IMF Urges Australia to Use Lending Curbs to Cool Red-Hot Housing

(Bloomberg) -- Australia should deploy lending curbs to cool a red-hot housing market, the International Monetary Fund said, while cutting its 2021 economic growth forecast by 1 percentage point due to a renewed coronavirus outbreak.

“Surging housing prices raise concerns about affordability and financial stability,” IMF staff said in the concluding statement of the 2021 Article IV discussions. “Macroprudential measures should be employed to address incipient risks.”

Options include increasing interest serviceability buffers and “instituting portfolio restrictions” on debt-to-income and loan-to-value ratios, it said in the report released Friday.

The call comes two days after the Reserve Bank said it’s constantly assessing the need for such measures due to risks arising from highly-geared borrowers. Australia’s property market is surging even as Sydney and Melbourne are in extended lockdown due to an outbreak of the delta variant of the coronavirus that’s set to push the economy into contraction this quarter.

The IMF lowered its forecast for economic growth this year to 3.5% -- reflecting the east coast lockdowns  -- and boosted to 4.1% its estimate for 2022, as a recovery is expected once restrictions are lifted. That compared with an estimate in April -- when Australia was almost Covid-free and rebounding strongly -- of 4.5% growth this year and 2.8% next year.

In the statement, the IMF also:

• Forecast underlying inflation would reach 2% by the end of 2022 and remain within the RBA’s 2%-3% target range thereafter
• Said RBA policy normalization should be calibrated with the recovery in a gradual and well-sequenced manner. Clear communications which stress the state-contingency of forward guidance will be important for a smooth transition
  • If downside risks materialize, the RBA has space to provide additional support by expanding its asset purchases, reinstating term funding facilities, lengthening the maturity of the yield target, and negative rates
• Urged Australia to reduce its relatively high direct taxes and instead strengthen indirect taxes, by reducing the corporate income tax burden and relying more on goods and services tax revenue
• Urged the government to set a “time-bound net-zero emissions target,” noting that while politically challenging, carbon pricing, along with measures to mitigate transition risks for industries, would be the most effective way to cut emissions and spur investment
• Called on authorities to promote innovation and competition to boost medium-term growth. Rapid implementation of the Digital Economic Strategy is essential to build skills and infrastructure, it said
• Downside risks include tighter global financial conditions, geopolitical tensions, an eventual housing correction, and climate change
• Upside risks include a faster recovery in household consumption and business investment after the lockdowns are lifted

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