IMF
Blasts New Zealand's "Discriminatory" Ban On Home Sales To
Foreigners
22
April, 2018
Amid
reports that 40,000 kiwis were living on the streets or in emergency
shelters thanks to an acute housing crisis in the nation of nearly 5
million, New Zealand's Labour-led government knew it needed to take
drastic action to cool the country's white hot housing market - or at
least convince the public that it was doing something.
So
late last year, lawmakers proposed a bill that would limit home
purchases to people who carry residential visas. It is called the
Overseas Investment Act.
As we've
pointed out, home
prices in New Zealand have risen dramatically since the financial
crisis. Over
the past ten years, New Zealand home prices have risen by roughly
60% due
to a combination of factors, including limited supply, low interest
rates fueling a boom in borrowing, and - of course - foreign
speculation.
And
on Sunday, the chorus of critics against the measure - which hasn't
been passed into law - gained another voice: That of the
International Monetary Fund. In its
annual report on the New Zealand economy, the
IMF said the measure would be "unlikely to have a significant
impact on housing affordability," and that the rest of the
government's "ambitious policy agenda" would likely be more
than enough to help make homes more affordable.
The government has initiated an ambitious policy agenda to restore housing affordability, which appropriately focuses on strengthening supply and lowering tax distortions . The agenda includes several work streams.
The KiwiBuild program aims to increase housing supply at affordable price points. The Urban Growth Agenda aims to address regulatory, planning and other policies that reduce development capacity for growth, along with the under-funding of local infrastructure development and maintenance. The government has already announced the extension of the bright-line test on sale of residential property from within two years of purchase to within five years and also proposes to limit negative gearing from rental properties. A Tax Working Group is considering possible additional reform, including a broader capital gains tax on real estate investment and land tax reform, although its mandate is narrow on the latter. These reforms are complementary, and the success of the housing policy agenda will depend on well-coordinated progress on all fronts.
A ban of residential real estate purchases by nonresidents is unlikely to have a significant impact on housing affordability. The proposed ban in the draft amendment to the Overseas Investment Act is a capital flow management measure (CFM) under the IMF’s Institutional View on capital flows. The measure is unlikely to be temporary or targeted, and foreign buyers seem to have played a minor role in New Zealand’s residential real estate markets recently. The broad housing policy agenda above, if fully implemented, would address most of the potential problems associated with foreign buyers on a less discriminatory basis.
Should
the measure become law, foreigners would be allowed to build new
developments, but only as long as they have plans to sell the
property as soon as its finished.
However,
it would include an exception for people who can convince New
Zealand's Overseas Investment Office that they intend to live in the
country long term (a
group that might soon include a
handful of US-based billionaires). Australian citizens are also
exempt from the rule.
Ironically, reports
about the rule led to a surge in home sales as foreigners scrambled
to buy ahead of the ban.
Local
critics of the law, including the Real Estate Institute of New
Zealand, agree with the IMF that the measure is unnecessary because
foreigners just aren't that big of a factor in the country's housing
market: The
organization estimates that less than 4% of home buyers are
foreigners, per the
Independent.
As we've
previously pointed out, it's
probable that banning foreign speculators will cool off the country's
property market. But the problem that the government is missing is
that it risks triggering a real-estate crash. And when housing prices
crash, people feel poorer, so they spend less, a pattern that
threatens to afflict the broader economy. In its report, the IMF
applauded New Zealand's "solid economic expansion in recent
years" and noted that "household debt-related
vulnerabilities are expected to decrease..."
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