The International Monetary Fund (IMF) sees "limited scope" for the Reserve Bank to further loosen the rules - the 'speed limits' - around high loan to value ratio (LVR) lending and says that "mitigating supply constraints" is critical for improving housing affordability.
And, separately, the IMF has welcomed the government’s intention to consider reforms such as a vacant land tax and says "a broad land tax" would offer additional benefits.
The comments come in the IMF's Concluding Statement of the 2019 Article IV Consultation Mission to New Zealand, which was released on Wednesday.
The IMF's comments about the LVR restrictions are somewhat intriguing, given that there is some expectation that the RBNZ will further relax the rules when it next issues a Financial Stability Report in November 2019.
The RBNZ relaxed the rules as from January 1 this year, having previously loosened them last year. The LVRs have been in place, in a variety of forms, since 2013 and have been attributed as helping to rein in house prices as well as reduce risk on bank balance sheets due to the reduction in the number of high LVR loans issued by banks.
However, the IMF is urging caution.
"The scope for easing macroprudential restrictions is limited, given still-high macrofinancial vulnerabilities," the IMF statement says.
It notes that the shares of riskier home loans in bank assets (those with very high LVRs, high debt-to-income, and investor loans) has moderated due to the combined impact of the LVR settings and tighter bank lending standards.
"However, with the RBNZ’s recent easing of the LVR restrictions, improvements in some macroprudential risk factors such as credit growth have recently stalled or started to reverse."
While not going so far as to suggest the RBNZ should not further relax the rules at all, the IMF says any further easing of LVR restrictions "should consider the possible impact on banks’ prudential lending standards, as well as the risks to financial stability from elevated household debt".
On the broader issue of the New Zealand's housing affordability, the IMF says mitigating supply constraints is critical for improving affordability.
"House prices are expected to continue rising under the baseline economic outlook," the IMF says.
Demand for housing is likely to remain strong, given population growth and low interest rates, while the supply response is constrained, by land use and other restrictions, and construction costs are high, it says.
"Improving housing affordability would reduce inequality and contribute to lower macrofinancial risks, and, in the longer term, make growth more sustainable."
Central to any broad improvements in affordability is "supply-side reforms", the IMF says, although it adds that additional direct support might be required for some lower-income households.
It says the establishment of the Ministry of Housing and Urban Development should help in implementing housing policies.
"The government entity Kāinga Ora―Homes and Communities is intended to become the lead developer for affordable homes and public housing.
"Steps have also been taken to support local governments’ infrastructure funding and financing to facilitate timely infrastructure provision.
"Further work is needed to complete the agenda, including enabling local councils to actively plan for and enable housing supply growth and planning reforms.
"The IMF team welcomes the government’s intention to consider adding elements of tax reform, such as a vacant land tax, to the agenda.
"A broad land tax would offer additional benefits," the IMF says.
"This comprehensive agenda should foster housing affordability on a non-discriminatory basis."