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RBNZ wants tax changes as property demand lifts

The Reserve Bank has renewed its plea for changes to the tax system to help put the economy on a more even keel and reduce risks to the financial system.

"We need to ensure there is no return to a debt-fuelled housing cycle which would likely bring with it further exchange rate pressure and erosion of competitiveness," Governor Alan Bollard said yesterday.

He would not be drawn on what specific tax changes the bank would like to see.

"[But] for a number of years we have made a point of the need to ensure property investment is not particularly advantaged in terms of tax. When it is, it draws funds into the housing sector, creating strong demand for mortgages and external funding, and putting pressure on the dollar and the external sector," he said.

"It is important people understand the link between the demand for mortgages and pressure on the exchange rate."

The financial stability report released yesterday shows that New Zealand banks still import more than 40 per cent of the funds they lend.

The risks involved in that were starkly evident during the financial crisis, when offshore credit markets froze.

Reducing that risk requires households to lift their savings, especially as the Government is no longer running surpluses, so that the current account deficit - the amount of capital the country needs to import to balance payments with the rest of the world - can be reduced.

The deficit has fallen from nearly 9 per cent of GDP in the middle of last year to below 6 per cent a year later. A sustainable level would be around 5 per cent and would require trade surpluses of 2 or 3 per cent of GDP, but the trade balance has only just moved back into positive territory after six years.

House prices were back at historically very high levels relative to incomes. Real incomes have fallen 2 per cent over the past year and the bank does not expect the trough in the labour market to occur for about another year. Interest rates will inevitably rise from their current low levels.

"The question is, have households learned to diversify their assets? We hope so but we can't be sure yet," Bollard said.

By Brian Fallow | Email Brian