Australia should bring in more lending curbs: IMF

The IMF executive board has noted that while Australia’s post-pandemic recovery “remained strong” some tighter curbs could be brought in.

In its 2023 Article IV Consultation of Australia – an annual bilateral discussion with members that reviews the country’s economic and financial information and economic developments and policies – the board suggested that inflation had “peaked” in the country.

However, it noted that it remains “persistently high” and that “persistence in non-tradeable prices driven by demand pressures will keep inflation elevated”.

Its baseline projections are for inflation to decline gradually and then return to the RBA’s target range in 2026.

However, the IMF highlighted the importance of continued monetary and fiscal policy coordination to reduce inflation and recommended reforms – including further monetary tightening to achieve the targeted inflation range by 2025.

“Monetary policy should be tightened further to ensure inflation comes back to target earlier than 2026 projected in the baseline,” it said.

“The pace of further tightening needs to be calibrated based on incoming data and should consider the lags in the transmission of the effects of monetary policy.”

More DTI and LVR curbs recommended

Given “the renewed increases in house prices” despite the fastest rate-hiking cycle in history, the directors suggested that “additional borrower-based tools”, such as new loan-to-value ratio (LVR) and debt-to-income (DTI) limits could be brought in.

“In line with past IMF advice, since October 2021, banks are required to assess new mortgages with a significant buffer of 300 bps above the contracted repayment rate (up from 250 bps earlier). However, given house prices have resumed their upward trend, additional borrower-based tools, such as loan-to-value (LTV) and debt-to-income (DTI) limits, that have been applied successfully elsewhere, should be considered to boost the overall macroprudential toolkit,” it said.

While the Australian Prudential Regulation Authority (APRA) had previously considered bringing in additional curbs during the peak pandemic years (DTIs reached a record-high level of 24.4 per cent in the December 2021 quarter), it instead moved to raise the interest rate buffer.

It introduced a higher loan serviceability buffer rate in 2021, requiring banks to consider borrowers’ ability to meet an interest rate of 3 percentage points above the product rate — compared to the previous 2.5 percentage points.

It recently reaffirmed that it believed that this buffer was appropriate, stating that it “provides an important contingency for new borrowers facing the risks of weaker conditions in the labour market, persistently high inflation and the potential for further increases in borrowing rates”.

The IMF also voiced concern regarding housing affordability – stating that the lengthening time to save for a household deposit had increased the “intergenerational equity” divide.

“The period a median household needs to save for a 20 per cent deposit, given prevailing house prices assuming it saves 15 per cent of its gross annual income, has increased to almost 10 years. This has increased intergenerational equity concerns between households trying to get into the property ladder and those who own their homes with their mortgages paid off,” it said.

“A borrowing capacity approach suggest[s] that median housing prices are 60 per cent above the price the median household could afford to finance with a debt service-to-income ratio of 30 per cent. The measure shot up in 2022, as interest rates more than offset the decline in dwelling prices.”

Indeed, it estimates that household debt rose to 193 per cent of disposable income in 2023 and would be 190 per cent this year (before falling over the years following).

It therefore also recommended that Australia bring in “supportive planning and land‑use policies” to improve housing supply.

“Greater housing stock is needed urgently,” it said, and lambasted moves to introduce higher taxes on foreign buyers as a means of reducing demand and improving affordability,” it said.

Other recommendations put forward by the IMF included:

• A tighter fiscal stance to support disinflation – including “comprehensive tax reform”. It highlighted that rebalancing the tax system from direct to indirect taxes, while addressing regressive impacts, would promote greater efficiency.
• Implementing public investment projects at “a more measured pace” to support disinflation efforts.
• Continued strengthening of macroprudential decision making and crisis management and resolution frameworks and continued vigilance amid tight financial conditions.

Overall, the IMF said that economic activity was projected to further decelerate in the near term, as the tightening of monetary conditions continues to take hold.

Growth is expected to slow to around 1.8 per cent year on year in 2023 and 1.4 per cent year on year in 2024, the report suggests.

“Faltering private consumption would continue to put a drag on the economy, as households with mortgages bear the brunt of higher interest rates, amid lower real wages and depleting savings,” it read.

However, GDP is forecast to increase to over 2 per cent from 2025.

Earlier this year, the IMF suggested that Australia’s housing market was the second most high-risk country of 27 countries.

At the time, the IMF said Australia had the highest household debt levels (as a share of gross disposable income) and cumulative real house price growth. Only Canada was deemed to be riskier.

[Related: Australia ranks second highest for ‘housing market risk’: IMF]