Extra tools likely to control dairy and housing bubbles, ANZ says

ANZ economists said they were "in no doubt" that further measures would be introduced over coming years to compliment the Official Cash Rate, with the focus on controlling bubbles in the dairy and housing sectors. In their weekly comment piece, the ANZ National economists said the dairy sector was likely to face different capital lending requirements at some stage, which would mean higher lending margins. They also said a capital gains or land tax may not be taken up for 'political reasons', but that "the rules will change" either through depreciation rates, elimination of various deductabilities or some other tax modifications. "(Y)ou can't have an investment class such as housing, which is NZ's biggest, and expect the Government to continue giving that investment class an aggregate tax refund, which is the current absurdity," they said. Here are the economists' comments on the impending changes:

At times like this "“ when major divergences are opening up "“ it is useful to remember that there is more than one way to skin a cat. The OCR is a blunt instrument and we are in no doubt other measures are going to be introduced over the coming years as monetary policy seeks more "mates" "“ including the interaction with fiscal policy. In terms of the two main "surprises", namely the dairy sector and housing, the former will face different capital lending requirements at some stage, which means higher lending margins and also some form of regulatory mechanism to internalise the negative externality it imposes on our environment. The "better" the outlook, the closer these changes are. Housing in some way or form will feature in terms of the recommendations out of various review groups and taskforces that the Government have in place and that are all due to report back before the end of the year. It may not be a capital gains or land tax that is taken up for "political reasons". But you can't have an investment class such as housing, which is NZ's biggest, and expect the Government to continue giving that investment class an aggregate tax refund, which is the current absurdity! The rules will change, either be it through depreciation rates, eliminating various deductabilities or some other tax modifications. It's all part of fostering changes across the economy, and we are in no doubt various structural modifications will be influential in so far as how much work monetary policy has to do. In the absence of such changes, the risk is that we go back to the behaviours of old, familiar bubbles form, the rebalancing process is stymied and the OCR once again becomes the sledgehammer.