The global lender has urged a rethink of the federal government’s flagship deposit guarantee program, while making numerous recommendations on tax reform and housing supply.
The International Monetary Fund (IMF) has cautioned that the federal government’s expanded 5 per cent Deposit Scheme risks adding to housing price pressures, while calling for tighter design of demand-side support and a stronger focus on supply, planning, and tax reform.
In latest assessment of the Australian economy, released on Sunday (15 February), the IMF noted that new policy measures – including the government’s $10 billion over eight-year pledge to help deliver 100,000 homes for first home buyers – were being rolled out against a backdrop of a fresh upswing in dwelling values.
It said house prices had rebounded during the monetary policy easing cycle and were now further “stretching valuations against income”, warning that constrained supply and lower mortgage rates would likely push prices higher and entrench affordability challenges.
Within that context, the Fund singled out the federal government’s expanded home guarantee scheme for special attention.
It said the scheme “may contribute to price pressures in the near term by pulling forward home purchases while financial conditions ease”.
The IMF said this highlighted “the critical need to increase housing supply,” either by fully delivering the promised 100,000 homes or by “limiting the guarantee program to the purchase of new dwellings”.
Under the expanded First Home Guarantee, eligible buyers can purchase a home with just a 5 per cent deposit, while the government guarantees the remaining percentage needed to access a loan without paying lenders mortgage insurance (LMI).
The warning lands amid fresh data showing stronger growth at the lower end of the market.
Recent Cotality research indicated that prices for homes under the scheme’s eligibility caps rose 3.6 per cent over the December quarter, compared with 2.4 per cent for more expensive properties.
Brokers also reported increased inquiries from first home buyers ahead of the schemes start date with industry heavyweights further questioning whether changes to the scheme would actually address long-term affordability issues.
Yet Housing Minister Clare O’Neil pushed back against the IMF’s concerns, with a spokesperson telling The Adviser that the policy “will have a very minor impact on prices, with modelling from Treasury pointing to a 0.6 per cent price impact over six years.”
The IMF, however, drawing on cross-country analysis, underlined that policies that reduce the cost of buying, owning, or renting – such as grants, stamp duty concessions, or guarantee schemes – tended to increase housing demand.
It added that in markets where supply was constrained, these policy interventions could translate into higher prices as opposed to improved affordability.
IMF sounds alarm on supply shortfall, spotlights affordability concerns
On the supply side, the Fund said Australia remained a long way from achieving its housing construction goals.
“Annualised completions of around 180,000 remain well below the peak levels seen in 2016 and the needed pace to achieve the authorities’ target of 1.2 million new homes over five years starting in 2024 under the National Housing Accord,” the report reads.
The IMF acknowledged that new housing supply had begun to lift as earlier headwinds – including high construction and financing costs – eased, but emphasised that longstanding structural constraints still weighed heavily on output.
It concluded that “a holistic strategy is needed to tackle the structural barriers that impede new housing supply and improve housing affordability” and called for “concerted efforts across different levels of governments” to meet national housing targets.
It also presented stark metrics on the household impacts of the nation’s housing imbalance.
The IMF estimated that housing affordability had deteriorated to the point where a new mortgage now required about 47 per cent of median household income, while rent consumed around 24 per cent.
It further stated that the time needed to save for a 20 per cent deposit had stretched to roughly 11 years.
At the same time, it said that the rebound in house prices alongside easier monetary conditions was “further stretching valuations against income.”
It urged regulators to remain “vigilant in monitoring mortgage lending standards, excessive buildup in household debt, and the effectiveness of the new DTI limit.”
Zoning, planning, and tax overhauls recommended
Beyond program design and credit policy, the IMF used the review to push for a sweeping reset of housing-related regulation and taxation.
It said efforts to meet national housing targets and improve affordability should “focus on relaxing stringent zoning and building restrictions and expediting approval and land release processes for housing developments, including by drawing inspiration from successful practices in Canada and New Zealand”.
On tax, the Fund said that state stamp duties on property should be replaced with “recurring property taxes” to promote more efficient use of land and existing housing stock.
It also recommended that authorities “consider reviewing tax arrangements that affect housing demand and investment, with potential fiscal savings redirected toward supporting new housing supply.”
The IMF then stated that “tax breaks, including superannuation concessions and capital gains tax discount, could be phased out to generate a more equitable and efficient tax system”.
The statement could be interpreted as tacit backing for the Albanese government’s consideration of changes to the capital gains tax discount in the upcoming May federal budget.
[Related: FHBs return in force as lending surges]
