Economy still fragile, housing market spongy, RBNZ's Bollard says

Reserve Bank governor Alan Bollard said over the weekend the domestic economy was still fragile and the RBNZ remained comfortable with its view that it would keep the Official Cash Rate on hold until the middle or latter part of 2010. Speaking to Guyon Espiner on TVNZ's Sunday Q&A, Bollard also said the housing market was "looking slightly spongy" at the moment, despite previous fears of house prices going back into a boom. Bollard also reiterated his support for reform on property taxation. The interview followed figures last week showing New Zealand's unemployment rate jumped to 7.3% in the December quarter from 6.5% in September. The RBNZ had been forecasting a 6.6% unemployment rate for December, although Bollard said he did not think this meant the economy was in a lot worse shape than predicted:

GUYON: Let's turn to us. Unemployment data out last week, 7.3% unemployment, you were predicting at the Reserve Bank about 6.6% I think. Does this mean that the economy is in a lot worse shape than you had predicted? ALAN: No I don't think so, but it is fragile, I mean we've started growing, we started growing in the middle of last year, we're seeing reasonable growth figures, but you've gotta realise we've been in the worst recession world wide since the 1930s, and you don't come out of that knowing exactly how it's going to happen, you don't come out with any solidness and we're watching, as I said quite a bit of fragility around the US and Europe at the minute, and our own version of that is that we're now seeing growth, but some of it is coming from stimulus from the government, some of it's coming from very soft monetary policies, some of it's come from businesses building up stocks and things like that, and some of it is coming from very good dairy prices and some other commodity prices offshore, but domestically no it's still fragile.

GUYON: One of the things you obviously keep a very close eye on is the housing market. We've seen house prices although they dipped, starting to edge back towards their 2007 peak. Do you expect house prices to keep rising over 2010. ALAN: Well, I mean we have to admit to some uncertainty here, this has been a big shock, people are changing their behaviours, we don't exactly know how. Initially I was a bit worried that we would see house prices go back into a boom, we're not seeing that at all, we have seen prices pick up, but actually sales are still quite low, residential investments, so building new houses is quite low, and credit growth, mortgages are very low. So no we're not seeing that at all, it's looking slightly spongy at the minute actually.

GUYON: One of the factors that obviously has a big impact on housing prices is investment in the residential property sector, investors getting in there. Do you accept that the tax system advantages that and encourages people to invest disproportionately in that sector in a way that is negative for the economy? ALAN: Yes. I mean the tax system is complicated. What we're saying about it is only one of the number of things that the government has to take into account, but from the point of view of monetary policy you don't want a tax system which says you'll get an advantage from investing in one particular area, in this case housing, because then you get over investment in one sector, you get people relying a lot of eggs in one basket and that seems to be the New Zealand story, we've got quite unusual household balance sheets where people are relying heavily on houses and house capital growth for retirement and for income. GUYON: So we need to change the tax system to do something to reduce that incentive, what is the best method to do that? ALAN: Well the tax working group that came out a couple of weeks ago I thought gave a very interesting story, which they really gave a menu of changes and then a set of directions about how to approach that menu, because it's complicated, I don't want to just talk about one measure by itself, you've gotta look at how the whole thing balances up and how basically the government can keep its revenue coming in. GUYON: Well one of the things that they suggested was levying a 0.5% land tax which would reduce that incentive that we've been talking about and also raise more than two billion dollars in revenue. Do you support that idea? ALAN: That's a possibility, there are a number of things they had in mind for really neutralising that playing field between housing and other investment, and I mean ultimately it comes back to New Zealanders have been encouraged to own their own homes, but not own their own businesses, and you can see that all coming through on the balance of payments now.