The Productivity Commission 's housing affordability report made some good points about the need to release more land for housing development, as councils continue to favour intensification, Prime Minister John Key says.

Speaking on TV One's Breakfast programme, Key said central and local government needed to work together on the issue, as local councils were able to manage land supply, and the government was able to manage migration patterns into the country, and mostly to its biggest city, Auckland.

Meanwhile, Key indicated the government did not want to target the rental investment sector much more, saying if they went too far in changing the dynamics of the sector, rents would rise.

'It's not about tax'


Key noted comments in the report that perceived tax advantages for housing was not a driving factor in driving up house prices over the last decade. He pointed to other nations with capital gains taxes which all experienced house price bubbles - the UK, US and Australia.

"I think they're right - it's balancing the release of land, making sure that you're intensifying the use of land in certain places, looking at the overall cost of building. One of the things they said was, in Australia they've got very large scale housing taking place that's cheaper," Key said on Breakfast.

"Their main point is if you choke off that supply of land then by definition land prices have to rise," Key said.

For home-owners, the biggest issue still was interest rates, he said.

'Don't want to hit rental investors too much'

Key indicated the government was wary about making further changes to the tax system that would hit rental property investors in the pocket, following the changes made to depreciation rules in Budget 2010, which he said took about a billion dollars a year out of the sector.

"There'll always be a rental market. There's no question we changed the dynamics around (the rental market) - it's not as attractive as it was. The balance there is making sure we don't do so much that people stop investing and then rental prices go up a lot," he said.

Net migration set to stay positive

Meanwhile Key said he expected net migration to New Zealand - a factor in house price pressures - would stay positive.

"One of the issues in Auckland is we're the home of most internal and external migration. We're on a pathway to a couple of million people. That puts pressure on the system," he said.

"The balancing act here is that the councils generally don't want to release land, because they say that forces them to build infrastructure further and further out - roading, sewerage, all those things - whereas intensification, they like that."

The government would look to continue the trend of net positive migration to New Zealand, Key said.

"Yes we lose people to Australia, but we still have a lot of migrants come and I think overall they add a lot of value," he said.