The International Monetary Fund says Australian banking regulators should come down even harder on risky property market lending.
The IMF has released a report recommending the federal government should consider scrapping or winding back negative gearing that distorts the housing market.
The report says Australia’s housing market faces some acute risks and says it’s crucial the nation’s banks remain strong amid lending exposure and a reliance on foreign capital and savings.
According to the IMF, the best way to clamp down on lending in Australia would be to set higher standards for borrowers’ debt-to-income ratios and for loan-to-valuation limits.
They also recommended regulators such as the Australian Prudential Regulation Authority could actively target specific property market segments that were at risk of a bubble.
Loan serviceability was still the best way to regulate though according to IMF through implemented processes like stress-testing prospective borrowers to ensure they could service a loan at 7 per cent interest rate instead of the record low rates we see today.
It was pressure from APRA that led banks to start implementing such stress tests after the RBA cut rates to below 2 per cent.
Mission chief of the Australia-New Zealand division of the IMF, Thomas Helbing, said they were questioning the economic and social benefits of tax breaks like negative gearing.
“These incentives tend to benefit higher-income households and tend not to benefit first-time buyers,” he said.
“If you remove one incentive, you don’t want to create distortions elsewhere.”