Australia was warned by the International Monetary Fund that rising house prices will lead to high levels of household debt.

The IMF recommended that macroprudential policy be tightened to manage the rising risk of financial instability in Australia.

According to IMF, “while the rise in housing prices is largely driven primarily by owner-occupiers taking advantage of low mortgage rates and fiscal support programs and low interest rates, high mortgage to income mortgages are on the rise amid elevated household debt, and investors demand has begun to rise from its low levels.”

According to the IMF recommendation lending standards should be closely monitored. Also, steps should be taken to reduce household borrowing.

“Options include increasing interest serviceability buffers and instituting portfolio restrictions on debt-to-income and loan-to-value ratios.”

High-indebted Borrower: Targeted policies

Michelle Bullock (assistant governor of Reserve Bank of Australia) recently stated that RBA’s continued credit growth, which extends beyond income, has resulted in an increase in house prices.

Ms Bullock said that unlike 2014 and 2017, the issues are not related to specific types of lending, such as interest-only or investor-only lending.

“This suggests to me that macroprudential tools, which are necessary to address rising risk, should be targeted at high-indebted borrowers.”

Ms Bullock believes tools that address both the serviceability and maximum credit that a borrower is allowed to obtain are more relevant today.

“A high level of debt could pose risks to the economy in the event of a shock to household incomes or a sharp decline in housing prices.”

Housing reform

IMF recommended policies regarding housing to keep market affordability under control and indebtedness under check.

According to IMF, improved infrastructure and planning will increase housing supply.

It was stated that both state/territorial and the Commonwealth should provide greater financial incentives for local governments to improve infrastructure and simplify zoning regulations.

Flexibility in working arrangements can help workers move out of capital city areas, which could increase their affordability. Governments should also provide targeted fiscal support for low-income households and expand social housing.

The rising housing prices will lead to an increase in household wealth

According to the Australia Bureau of Statistics (ABS), there was a 5.8% increase in household wealth during June quarter. The record amount of wealth per capita was $522,032.

This was largely due the increase in house prices.

Residential assets were responsible in fact for 4.5 percentage points quarterly growth of household wealth. Superannuation accounts followed by directly owned shares at 1.1 to 0.3%.

Katherine Keenan from ABS is head of wealth & finance. She said that the main driver behind household wealth was the 6.7% quarterly increase residential property prices.

Ms Keenan said that the strong property price growth was due to a record low interest rate and rising consumer confidence. She also stated that demand is greater than housing stock.