IMF warns of 'pronounced correction' in NZ's housing market

In its regular review of NZ's economy, the IMF noted the surging housing market could trigger a "pronounced correction". Photo / RNZ

By Nicholas Pointon of RNZ

The International Monetary Fund has praised New Zealand's economic performance in response to Covid-19, but warns it is vulnerable to a housing downturn.

In its regular review of the country, it said the Government's swift moves to control the spread of Covid-19 and significant support for the economy have allowed a quicker than expected rebound in activity.

"On the fiscal side, I would particularly say the wage subsidy programme was very helpful during the initial lockdown and has helped [avoid] a much, much worse labour market outcome," IMF Australia New Zealand division chief Harald Finger said.

"It made sure that 60 per cent of wage earners in New Zealand could benefit from it and that actually is, from what we can see, the highest coverage in the world."

However, the IMF report said the recovery had been uneven, with job losses felt most among low-skilled workers, young people, women and people from ethnic communities.

Finger said active labour market policies, the reform of vocational training and expanding the eligibility of training subsidies would help support those affected.

Additionally, the report noted the surging housing market could trigger a "pronounced correction", which needed to be tackled with specific measures to dampen speculative demand and unlock supply.

"Mitigating near-term housing demand, particularly from investors, would help moderate price pressures," it said.

"Introduction of stamp duties or an expansion of capital gains taxation could reduce the attractiveness of residential property investment."

To address long-term affordability the IMF recommended policies that freed up land supply, improved zoning and allowed housing developments to be fast-tracked.

But without some near-term measures to quell demand, while more houses come to market, prices would continue to rise, Finger said.

In the near term, the IMF expected the economic growth would be moderate, wage growth would be slow and inflation would reach 2 per cent by 2023.

The IMF said while additional stimulus is not needed, monetary and fiscal support should not be withdrawn too quickly because significant risks remain.

- RNZ