The Commission's housing affordability enquiry report, released today, said the application of a capital gains tax needs to be viewed in the wider economic context, not just in relation to the housing market.

"Taxation should be approached in a principled way across the economy - an ad hoc regime for housing alone would risk significant costs and distortions," the report said.

The report also said "significant challenges" existed around implementing a capital gains tax, and "international experience suggests that implementation typically falls short of the in-principle ‘ideal'."

The Commission also cites the current GST regime as an argument against the introduction of a capital gains tax.

"GST is an efficient tax in that it does not distort the rates of return on saving and investments, is broad-based, and has low compliance and administrative burdens," the report says.

"The existing GST treatment of housing, which applies equally to rental and owner-occupied housing, is appropriate."

The Commission also recommends the Government monitor the impact of the removal of depreciation from both rental and commercial properties to ensure proper upkeep and building safety is maintained.

With specific regard to the rental market the Productivity Commission recommends the Department of Building and Housing review legislation and regulations around rental property.

The recommendation calls for the DBH to check their effectiveness, "and consider options for improvement, including their implementation and enforcement."

The full copy of the report is available of the Productivity Commission website at: http://www.productivity.govt.nz/final-report/1468.