IMF calls for crackdown on growing house prices

The International Monetary Fund has called for Australia to address the rising financial stability risks posed by rocketing house prices, which are expected to increase by up to 20 per cent this year.

The IMF also warned there would be a “reckoning” for so-called zombie companies once pandemic supports were withdrawn, which could result in a spike in corporate insolvencies, particularly in small and medium firms.

Australia’s consistent lack of large-scale systemic tax reform also needed attention, according to the global financial institution, which said a failure to act on productivity enhancing reforms would come with a long-term cost.

“We think the tax reform would help economic efficiency and strengthen Australia’s position fiscally over the medium term … but also in terms of economic efficiency by realising gains from having a better system of direct taxation,” Australian Mission Chief Harald Finger said.

Echoing recommendations from the OECD last week, the IMF called for Australia to reduce the income tax burden on households and business – which is higher than the OECD average – by increasing GST revenue and offsetting the regressive effects on low and middle income households.

“Not pursuing the reform basically means losing out on the gains that one can have from better incentivising investment,” Mr Finger said. Treasurer Josh Frydenberg last week ruled out any change to the GST.

The recommendations came at the conclusion of the IMF’s biannual (and this time online) assessment of Australia’s economy, which forecast growth of 3.5 per cent by the end of 2021 and 4.1 per cent in 2022.

Of note was the IMF’s projection that inflation would grow to 2 per cent by the end of 2022 and stay within the Reserve Bank of Australia’s target band of 2 per cent to 3 per cent. This would suggest interest rates could begin to lift by the end of that year, ahead of the RBA’s current 2024 forecast.

The release of the IMF report came as Prime Minister Scott Morrison and his Ambassador to the United States Arthur Sinodinos met with IMF managing director Kristalina Georgieva in Washington DC on Friday (AEST).

The meeting focused on the international economic outlook and the world’s recovery from the COVID-19 crisis, particularly the challenges for Australia’s closest neighbours in the Pacific and its largest trading partner, China.

On Australia’s booming housing market, Mr Finger said the IMF’s concerns were twofold: first, growing affordability issues; and second, the potential for rising financial vulnerabilities.

“We think that requires a comprehensive policy response,” he said. “Macroprudential policy should be tightened to address gradually rising financial stability risks.”

Possible options include increasing interest serviceability buffers (the stress test on household for their ability to pay loans with higher interest rates), as well as caps on debt-to-income ratios or loan-to-value ratios.

The chief executives of the Commonwealth and ANZ Banks this week said they were concerned about rising house prices, and CBA boss Matt Comyn said the bank, which is also Australia’s biggest residential mortgage lender, has already increased its rate benchmark from 5.1 per cent to 5.25 per cent.

Mr Comyn suggested this was a more nuanced approach to dealing with financial instability issues than caps on loan ratios, which had the potential to disadvantage certain groups such as first home buyers.

Reserve Bank of Australia assistant governor Michelle Bullock this week said the RBA was monitoring the situation closely given the risk to financial instability caused by high household debt-to-income ratios, but gave little indication the RBA believed an intervention was needed at this stage.

The IMF also called for further supply side reforms including more efficient planning, zoning, and better infrastructure, in addition to transitioning from stamp duties to broad-based land taxes, which has long been called for in Australia but has, so far, only been adopted by the ACT government.

On the potential for a spike in business failures when pandemic supports were withdrawn, the Mr Finger said there was a need to balance and support businesses through artificial downturns created by lockdowns, and also the need for the economy to react flexibly and reallocate resources from less productive firms to more productive firms.

“Of course once the recovery starts and sets in there will have to be that eventual reckoning, and firms that are, longer term, not viable will need to exit overtime,” he said, though added this would occur at a pace that is digestible for the labour market and the financial system.

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