solve this possible source of financial stability, which is the inelastic supply of housing and the resulting high inflation of houses."

New Zealand's economic growth has slowed this year as a slump in global dairy prices weighed on farmers' incomes, prompting the Reserve Bank to cut interest rates, even as house prices in Auckland continued to rise, raising fears about the threat a sharp property downturn might pose to the nation's financial stability.

IMF's Sumi said the Reserve Bank's response was appropriate, with the supply shortage driving up Auckland house prices, and that macro-prudential tools such as limiting loan-to-value ratios still needed time to bed in before assessing their effectiveness and whether further measures should be introduced. Real Estate Institute of New Zealand data released this afternoon shows a slowing trend in the Auckland housing market, with the median price of an Auckland house falling 3 percent between September and October, and an annual increase of 16.8 percent, compared with almost 25 percent in the September year.)

While the IMF didn't recommend the government build new houses directly, Sumi said its efforts to help coordinate a response to address the shortage can go a long way.

The IMF forecasts New Zealand gross domestic product to grow 2.2 percent in calendar 2015, below its potential expansion of 2.5 percent. That doesn't include any impact from an El Nino-related drought, which will ultimately depend on which areas are affected and whether they rely on natural irrigation.

Sumi said a slowing Chinese economy isn't expected to have as marked an effect on New Zealand exports as hard commodity producers, with the world's second-biggest economy transitioning to consumption-led growth. That means New Zealand's agricultural food products will continue to attract demand in China.

The IMF said New Zealand's chronically low level of national saving was a long-standing source of vulnerability, and Sumi said it would need a "decisive action" and implementation would probably require a longer lead-in time.

Among the policy prescriptions recommended, the IMF said New Zealand should look at measures to encourage long-term private savings, including incentives for the government-designed KiwiSaver scheme such as adjusting taxation or default settings.

Sumi said New Zealand lags behind other developed economies in the financial products offered, and that residential property retained tax incentives, such as negative gearing, that encouraged investment in housing.

Addressing those issues may help "shift households' decisions from investment in housing to some other form of financial retirement savings, which should help both raise the saving rate and help solve the (house) price dynamic issue," Sumi said.

BusinessDesk.co.nz

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