Policy-makers need to focus on housing supply as they try to make homes more affordable, according to the Reserve Bank.
The pace that new housing can be built is a "critical factor" for house prices, and needs to be the focus of any long-term policy, the central bank said in its submission to the Productivity Commission's investigation into home affordability.
That comes after recent local and international research shows New Zealand's housing supply hasn't been responsive to big swings in housing demand.
"Evidence suggests that significant supply constraints lead both to bigger house price booms and eventually to nastier house price corrections," the submission said. "Policy should focus on regulation that gets supply conditions in the housing market right and removes barriers that impede productivity gains in the construction sector."
The commission was asked by the government to evaluate the factors influencing the affordability of housing (both rental and owner-occupied housing) and examine potential opportunities to increase housing affordability.
The central bank also said a "sensible tax structure" is likely to matter, and inflation indexing the treatment of interest would reduce benefits of property investment.
"A more appropriate tax treatment of the inflation would probably largely eliminate reported tax losses on residential rental properties even near the peaks of the housing booms," the submission said.
New Zealand house prices hit their peak in 2007, according to the discussion paper released by the commission. House prices rose 180 per cent in real terms relative to 1990 levels through to 2007, with the largest price increases exceeding 200 per cent in real terms and concentrated in major urban centres and holiday locations, and exceeded only by Australia.
Since the global financial crisis nominal house prices have fallen around 5%. House prices had risen from an average of around two and a half times personal income to five times between 1990 and 2007.
Among other submissions, construction company Fletcher Building Ltd. said land costs was the primary cost for building new housing, followed by materials, project management costs, labour and regulatory costs. To lift productivity in the sector, land needs to be more available and greater standardisation is needed to drive efficiencies, it said.
Commercial property lobbyist the Property Council said in its submission the debate on housing affordability was "wrongly skewed primarily in favour of public analysis about demand," and supply issues had a wider impact on the issue.
The Department of Labour talked down the impact of immigration on house price appreciation, saying that although there was evidence of a correlation at a national level, that didn't filter into a regional level.
Housing New Zealand Corp. said low rental yields restrained both rents and the cost of government support for housing, though if that reverses, rental affordability could become a "real issue."
Insurer IAG New Zealand used the recent bout of natural disasters to ask the commission to "not lose sight of an important point; making houses more affordable must not occur at the expense of making them less resilient to the dangers posed by our geography and climate."
Rental property owners group, the New Zealand Property Investors Federation used its submission to criticise any tax reform, saying "current tax settings seem to be efficient and are not overly lenient for residential rental property providers."
The commission was allowed to examine the efficiency of tax treatment for owner-occupied and rental housing, even though the current government has ruled out a land or capital gains tax.
Last month, the Opposition Labour Party said it will introduce a capital gains tax on most assets, excluding the family home, at a flat rate of 15 per cent if it is elected in the November election.