## Australia’s Housing Price Correction in Perspective ## Source details **Canonical URL:** [Australia’s Housing Price Correction in Perspective](https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1ausea2019008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1ausea2019008.pdf.json) --- ### Context and vulnerabilities - Australia is on the final leg of rebalancing after the end of the commodity price and mining investment boom. - Exchange rate flexibility and monetary easing have moderated demand impacts; export orientation to Asia and rapid population growth supported adjustment. - Key vulnerabilities and structural challenges: - Household debt has risen to around 190 of households’ gross disposable income. - Housing assets have become overvalued. - Commercial bank exposure to residential real estate: over 50 percent of total assets. - Productivity growth lagging; potential growth lower since the GFC. - Infrastructure gaps after rapid population growth and constraints from urbanization and housing supply. ### Recent developments (past year) - Growth and demand - Annual growth picked up to 3.0 percent in 2018Q1-Q2. - Growth slowed in 2018Q3; household saving ratio declined further. - Mining investment stabilized; rebound in Western Australia. - Labor markets - Unemployment rate declined to 5.1 percent in November; staff NAIRU estimate 4.8 percent. - Underemployment remains well above its longer-term average. - Nominal wage growth weak but starting to pick up. - Prices and inflation - Inflation hovered around the floor of the RBA’s 2-3 percent target range. - External position - Current account gap mid-point estimate in 2018: -1.0 percent of GDP. - Current account deficit projected to remain within 2½-3 percent of GDP over the medium term. - Housing market - House prices rose by 70 percent nationally over the past decade; roughly 100 percent in Sydney and 90 percent in Melbourne; prices have started to decline. - Mortgage credit growth slowed to 5 percent in October 2018 after peaking mid-2015. - Residential investment growth picked up in the first three quarters of 2018; pipeline of pending residential construction remained strong. - Mortgage credit and banking - Major banks raised mortgage rates by 14-16 basis points in September and October 2018. - Banks’ wholesale funding about one-third of total liabilities, of which two-thirds are from external sources. - Housing loan delinquencies trending up but at low levels; banks are well capitalized and profitable. ### Outlook (staff projections and expectations) - Growth and demand - Economy expected to adjust toward potential growth and full employment; process gradual. - Growth should moderate to potential; rebound in non-mining private business investment and public infrastructure spending to offset expected contraction in dwelling investment near term. - Private consumption growth expected to remain close to potential growth. - Net exports expected to contribute less to growth due to drought-related supply declines, end of LNG ramp-up, and lower growth in China/global economy. - Inflation - Forecast to return to the midpoint of the 2-3 percent target range over the next two to three years. - Housing market correction - Expected to be mild and short-lived; assumed to continue over the next year or so with some contraction in dwelling investment and further price declines. - Underlying demand expected to hold up because of robust population growth; eventual house price rebound expected. - Household debt ratios should stabilize and then decline. - Potential output - Potential output growth forecast to stabilize at 2.6 percent in the medium term. - Labor input projected to grow steadily with immigration and higher participation by female and older workers. ### Risks and alternative scenarios - Overall: downside risks to growth have increased with a less favorable global picture, housing downturn, and domestic demand uncertainties. - External risks - High exposure to China (coal, iron ore, tourism, education) makes Australia vulnerable to US-China tensions and China’s rebalancing. - Sharp tightening of global financial conditions could raise funding costs and lower debtor disposable income; impact depends partly on Australian dollar response. - Domestic risks - Housing correction may be deeper/longer if banks are overly cautious in credit extension. - Domestic demand could be weaker if wage growth remains subdued. - Upside: stronger non-mining business pickup, larger spillovers from public infrastructure, and AUD depreciation could boost growth. - Risk-assessment matrix highlights - Severe housing market downturn: Likelihood L/M, Impact H. - Weaker growth in China: Impact H. - External debt DSA scenario figures (external debt in percent of GDP): - Baseline: 112 - Interest-rate shock: 115 - Historical scenario: 109 - CA shock: 114 - Growth shock: 114 - Combined shock: 115 - Real depreciation shock (one-time 30 percent in 2018, 80 percent hedged): 115 ### Monetary policy stance and contingencies - Policy rate: on hold at 1.5 percent since August 2016; stance described as accommodative. - Real neutral interest rate estimated in the range of 1-2 percent. - Staff view: monetary policy should remain accommodative until substantive upward pressures on wages and prices emerge. - RBA signaled next move likely an