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Banks vulnerable to housing downturn

Author
Newstalk ZB Staff ,
Publish Date
Thu, 16 Apr 2015, 5:10AM
(Getty Images)
(Getty Images)

Banks vulnerable to housing downturn

Author
Newstalk ZB Staff ,
Publish Date
Thu, 16 Apr 2015, 5:10AM

The Reserve Bank is warning banks will take a huge hit if there's a down turn in the housing sector.

It's warning the banking sector will be hit hard with 60% of its lending tied up in residential mortgages.

Deputy Governor Grant Spencer acknowledges New Zealand is one of a few advanced economies that has not had a major house price correction in the past five decades.

He warns if that happens it would put the New Zealand banking system under serious pressure to cope.

MORE: Barry Soper - Housing investment needs reining in

Massey University's banking expert David Tripe admits the Reserve Bank is concerned banks might become insolvent and unable to pay depositors on demand.

"The concern is that bank's loans against these properties could turn out to be worth less across the passage of time and that would cause a loss for the backs."

Tripe confirms the concern is that banks loans against properties could turn out to be worth less over passage of time and that would cause losses for the banks.

"They are concerned that banks might become insolvent and therefore might be unable to repay depositors on demand. That situation might arise if banks had losses on their loan portfolio."

For the first time the Reserve Bank has come out in favour of taxing investment houses and wants property investors hit with a tax to clamp down on the over heated Auckland property market.

It says there's increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains.

Tax Partner with PriceWaterhouseCoopers, Scott Kerse acknowledges there are incentives for investors to get into the property market.

"You'd have to say being able to borrow money, leverage up a rental property and effectively claim a tax deduction for the loss of the result probably is a bit of an incentive for people to invest in that way.

"If you think about where the sort of alleged incentive comes from, it's the fact that you can claim a tax deduction on interest on borrowings to fund a rental property. It's not just
the rental, it's the return you get on it. It's also the capital gain that you earn."

The Leader of the Labour Party Andrew Little is retaining his reservations about capital gains tax. He has previously publicly spoken against a a capital gains tax, a policy his party took to the last election.

Little still maintains the problem with it is that it catches mum and dad investors who are trying to save for their retirement.

"The issue we've got in many parts of the housing market are those people who own 5, 10 or 15 properties and are putting huge upward pressure on house prices. That's where you've got to go and it may well be that a conventional capital gains tax is too blunt an instrument for that."

New Zealand First leader Winston Peters believes more tax isn't the answer.

"The Reserve Bank should stop widdling into the wind and face up to the fact that that's not the problem with New Zealand at the moment, rather than talk about capital gains tax, why not talk about deductions for capital losses, that would be the fair thing to talk about."

Peters thinks the Reserve Bank's on the wrong track and he's no fan of their past solutions either.

"Their reaction to a bloated Auckland housing market was not to recommend cut back on immigration, cut back on overseas buying into Auckland, it was rather to apply loans to value ratio."

Green MP Kevin Hague believes the Reserve Bank is after more than a Capital Gains Tax.

"I think that they are also talking about restrictions on house ownership by non-resident foreign citizens, which is also something we've been calling far.

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