The Unassuming Economist

From the IMF’s latest report on Australia:

“The housing market correction is helping housing affordability. Foreign and domestic investor demand has moderated, thereby enhancing opportunities for first-time home buyers and purchases by owner-occupiers more broadly. On the supply side, progress has been made in using City Deals, agreements across all levels of government that integrate planning and infrastructure delivery for new developments and redevelopments. A prominent example―the City Deal for western Sydney―encompasses the development of the urban area around the new airport. Two states (Western Australia and Tasmania) introduced or announced housing-related tax policy measures discriminating between residents and non-residents since the last Article IV Consultation.

Housing supply reforms will remain critical to restoring housing affordability. While the housing market correction will help, it is unlikely to be sufficient for inclusive, broad-based affordability and growth. The underlying demand for housing is widely expected to remain strong with a robust economic growth outlook for and high population growth in urban areas. At the same time, broad affordability will also be a precondition for a significant reduction in related macro-financial vulnerabilities. As planning, zoning, and other reforms affect supply and prices with long lags, housing supply reforms should, therefore, not be delayed because of the housing market correction. City Deals are a useful catalyst for the large-scale development or redevelopment of urban areas. Nevertheless, this instrument has limited reach, although the Regional Deals envisaged by the government would provide for a welcome extension. Some states should still take the opportunity for further streamlining and consolidation in planning and zoning regulation.

Broader tax reforms that also address housing and land use would reinforce the impact of supply-side measures. Stamp duties should be replaced by broader land taxes, which would strengthen incentives for efficient land use. Within the context of a broader tax reform, gradual lowering of capital gains discounts and limits on negative gearing for investors would reduce structural incentives for leveraged investment by households, including in residential real estate. A more limited capital gains tax exemption for owner-occupiers should also be considered.

The housing policy measures discriminating nonresident buyers should be reconsidered. As the role of foreign buyers in residential real estate markets has started to decline, the discriminatory measures should be reconsidered, as they may no longer be needed to address housing market imbalances. They should be replaced by alternative and effective non-discriminatory measures where possible (e.g., a general surcharge on all vacant property).

The state governments of New South Wales and Victoria noted that the fall in housing prices in Sydney and Melbourne was larger than originally projected in their budgets. Nevertheless, despite their limited progress on zoning and planning reform to reduce impediments to housing supply and affordability, they expected house prices to find support from both housing demand and supply factors. The authorities highlighted that City Deals could be important tools to foster urban housing supply. City Deals have allowed all levels of government to coordinate planning and construction decisions, thereby facilitating infrastructure provision which can in turn support housing supply expansion. Deals agreed on or announced in 2018 included Darwin, Geelong, Hobart, and Perth. There are also plans underway to pilot Regional Deals outside of the major urban areas.”