Five Australian cities are now among world’s top 20 most expensive

The International Monetary Fund has told the federal government and Coalition that Australia needs a major policy package to deal with the nation’s unaffordable housing, saying everything from tax to the supply of new land should be on the table.

Just days after Reserve Bank research showed lower interest rates had contributed to the collapse in home ownership among young Australians, the fund used its annual review of the economy to argue a string of politically contentious policy changes are needed to ensure housing remains within the financial reach of ordinary people.

The International Monetary Fund says major changes, from tax to land supply, are needed to make Australian housing more affordable.Credit: Louie Douvis

Across all international metrics, Australian housing is among the most expensive in the world despite a recent slowdown in prices.

Sydney, says US-based analytics organisation Demographia, is the world’s second most expensive city – after Hong Kong – with 13.8 times the median household income needed to buy a median-priced house. Melbourne and Adelaide are in the top 10 most expensive, while Brisbane and Perth are in the top 20.

The federal government has set a target of 1.2 million new homes by 2029, putting together a series of policies worth over $30 billion to lift housing construction. The Coalition has promised $5 billion towards local government infrastructure to unlock housing projects.

But the IMF says all levels of government must go further, arguing eradication of state stamp duties and a shift to land taxes, lifting the number of workers in the sector and easing zoning rules had to be on the agenda.

“A comprehensive policy package is essential to tackle Australia’s housing affordability crisis, focusing on increasing the construction workforce, relaxing zoning regulations, advancing initiatives to boost new housing supply, and re-evaluating property taxes and stamp duty,” it said.

Last week, research by Reserve Bank economists estimated a quarter of the sharp drop in home ownership among Australians under the age of 40 since the mid-1990s was due to low interest rates.

But it also found state government stamp duties had contributed to the problem, along with other policies involving such tax arrangements as capital gains.

Coalition MPs are pressing to relax the interest rate buffer imposed by the Australian Prudential Regulation Authority on bank loans to first-time buyers, arguing it has contributed to the cost pressure on young people. But the IMF rejected any change to the 3 percentage point buffer.

“Macroprudential policies should remain stringent to protect household balance sheets, especially in the context of rising housing prices,” it said.

“Additionally, the authorities are encouraged to proactively adapt their macroprudential
tools to pre-empt excessive build-up in household indebtedness, including when the time is appropriate for monetary policy easing.”

Last week, Treasurer Jim Chalmers revealed a $22 billion deterioration in the budget bottom line over the next four years. Next financial year’s forecast deficit is $46.9 billion. Chalmers said much of the government’s extra spending was unavoidable.

The IMF says if the rate of inflation does not continue to ease, all governments will have to look at “expenditure rationalisation” to reduce aggregate demand across the economy. This could include axing infrastructure projects or targeting welfare payments more carefully.

In what would be a challenge for either side of politics, the fund says tax reform has to be on the agenda to help improve the economy’s performance and reduce structural pressures on the budget.

Jim Chalmers, in his mid-year budget update, revealed a $22 billion deterioration in the nation’s bottom line over the next four years.Credit: Alex Ellinghausen

“Tax reforms should focus on efficiency and fairness, reducing dependence on direct taxes and
high capital costs, and phasing out tax breaks like capital gains tax discounts,” it said.

Chalmers said the IMF had validated his budget settings.

“We’ve overseen a record-breaking fiscal turnaround – the budget is $200 billion better than what we inherited, and our back-to-back surpluses have helped in the fight against inflation, a point the RBA governor [Michele Bullock] has made,” he said.

“The IMF has endorsed our efforts to make our economy more competitive, dynamic and productive, like our historic shake-up to Australia’s merger settings.”

The fund believes Australia is still on track for an economic soft landing over the next 12 months, with growth lifting from 1.2 per cent this year to 2.1 per cent in 2025. It forecasts underlying inflation to ease to 3 per cent and unemployment to lift to about 4.5 per cent.

But it says the risks to the economy are tilted to the downside, with soft consumer spending and a deterioration in the global outlook the largest threats to its forecasts.

Much hinges on the Reserve Bank’s expected cuts to interest rates next year. A stronger jobs market or extra government spending could force the bank to leave rates higher for longer.

“Conversely, weaker-than-expected growth or a faster-than-projected increase in unemployment may prompt the Reserve Bank to lower interest rates sooner,” it says.

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