increase, but a tightening bias is premature given labor market slack and downside risks. - RBA retains space for further rate reductions from 1.5 percent though effective lower bound would constrain. - Unconventional monetary policy options and use of the balance sheet exist within the institutional/legal framework. Key numeric references (monetary) - 1.5 percent (policy rate) - real neutral interest rate: range of 1-2 percent - inflation target range: 2-3 percent ### Fiscal policy stance, outlook, and guidance - Fiscal stance supportive; general government expenditure grew faster than potential output since 2016, partly due to infrastructure. - Commonwealth MYEFO December 2018 incorporated higher spending on education, health care, aged care, and increased infrastructure. - Government’s medium-term fiscal strategy aims to reach a balanced budget by FY2019/20 and run surpluses thereafter. - Staff recommendation: projected surpluses should not be cut short prematurely through permanent tax cuts or increases in current spending. - Fiscal contingencies: with limited conventional monetary space, discretionary fiscal stimulus may need to complement monetary easing if downside risks materialize. Key numeric references (fiscal) - FY2019/20 (target balanced budget year) - A$15.0 billion (improvement in underlying cash balance over four years to FY2021/22) - 23.9 percent of GDP (cap on Commonwealth tax revenue) - FY2021/22 (end of four-year window for cash balance improvement) - seven years (duration of planned PIT cuts) ### Macrofinancial policies and recommendations - Two-track approach by authorities to asset- and liability-side bank vulnerabilities; prudential caps on investor and interest-only lending removed by end-2018/early-2019 conditional on assurances. - Capital adequacy framework refined in 2018; introduced tighter liquidity requirements including a net stable funding ratio in line with Basel III. - FSAP stress tests of ten largest banks to a combined shock found solvency and liquidity relatively resilient though some capital pressure; liquidity vulnerabilities remain due to wholesale funding reliance. - Staff policy recommendations: - Hold course on stricter lending standards; be prepared to reintroduce caps on interest-only loans if assurances prove insufficient. - Explore expanded macroprudential toolkit: borrower-based LVR caps, income-based limits (loan- or debt-to-income), refined debt-serviceability requirements. - Strengthen systemic risk oversight, increase CFR transparency, improve data granularity, and bolster supervision and crisis management (independence, budgetary autonomy, enhanced stress testing, complete resolution framework). Key macrofinancial numeric references - 10 percent (cap on annual investor lending growth removed, effective July 1, 2018) - 30 percent (cap on interest-only lending removed, effective January 1, 2019) - 2018 (year of capital adequacy refinements) - 2020 (planned next FATF assessment) ### Housing markets and policy recommendations - Core assessment - Supply reforms critical to restoring affordability; correction alone insufficient. - Underlying demand expected to remain strong due to population growth. - Planning, zoning, and supply-side reforms should not be delayed. - Tax and housing policy options: - Replace stamp duties with broader land taxes. - Consider, within broader tax reform: gradual lowering of capital gains discounts; limits on negative gearing; a more limited capital gains tax exemption for owner-occupiers. - Reconsider discriminatory measures on nonresident buyers and prefer non-discriminatory alternatives (e.g., general surcharge on vacant property). - Role of City Deals: useful catalyst for development; Regional Deals to extend reach. Housing market facts and indicators (selected) - National housing prices peaked in 2017Q3. - Housing prices declined 2.3 percent in real terms since 2017Q3 (ABS index). - Sydney and Melbourne account for about 60 percent of the nation’s housing value. - House price index series (selected years): 2017 148, 2018 141, 2019 135, 2020 136, 2021 137, 2022 141, 2023 144, 2024 148. - House price % change series (selected years): 2017 5.0, 2018 -4.4, 2019 -4.1, 2020 0.3, 2021 1.0, 2022 2.5, 2023 2.5, 2024 2.5. - House price-to-income, capital cities (ratio): 2017 4.8, 2018 4.5, 2019 4.1, 2024 3.5. - Household debt (percent of disposable income): 2017 187, 2018 188, 2019 176, 2024 165. ### Banking system resilience and indicators - Major banks: highly rated, profitable; capital and liquidity substantially stronger than a decade earlier. - Regulatory ratios (selected): - Regulatory capital to risk-weighted assets 2018Q3: 14.7 percent. - Regulatory Tier I capital to risk-weighted assets 2018Q3: 12.7 percent. - Nonperforming loans to total gross loans 2018Q3: 0.9 percent. - Return on equity, banking sector 2018Q3: 19.7 percent (Table 5 entry). - Funding: reduced short-term offshore wholesale funding; increased domestic deposits. ### Public finances, DSA highlights, and infrastructure - Net lending/borrowing 2018: -1.2 percent of GDP; projected improvement toward 0.0 percent by 2022–2024. - Gross debt (percent of GDP) series: 2018 40.7, 2019 41.4, 2020 40.8, 2024 36.7. - Net debt (percent of GDP) series: 2018 18.4, 2019 19.3, 2020 20.6, 2024 17.0. - Public DSA baseline assumptions (selected): - Real GDP growth: 2019 3.0, 2020 2.7, 2021 2.6. - Inflation (GDP deflator): 2019 1.7, 2020 1.0, 2021 2.1. - Effective interest rate: 2019 3.0, 2020 3.0, 2021 3.0. - Infrastructure: closing gaps could raise GDP by about one percent in the medium term; average forecasted annual infrastructure gap roughly 0.35 percent of GDP through 2040 for basic infrastructure. ### External position and REER assessment - Current account balance: 2018 projection -2.4 percent of GDP; 2017 -2.6 percent of GDP. - Staff-adjusted 2018 CA gap assessed around -1.0 percent of GDP; staff-assessed range -0.5 to -1.5 percent of GDP. - NIIP around -54 percent of GDP at end-2017; expected to remain around -53 percent of GDP medium term. - REER: appreciated by 2.9 percent in 2017 relative to 2016; as of December 2017 REER about 11 percent above thirty-year average; up to November 2018 REER depreciated by 4.8 percent relative to 2017 average. - Staff assesses 2017 REER to be 0 to 17 percent above fundamentals; 2018 depreciation narrowed overvaluation to 0 to 13 percent. ### FSAP findings and Annex V key recommendations (selected) - FSAP stress tests: ten largest banks resilient to a combined shock though some capital pressure and liquidity vulnerabilities due to wholesale funding reliance. - Key FSAP recommendations (selected, short/medium/important timeframes noted in source): - Strengthen independence and budgetary autonomy of APRA and ASIC; enhance APRA supervisory approach; integrate systemic risk analysis and stress testing into supervision. - Improve quantity, quality, granularity, and consistency of data for CFR agencies. - Complete resolution policy framework and expedite bank-specific resolution plans; expand loss-absorbing capacity. - Expand AML/CFT regime to cover DNFBPs and strengthen supervision (AUSTRAC, Department of Home Affairs, Treasury). ### Staff appraisal and policy guidance (summary) - Rebalancing has advanced; growth above potential in early 2018 but slowed in 2018Q3. - Labor market improving; wage growth subdued; inflation near but below RBA target midpoint. - Policy recommendations: - Maintain accommodative monetary policy until clear upward pressures on wages and prices. - Continue infrastructure investment boost; prioritize sequencing and implementation given capacity constraints. - Preserve prospective fiscal surpluses and resist premature permanent tax cuts or spending increases. - Hold the course on prudential lending standards and expand macroprudential toolkit readiness. - Pursue housing supply reforms and broader tax reform (shift from stamp duties to land taxes, broaden GST base then consider rate, consider limits on negative gearing and capital gains discounts within broader reform). *IMF staff summary of chapter 2 and associated annexes from content unit 1ausea2019008.* ### 2. Australia’s Housing Price Correction in Perspective ____________________________________________ 29 ### 2. Australia’s Housing Price Correction in Perspective ### Context - Australia is on the final leg of rebalancing and adjustment after the end of the commodity price and mining investment boom. - Exchange rate flexibility and monetary easing have moderated adverse demand impacts. - Export orientation toward dynamic Asia economies and rapid population growth supported by immigration have helped adjustment. - Adjustment has been protracted with weak inflation and low wage growth amid persistent economic slack. - Nominal wage growth has started to pick up but has not yet contributed significantly to inflation, which has remained below the Reserve Bank of Australia’s (RBA’s) target range of 2 to 3 percent. - The housing market cooled after a long boom, but accumulated vulnerabilities are high: - Household debt has risen to around 190 of households’ gross disposable income. - Housing assets have become overvalued. - Commercial bank exposure to residential real estate has remained substantial at over 50 percent of total assets. - Structural challenges and exposures: - Benefitted from China’s rapid growth but now more exposed to China-related risks. - Infrastructure gaps after more than a decade of rapid population growth. - Challenges of urbanization, agglomeration, and housing supply constraints. - Productivity growth has been lagging; potential growth lower since the GFC. ### Recent developments (Over the past year) - Growth and demand: - Annual growth picked up to 3.0 percent in 2018Q1-Q2 driven by solid private and public consumption and residential investment. - Mining investment stabilized after a sharp contraction, supporting a rebound in Western Australia. - Growth slowed in 2018Q3 as private consumption and non-mining business investment moderated; public investment increased. - Household saving ratio declined further reflecting weak disposable income growth. - Labor markets: - Unemployment rate declined to 5.1 percent in November, closer to staff’s estimate of NAIRU of 4.8 percent. - Underemployment rate remains well above its longer-term average despite starting to decline. - Wage growth remains weak though recently starting to pick up; factors include higher labor force participation by female and older workers, sticky wage contracts, and structural change. - Prices and inflation: - Headline inflation has hovered around the floor of the RBA’s 2-3 percent target