Treasury suggested introducing a capital gains tax and restrictions on foreign buyers as part of a long term prescription to curb house price increases, documents released today show.

The suggestions were included in a series of documents about the Reserve Bank's new loan to value (LVR) restrictions released today by the bank, Treasury and the Ministry of Business Innovation and Employment.

In July 2 advice to Finance Minister Bill English, Treasury analysts said the use of LVR restrictions was "likely to be the best available option in dealing with excess demand for housing in the short run, while broader policy to stimulate housing supply takes effect''.

Longer term measures to dampen housing demand suggested by Treasury included restrictions on overseas buyers and a capital gains tax. Both measures are currently Labour and Green Party policy but have been criticised by the Government.


Treasury also suggested levying a land tax on unimproved land.

Treasury noted that the introduction of LVR restrictions was likely to have "some negative effects on a proportion of first home buyers'' they were likely to be smaller than the economy-wide impacts of increases in interest rates which the policy is designed to help counter.

"While there may be ways to counter the impact of LVRs on the affected group of first home buyers, these measures are likely to diminish the effectiveness of LVRs, and there are likely to be fiscal costs associated with them'', Treasury said.

Labour's housing spokesman Phil Twyford said Treasury was suggesting things "that are straight out of Labour's policy prescription''.

"It shows how much the Government is on the back foot over housing. The Reserve Bank and Treasury are telling them first home buyers are going to get walloped they and they are questioning the credibility of the Government's response.''

"The Government's housing policy is in tatters and they're really struggling day by day to maintain credibility.''

Speaking in Parliament this afternoon, Associate Finance Minister Steven Joyce said Mr Twyford and Labour needed to read Treasury's advice in full,

"Treasury's keen to have it (capital gains tax) on all houses and the trouble with having it on all houses is of course is that it affects everybody's family home."

Mr Joyce pointed out Australia had a capital gains tax, "like the Labour Party policy and their prices are going up even faster".