Government’s housing moves take pressure off RBNZ - Capital Economics
Australia & New Zealand Economics

Government’s housing moves take pressure off RBNZ

Australia & New Zealand Economics Weekly
Written by Ben Udy
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New tax policies aimed at reducing the appeal of housing as an investment asset in New Zealand, together with the RBNZ’s macroprudential policies, should lead to lower house price growth in the months ahead. That will take a little bit of pressure off the RBNZ to tighten policy. But we still think improvements in the macroeconomy will cause the RBNZ to hike rates in 2022.

More moves to slow house price growth

We’ve expressed doubts over the ability of the RBNZ’s loan-to-value ratio (LVR) limits which were implemented at the start of the month to slow the pace of house price growth very much. (See here.) The government seems to share these concerns, announcing a suite of policy changes this week designed to cool the red-hot housing market. As with the RBNZ’s macroprudential limits, the government’s changes were particularly targeted at stemming investor demand. In particular, the length of time a property needs to be held before it can be sold without incurring tax on the capital gain, known as the ‘bright line test’, has been extended from five to ten years for investment properties.

The government also ended the ability of landlords to claim any interest payments against the taxable income they pay on rental income. For some landlords with large mortgages that could be a near 30% reduction in their rental incomes.

The additional tax requirements reduce the appeal of housing as an investment asset, so investor demand is likely to cool in response. Given that investors have accounted for a quarter of mortgage borrowing in recent months, a sharp reduction in investor demand would result in a slowdown in the overall property market. The lower volume of sales in the early months of this year was already consistent with a slowdown in price growth over the months ahead. (See Chart 1.)

From a macro perspective, another consideration is how these new rules relate to the new requirement for the RBNZ to consider house prices when setting monetary policy. With house prices surging this requirement, at the margin, would make the RBNZ more inclined to tighter policy. (See here.) The latest policy changes should ease pressure on the RBNZ a little. But we think that other factors – strength in the labour market and inflation – will bring the RBNZ around to our view that rates should be raised by the end of next year.

Chart 1: Home Sales & House Price Growth

Sources: Refinitiv, Capital Economics

Vaccination pace diverging

Vaccinations have continued to steadily climb in Australia with daily vaccinations reaching more than 25,000 this week. That’s still well below the rate that would be required to hit the government’s former goal of having all adults vaccinated by October. But the trajectory is looking much more promising than in New Zealand where the pace of vaccinations has barely changed since the start of the month. (See Chart 2.) The slow pace of vaccinations is a key reason why we think the borders will not open to most countries until the end of the year. While the possibility of a travel bubble with Australia will be highly anticipated, the economic impact will be small. (See here.)

Chart 2: Daily Vaccinations
(7-day Ave, per Million people)

Sources: CEIC, Capital Economics

The week ahead

The preliminary data were consistent with a broadly stable trade balance in February (due Thur.)


Data Previews

Australia International Trade (Feb.) Thu. 5th Apr.

Forecasts

Time (AEST)

Previous

Consensus

Capital Economics

Trade Balance (bn)

11.30

$10.1

$9.5

$10.0

Trade balance steady in February

High iron ore prices have pushed Australia’s trade surplus to a record high in recent months. And despite a dip in iron ore exports in February, we think the surplus remained close to that record high.

Preliminary trade data are consistent with a 1% rise in goods exports. The preliminary data show metal ore export values declining 6% m/m following the more than 20% rise since November. But that decline was offset by a strong 15% m/m rise in rural export values and a 5% m/m rise in coal export values. The rise in goods exports was probably offset by a 1.4% rise in goods import values. And the border closure will have kept service trade subdued. Taken together, we estimate that the trade balance remained broadly stable, at $10.0bn in February. (See Chart 3.)

Given that the strength in the trade balance has been partly driven by higher export prices the impact of GDP should be small. We’ve pencilled in a 0.1ppt contribution from net trade to GDP in Q1 following the drag from trade in the second half of 2020.

Chart 3: Trade Balance ($bn)

Sources: Refinitiv, Bloomberg


Economic Diary & Forecasts

Date

Country

Release/Indicator/Event

Time AEDT

Time (NZDT)

Previous*

Median*

CE Forecasts*

29th Mar

No Significant Data or Events

30th Mar

NZ

Residential Building Consents (Feb.)

08.45

(10.45)

+2.1%(+26.9%)

31st Mar

Aus

Private Sector Lending (Feb.)

11.30

(13.30)

+0.2%(+1.7%)

Aus

Building Approvals (Feb.)

11.30

(13.30)

(-19.4%)

(+5.0%)

(-2.0%)

1st Apr

NZ

ANZ Consumer Confidence (Apr)

08.00

(10.00)

113.1

Aus

Ai Group Manufacturing Index

08.30

(10.30)

58.8

Aus

CoreLogic House Prices (Mar., nsa)

10.00

(12.00)

+2.0%

+2.5%

Aus

Job Vacancies (Feb.)

11.30

(13.30)

23.4%

Aus

Trade Balance (Feb., sa, AU$)

11.30

(13.30)

+10.1bn

$9.5bn

+10.0bn

Aus

Retail Sales (Feb., Fin.)

11.30

(13.30)

-1.1%

-1.1%

-1.1%

Aus

RBA Commodity Price Index (Mar., AU$)

16.30

(18.30)

+5.4%(+12.1%)

2nd Apr

No Significant Data or Events

Selected future data releases and events

6th Apr

Aus

RBA Policy Announcement

Aus

RBA 3-Yr Yield Target

14th Apr

NZ

RBNZ Policy Announcement

*m/m(y/y) unless otherwise stated; p=provisional estimate

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

Australia

GDP

3.4(-3.7)

3.1(-1.1)

0.9(0.1)

1.2(8.9)

0.5(5.9)

0.7(3.3)

(-2.4)

(4.5)

(3.5)

CPI Inflation (nsa)

(0.7)

(0.9)

(1.1)

(3.3)

(2.2)

(1.7)

(0.8)

(2.1)

(1.3)

Core CPI Inflation1 (nsa)

(0.9)

(1.9)

(1.9)

(3.8)

(2.5)

(1.3)

(1.2)

(2.4)

(1.7)

Unemployment Rate (%)

7.1

6.8

6.0

5.8

5.5

5.3

6.5

5.7

5.2

RBA Cash Rate, End Period (%)

0.25

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

US$/AUS$, End Period

0.72

0.77

0.78

0.79

0.79

0.80

0.77

0.80

0.80

New Zealand

GDP (production basis)

13.9(0.2)

-1.0(-0.9)

-0.7(-0.4)

2.4(14.7)

1.7(2.4)

0.9(4.3)

(-3.0)

(5.0)

(3.5)

CPI Inflation (nsa)

(1.4)

(1.4)

(1.4)

(2.2)

(2.1)

(2.0)

(1.7)

(1.9)

(2.1)

Core CPI Inflation1 (nsa)

(1.7)

(2.1)

(1.8)

(2.1)

(2.1)

(1.7)

(2.0)

(1.9)

(2.0)

Unemployment Rate (%)

5.3

4.9

4.8

4.7

4.7

4.6

4.6

4.7

4.3

RBNZ Cash Rate, End Period (%)

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.25

0.50

US$/NZ$, End Period

0.66

0.72

0.73

0.74

0.74

0.75

0.72

0.75

0.78

Aus$/NZ$, End Period

0.92

0.94

0.94

0.94

0.94

0.94

0.94

0.94

0.98

Sources: Bloomberg, Capital Economics; 1Excludes food, household energy and vehicles fuel.


Ben Udy, Australia & New Zealand Economist, ben.udy@capitaleconomics.com