Understanding the IMF’s warning on the Australian housing market

Instability could affect the entire financial system

The IMF has warned that the Australian housing market is heading into risky territory, and that the government should act to prevent runaway prices leading to instability which could affect the financial system more broadly. In a regularly issued report on the Australian economy called “Staff Concluding Statement of the 2021 Article IV Discussions”. Article IV refers to an agreement by IMF member states to be subject to “surveilance”, cooperating with IMF staff and providing data so they can make an independent assement of economic policy and performance.

This year’s report begins with four main points, which the rest of the report expands upon:

  • Following swift economic recovery from COVID-related lockdowns in 2020, new outbreaks set back economic activity in the near term, posing fresh challenges. Recent progress in the vaccination campaign offers a pathway out of lockdowns starting in the December quarter and will enable an ensuing economic recovery.
  • Supportive and well-coordinated fiscal and monetary policies soften the near-term economic impact and lay the foundation for post-lockdown recovery. Fiscal and monetary support should stay nimble amid very high uncertainty, and additional stimulus should be provided if downside risks materialize.
  • Surging housing prices raise concerns about affordability and financial stability. Structural reforms to boost housing supply and targeted support for low-income households are needed to improve housing affordability. Macroprudential policy should be tightened and lending standards closely monitored.
  • Promoting innovation, competition, and infrastructure investment, focusing on climate change policies, and addressing inequality will be important to achieve high, sustainable, and inclusive growth over the medium term.

The first bullet point is mostly descriptive. The fourth addresses issues outside the scope of this article.

The second emphasises the need for “supportive and well coordinated fiscal and monetary policies”, suggesting further stimulus might be needed. Later in the report they mention “Australia’s substantial fiscal space”. The third paragraph moves to the issue of housing with this macroeconomic background already in place, but does not draw any direct link between monetary policies and house prices. But in an article from the Sydney Morning Herald, the mission chief for Australia is quoted as saying they are ‘“collateral damage” from low interest rates . The article then quotes him again sayin “Increasing interest rates now would not be the right instrument because that would endanger the broader recovery and inflation prospects and so the better way is then to use macroprudential measures”.

Later in the report the IMF adds “If downside risks materialize, the RBA has space to provide additional support by expanding its asset purchases” endorsing the use of digital money printing to support bond markets and thus help pay for government spending. This fits with the general diagnosis that the prevailing conditions are deflationary, and governments around the world should be more worried about under-spending than over spending, especially right now.

I am personally left with two questions, one of these is to what extent the conditions in Australia now resemble the conditions in the US in 2007. I have emailed the IMF spokesperson listed on the release. I await a response, which might form the basis of another article (or an update to this one). A second question is whether increased fiscal spending could, indirectly through it’s effect on inflation and therefore interest rates, decrease house prices, even as it increases the incomes of those looking to buy. I haven’t bothered the IMF with this point, yet, but it’s something to think about.

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