Australia needs housing reforms: IMF

In a statement describing the findings of International Monetary Fund (IMF) staff last week, concerns were expressed around housing affordability and financial stability in Australia amid escalating house prices.

The Reserve Bank of Australia (RBA) had aired a similar warning days before, stating the ever-rising prices and housing debt levels could lead to cracks forming in the country’s financial stability.

The IMF has insisted Australia should consider shifting its policies across lending regulation and housing supply.

“Structural reforms to boost housing supply and targeted support for low-income households are needed to improve housing affordability,” the statement read.

“Macroprudential policy should be tightened and lending standards closely monitored.”

While the surge in housing prices has been largely driven by owner-occupiers taking advantage of low interest rates and government support such as HomeBuilder, the IMF pointed to an uptick in high debt-to-income (DTI) mortgages, and in investor demand (albeit increasing from low levels).

Macroprudential measures should be deployed to address impending risks, the organisation recommended.

“Options include increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios [LVR],” the IMF statement said.

On Friday, APRA signalled that it had plans to release an information paper setting out its framework for how it would use macroprudential policy tools in the last quarter of the year.

The paper will come after it has been monitoring the housing and lending markets with the RBA.

The two regulators have discussed the macro tools they will use, should they decide to intervene. RBA governor Philip Lowe revealed considered measures had included raising the minimum interest rate banks use for home loans, or limits on high LVR or DTI lending in banks’ portfolios.

But RBA assistant governor (financial system) Michele Bullock confirmed last week the regulators are yet to see any deterioration in lending standards.

Meanwhile CBA and ANZ bosses Matt Comyn and Shayne Elliott have both recently said the banks shouldn’t wait for regulators to set standards and they should be proactively tightening their lending.

Mr Comyn in particular favoured raising serviceability buffers above LVR limits, saying the latter could disproportionately hit first home buyers.

“If you’re asking me what do we think the preferred implementation mechanism is, I would suggest that it’s the benchmark for floor servicing,” he told a parliamentary committee on Thursday.

“It’s very transparent, it’s very easy to implement, it’s effectively the rate that you’re testing serviceability, you can apply it to banks and non-banks.”

CBA raised its serviceability floor rate in June, to 5.25 per cent.

Housing supply

Further, the IMF has called for housing supply-side reforms, including more efficient planning, zoning and better infrastructure.

“Commonwealth and state/territory governments should consider providing more financial incentives for local governments to streamline zoning regulations and improve infrastructure,” the statement said.

“Promoting flexible work arrangements could allow workers to move away from capital cities, improving affordability. In addition, governments should focus on providing targeted fiscal support for low-income households and expand social housing.”

A general land tax instead of stamp duty was also suggested, with the IMF saying it would be a more stable revenue source for states and promote labour mobility.

It also noted Australia could stand to reduce structural tax incentives for property investment.

Adjusting monetary, regulatory frameworks

“There is a need to ensure that the monetary, financial and regulatory frameworks remain appropriate in a changing environment,” the IMF said.

Currently, regulators are revising the bank capital framework to make it more flexible, risk-sensitive and accommodative to competition, aiming to increase the risk weights for high-risk mortgages and lower risk weights for SME lending.

The end goal is to reduce the banks’ concentration risks in housing, with around 60 per cent of their current lending being in residential mortgages.

Looking at the broader economy, the IMF has an outlook tilted down in the near-term, mostly due to risks due to the pandemic and the Delta variant of the virus.

An eventual housing market correction was also noted as a risk, alongside global financial conditions, geopolitical tensions and climate-related risks.

However, the economy could move in the other direction, with faster recovery in spending levels and business investment post-lockdown.

Economic policies should remain agile and supportive, the IMF said, in light of ongoing uncertainty.

“Monetary policy should remain data-dependent and nimble in a highly uncertain environment. Accommodative monetary policy settings will be important during the lockdowns and ensuring recovery,” the statement said.

Further, it noted if conditions take a turn, the Reserve Bank has room to provide additional support, by expanding asset purchases, reinstating term funding facilities, lengthening the maturity of the yield target or introducing negative rates.

Fiscal policy such as the government’s COVID-19 disaster payments and business support grants were deemed as broadly adequate and appropriately targeted – and able to be scaled up or reoriented if needed.

[Related: Government urged to support off-the-plan sales]