KEY POINTS:
Three potential measures to give the Reserve Bank more traction in the housing market remain under consideration, the bank indicated yesterday.
One is greater emphasis on enforcing existing tax laws regarding capital gains made on investment properties.
This relates to provisions that allow the Inland Revenue to treat profits on the sale of properties as taxable, if they were bought with the intention of resale. It is intended to apply to traders or people who are in the business of property development, not owner-occupiers.
But the bank notes that this has tended to yield very little revenue to the Government, suggesting that with some well-known exceptions such as a blitz in Queenstown last year enforcing it is not a priority for the IRD.
The second measure, which would require a law change and therefore political support, relates to "ring-fencing" the operating losses the owners of investment properties often make. This is called negative gearing. Often landlords' expenses including maintenance costs and depreciation exceed the rent they get but that operating loss can be used to reduce their tax liability on other income.
The ability to use rental properties as a tax shelter in that way, and in effect rely on capital gains for the return on investment, has contributed to the strength of the housing market.
And that makes Bollard's life difficult by making homeowners feel wealthier and more willing to borrow against some of the increase in their housing equity and spend it.
The third potential measure is largely within the bank's control.
Commercial banks are required to hold a minimum level of capital in reserve relative to their assets, including loans, to absorb losses associated with ups and downs in the economy.
Should the Reserve Bank require banks to hold larger reserves relative to their mortgage loans, that would place a restraint on growth in their mortgage lending.
When such changes were suggested in late 2005, banks labelled them "draconian" and a return to old-fashioned Muldoon-style interventionism.
Massey University head of banking studies David Tripe said they made no more sense now.
"There get to be some problems in doing it. I suspect it's more easily said than done."
Westpac chief economist Brendan O'Donovan said it was unlikely the RBNZ could introduce such controls in time to affect the current housing cycle.
"Then there's always the risk of unintended consequences."
Furthermore such controls would run counter to Basel Capital Accords, which are guidelines on how capital adequacy ratios should be set.
Under the most recent "Basel II" guidelines which New Zealand is set to adopt next year, banks are likely to be obliged to hold even smaller reserves as property mortgages are deemed to be relatively low risk.
