Inflation Tools - report
Hard finding inflation tools beyond interest
rates:
(posted 07/04/2006)
A government commissioned report looking at alternative tools
for controlling inflation in light of the prolonged housing market
upswing has been released today.
The report has many ideas about how to control the property market,
however it is unlikely any will see the light of day in the near
future.
NZPA provides a summary of what is in the report.
Letter to Minister link here.............
(Breif)
The Government's top financial agencies have struggled to find
alternatives to raising interest rates that could be used to keep
inflation in check.
In November the Reserve Bank and the Treasury commissioned a team
of senior staff to look at alternative tools for controlling
inflation in light of the prolonged housing market upswing.
In a report released to the public they do see merit in the idea of
making it easier to build more houses as demand rises.
And beyond that they showed interest in the idea of a mortgage
interest levy of possibly up to 2 percentage points that would be
imposed on all mortgages when needed.
Such a "wedge" between interest rates paid by domestic borrowers
and those available to foreign savers would be used when the
housing market was particularly stretched, and this country's
interest rates were unusually out of line with those in other
countries.
The report also suggested Inland Revenue could be encouraged to
increase the publicity and enforcement of the income tax payment on
house sales.
Under tax law, income tax applies to gains on property sold when
the property was bought with the purpose or intention of resale,
with an exemption for owner-occupied property.
Inland Revenue had found a "variable level of non-compliance" with
existing rules, the report said.
When the report was commissioned in November there was concern
that hiking interest rates was pushing up the currency, causing
hardship for exporters, and helping blow out the current account
deficit.
Finance Minister Michael Cullen pointed out that raising interest
rates had become "clearly less immediately effective" at holding
inflation than was the case five or 10 years ago. That is because
more than 70% of mortgages are at fixed rates.
Since then the pressure has come off a little as the New Zealand
dollar has slipped from around US70c in January to around
US61c.
The report said house prices in this country, where housing was
a much larger share of total household wealth than in most other
countries, had risen by about 75% since 2001, with strong growth
continuing through last year.
Rapid house price inflation had posed a considerable challenge for
monetary policy because of the strong apparent connection between
housing market activity, house price inflation, and inflation in
the non-tradeable sector of the economy generally.
The current house price cycle was not ordinary, with the closest
historical comparison probably being the house price boom of the
early to mid-1970s, the report said.
The assessment of the report's authors was that house prices in
this country had moved beyond levels that could be warranted by
medium term economic fundamentals.
They pointed to a changing global financial environment as a
probable contributor to the latest boom.
Financial liberalisation in a wide range of countries had improved
access to credit, while a fall in nominal interest rates, as global
inflation was brought under control, had made a difference to the
ability of households to service conventional mortgages, the report
said.
While several options explored in the report focused on investment
properties, no comprehensive analysis had been done to determine
whether that sector of the market had played a disproportionate
role in the house price boom.
Arising from the report, Reserve Bank governor Alan Bollard and
secretary to the Treasury John Whitehead made several
recommendations to Dr Cullen.
They wanted him to agree in principle that Inland Revenue be
encouraged to consider broader cyclical stabilisation
considerations when assessing the priority of enforcing tax
provisions covering capital gains on residential properties.
They also wanted Dr Cullen to agree that the Treasury should take
an active role in shaping work being done by the Building and
Housing Department and Housing New Zealand Corporation on factors
that may be slowing the supply of new housing at times of strong
demand.
On the issue of the discretionary mortgage interest levy, the
officials said it could relieve exchange rate pressure at cyclical
housing peaks.
But extensive further work would need to be done covering
implementation and enforcement.
The report's authors were unimpressed with two other options
considered.
One, a discretionary limit on the ratio between the amount of a
loan and the value of the residential property securing it, was
considered to be relatively poorly targeted.
The other, ring-fencing operating losses on investment properties
so that such losses could only be offset against other property
income but not against other income such as that from wages and
salaries, was thought unlikely to have more than limited
impact.
A spokesman for Dr Cullen said the minister had little to say
about the report for now, other than it was valuable and that some
areas needed more work.
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