Accelerate housing, infrastructure - IMF

New Zealand’s short-term economic outlook is challenging but the country’s strong balance sheet and flexible economy underpin confidence in it, according to the International Monetary Fund (IMF).

After a two week mission to New Zealand, the IMF said New Zealand is resilient and well-positioned to weather the recent slowdown of the economy and manage financial stability risks.

However, the risks are significant and are tilted to the downside.

They include the decline in dairy prices, China spill-over, El Nino, financial market volatility – and Auckland’s housing market which faces the risk of a sharp price correction.

In connection, the IMF also noted high levels of household debt.

“A rise in interest rates could strain their ability to service debts, squeeze disposable income and consumption, and possibly trigger declines in house prices.”

But monetary policy should focus on the real economic cycle.

This means the risks arising from further house price inflation in Auckland – where the underlying issue is a supply/demand mismatch - need to be managed through other policy measures, the IMF said.

“Intensifying efforts already underway to boost higher-density housing, and increase the supply of land and infrastructure in the city would be welcome, including through better local/central government coordination and measures to discourage land hoarding, but even then the supply response will be slow.”

For this reason, the IMF recommended that, to buy time, other measures could be employed if necessary.

They could include targeted higher risk weights on housing loans, higher down payments, and a formal debt serviceability test.

Further, reform to reduce the tax advantages of housing over other forms of investments could be warranted.

This could mean reducing the scope for negative gearing, for example.

On the upside, the IMF said a stronger-than-anticipated supply response to housing demand could pave the way for a smoother deceleration of house price inflation while supporting growth.

“A recovery in dairy prices would boost incomes and investment.

“Continued high net immigration could pose challenges for short-term economic management, but in the longer run would boost growth.”

The IMF’s verdict on New Zealand’s economy came in its preliminary findings on its mission, which was led by IMF assistant director of Asia Pacific Chikahisa Sumi.

During its visit, the mission team met with politicians and business leaders including Prime Minister John Key and Reserve Bank Governor Graeme Wheeler.