Terms of Reference for the Supplementary Stabilisation Instrument Project

November 2005

The strength and persistence of domestic demand, the scale of the accompanying external imbalances, and the key role being played by the current house price cycle, have prompted officials to explore whether ancillary instruments could be deployed to complement monetary policy in the task of managing inflation pressures. Such tools, if they exist, could enable less reliance to be placed on the OCR and, hence, reduce some of the pressure on the exchange rate.

There is a variety of policy factors which may have shaped New Zealanders' attitudes to housing and to savings-consumption choices. The longer-term policy issues, such as the tax treatment of capital gains, the extent of social safety nets and public sector savings programs are important but beyond the scope of the present review. The review will consider structural and cyclical policies that are amenable to implementation in the short term and which have a direct bearing on housing. In particular, the review will look at policies that may influence housing credit growth independently of changes to the OCR.

Two classes of options will be explored:

One-off measures, eg:
· The removal or restriction of structures that facilitate tax reduction through property investment, such as Loss Attributing Qualifying Companies (LAQCs)
· Factors that may be incorporated into the prudential framework which could reduce the amplitude of housing credit cycles

Discretionary stabilisation measures, eg:
· A limit on loan-to-value ratios for mortgages, that could be managed by the Reserve Bank as a macro-stabilisation instrument
· Other direct interventions that might be used by the Reserve Bank to influence the quantity and or price of mortgage lending

Factors that will be considered include:

· The nature of the problem being addressed
· Likely effectiveness of the measures using real industry data
· Likely signalling and reputation effects
· Long-term enforcement and disintermediation risks
· Consistency between cycle-management objectives and longer term financial stability objectives
· Efficiency costs
· Distributional implications
· Options for implementation and their timing
· Legal powers (including whether, and in what form, legislation would be required).
· International precedents and practices.

The work will be conducted jointly by staff of the Reserve Bank and the Treasury, and the Inland Revenue Department will be consulted on tax specific matters. An initial report will be provided to the Governor and Secretary of the Treasury by 31 January 2006, and a report to the Minister of Finance shortly after.