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OECD report warns of house price risk

NZ Newswire logoNZ Newswire 15/06/2017

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Soaring house prices pose a risk to the financial system while Kiwi's living standards are being held back by poor productivity, according to a global report.

The OECD's 2017 Economic Survey of New Zealand, released on Thursday, is optimistic about the country's economic future but considers the Reserve Bank should be allowed to bring in debt-to-income ratio limits for mortgages to make banks safer.

Its authors say high levels of household debt combined with surging house prices posed risks to otherwise strong economic growth driven by immigration, construction and tourism.

Finance Minister Steven Joyce says house price rises are slowing and any further loan restrictions could mean fewer new homes being built.

"Last week the Reserve Bank released its consultation document on that proposal and I'm looking forward to seeing the responses to it," he said.

Prime Minister Bill English had a similar comment.

"We want to see continued growth in housing because we need more houses," he told reporters in Niue.

"So while we don't want to see more risk in the financial system, the fact that house prices are slowing, but houses continue to be built, indicates there's still demand and we need more supply."

Debt-to-income ratio limits mean people can only borrow a multiple of their income.

In Britain the ratio is four, the Reserve Bank is suggesting five in New Zealand.

Mt Joyce is welcoming the report, despite its criticisms.

"It highlights that New Zealand outperforms most OECD economies in regards to our standard of living, health status, the quality of our education system and our overall environmental quality," he said.

The OECD report, while praising New Zealand's economic growth, describes labour productivity as "well below leading OECD countries" with low productivity growth found to be a long-term risk to the economy.

"New Zealand's robust economic growth and high levels of well-being are enviable, even among the highest-performing OECD countries," said chief economist Catherine Mann.

"The challenge going forward is to enact reforms that will boost productivity, to improve on today's strong performance, and ensure that future generations share in the prosperity."

The report says disposable income inequality is above the OECD average ... and the child poverty rate, which is around the OECD average, is more than double the rate in the the best performing countries.

Low spending on research by business, low capital investment, remoteness and weak competitive pressures were key factors, it said.

The OECD - Organisation for Economic Co-operation and Development - is made up of 35 mostly high-income and developed countries.

The report's recommendations for fixing New Zealand's productivity include:

* Reducing barriers to foreign investment

* Increasing financial support for business research and development

* Lowering corporate taxes

* And giving councils more options to fund local infrastructure, such as "sharing in a tax base linked to local economic activity".

In a section looking at the labour market, the report's authors also criticised weakness in New Zealand's mathematics teaching, said many kiwis were over-qualified for their jobs and said greater urban density was needed to free up housing for workers.

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