range. - Strong retail competition and one-off declines in some administrative prices have weighed on core and headline inflation. - External position: - Current account deficit narrowed substantially in 2017 and 2018, reflecting stronger terms of trade and a ramp-up in new resource exports including liquified natural gas. - Preliminary mid-point estimate of the current account gap in 2018 is -1.0 percent of GDP. - Current account deficit projected to remain within 2½-3 percent of GDP over the medium term, lower than the historical average. - Housing market: - House prices rose by 70 percent at the national level over the past decade; roughly 100 percent in Sydney and 90 percent in Melbourne; they have started to decline. - Cooling evident in lower turnover and lower public auction clearance rates. - Contributing factors to cooling: tightening credit supply, increased housing supply coming to market, easing domestic and foreign demand. - Rental vacancy rates have remained stable or declined in smaller capital cities; new dwellings for rent absorbed by strong population growth. - Residential investment growth picked up in the first three quarters of 2018; pipeline of pending residential construction remained strong. - Mortgage credit and banking: - Mortgage credit cycle peaked in mid-2015; annual housing credit growth slowed to 5 percent in October 2018. - Growth in lending to investors much lower following prudential measures in April 2017 targeting interest-only loans. - Banks reportedly tightened lending standards further amid Royal Commission findings and asset quality risks. - Major banks raised mortgage rates by 14-16 basis points in September and October 2018. - Interest rates for new mortgages remained lower than those of existing mortgages due to competition for high credit-quality borrowers. - Housing loan delinquencies trending up but remain at low levels. - Banks are well capitalized and profitable; capital levels high relative to international comparators. - Banks’ dependency on wholesale funding reduced but remains substantial at about one-third of total liabilities, of which two-thirds are from external sources. ### Outlook - Growth: - Economy expected to adjust toward potential growth, full employment, and inflation well within the target range; process will be gradual. - Growth should gradually moderate to that of potential output. - Rebound in non-mining private business investment and public infrastructure spending projected to offset expected contraction in dwelling investment in near term. - Mining investment projected to increase at a rate consistent with capital stock maintenance. - Private consumption growth predicted to remain close to potential output growth, supported by employment gains and gradual wage increases but tempered by debt reduction and higher saving rates. - Net exports expected to contribute less to growth due to drought-related supply declines, end of LNG ramp-up, and lower growth in China and the global economy. - Inflation: - Forecast to return to the midpoint of the target range over the next two to three years. - Output and unemployment gaps expected to close, underemployment to decline, leading to upward pressure on wages and prices. - Near-term disinflationary effects from retail competition and recent one-off administered price declines to weigh on inflation. - Housing market correction: - Expected to be mild and short-lived; assumed to continue over the next year or so with some contraction in dwelling investment and further price declines. - Negative feedback effects on banks’ asset quality and the real economy expected to remain modest in context of continued strong growth and improving labor markets. - Underlying demand for housing expected to hold up because of robust population growth, eventually leading to a house price rebound. - Negative credit supply shock expected to ease as banks enforce stricter lending standards in anticipation of banking royal commission recommendations due in February 2019. - House price overvaluation should decrease; household debt ratios should stabilize and then decline. - Potential output: - Potential output growth forecast to stabilize at 2.6 percent in the medium term. - Productivity has recovered somewhat despite diminishing capital deepening since the end of the mining investment boom. - Trend TFP assumed broadly stable with a small increase due to increased infrastructure investment and higher R&D spending. - Labor input projected to grow steadily with immigration maintaining population growth and potential higher labor force participation by female and older populations. ### Risks - Overall: Downside risks to economic growth have increased with a less favorable global risk picture, the housing market downturn, and uncertainties about domestic demand. - External risks: - High exposure to China via exports (coal, iron ore, tourism, and education services) makes Australia vulnerable to US-China trade tensions and China’s rebalancing. - These risks could delay closure of the output gap, though there are also near-term upside risks to the terms of trade. - A sharp tightening of global financial conditions could spill over into domestic markets, raising funding costs and lowering debtor disposable income; impact partly depends on Australian dollar response. - Domestic risks: - Housing market correction may be deeper and longer than anticipated, especially if banks are overly cautious in extending credit. - Larger negative shocks could interact with and amplify the housing correction. - Domestic demand could be weaker if wage growth remained subdued or investment spillovers were smaller. - Conversely, stronger non-mining business pickup, larger spillovers from public infrastructure investment, and Australian dollar depreciation could boost near-term growth. - Over the medium term, potential output growth could be lower if TFP weakens or higher with effective structural reforms. - Estimated impact of interest rate changes: - Alternate scenario assumes a 1 percentage point increase in interest rates; implicit figures shown for interest payment and DSTI in the source tables. ### Authorities’ views on outlook and risks - Authorities expected near-term growth to remain around 3 percent, a little above estimates of potential growth. - By 2020, housing investment expected to slow and LNG exports expected to reach capacity. - Remaining labor market slack expected to diminish steadily; pickup in wage growth and inflation expected to be gradual due to labor market slack and retail competition. - Authorities emphasized the housing market correction has been orderly within a strong economy, with declines in Sydney and Melbourne considered against previously large price increases. - Downside risks from the housing correction include excessive moderation in credit flows from banks overreacting to the royal commission, market participants’ strong caution, or interaction with other negative shocks amid high household debt. - Authorities expected the impact of the housing correction on consumption via wealth effects to be small but noted uncertainty given low wage growth amid household debt. - Authorities agreed downside risks had increased with a less favorable global risk picture; exchange rate flexibility expected to mitigate some impacts through typical Australian dollar depreciation in adverse scenarios. *IMF staff summary of chapter 2, "Australia’s Housing Price Correction in Perspective."* ### 16. The monetary policy rate has been on hold at 1.5 percent since August 2016. The ### 16. The monetary policy rate has been on hold at 1.5 percent since August 2016. The ### Monetary policy stance and outlook - Policy rate on hold at 1.5 percent since August 2016. - Monetary policy stance described as accommodative. - Current cash rate implies a slightly negative real policy rate relative to estimates of the real neutral interest rate in the range of 1-2 percent. - Financial conditions broadly unchanged in 2018; a small steepening of the domestic short-term yield curve was broadly offset by depreciation of the Australian dollar. - The RBA has signaled the next move in the cash rate will likely be an increase, but the accommodative stance will be needed for some time given weak inflation. - Staff view: monetary policy should remain accommodative until substantive upward pressures on wages and prices emerge. - Staff concurs with RBA that current stance is sufficiently accommodative for inflation to return gradually to the 2-3 percent target range. - A tightening bias is premature given labor market slack and downside risks to near-term outlook and inflation. - With recent increase in the share of households with high debt, normalization would likely have to be gradual; the cash flow channel (impact of interest payments on disposable income) will likely be relatively more important in transmission. ### Monetary policy contingencies - RBA still has space for further rate reductions from a nominal policy rate of 1.5 percent, though the effective lower bound would be a constraint. - If a country-specific shock occurs, the Australian dollar would likely depreciate in real effective terms, raising expected inflation and nominal interest rates, everything else equal. - Unconventional monetary policy responses: several options exist for the RBA to use its balance sheet within current institutional and legal framework. ### Key numeric references (monetary) - 1.5 percent (policy rate) - real neutral interest rate in the range of 1-2 percent - inflation target range: 2-3 percent --- ### Fiscal policy stance and outlook - Fiscal policy stance has remained supportive; general government expenditure has grown faster than potential output since 2016, partly owing to an infrastructure investment boost. - Commonwealth and general government budget deficits have narrowed, primarily reflecting strong revenue growth, improving cyclical position, stronger terms of trade, and until recently, the housing boom. - Commonwealth Mid-Year Economic and Fiscal Outlook (MYEFO) of December 2018 incorporated higher spending on education, health care, and aged care, some matching at state level, and increased infrastructure spending. - Real expenditure growth projected to remain above potential output in 2019 due to continued high growth in public investment. - Australia has substantial fiscal space and could consider further increases in infrastructure spending, but capacity constraints have held back implementation. - Appropriate sequencing of projects between levels of government and regions, especially Melbourne and Sydney, is important. ### Medium-term fiscal strategy and recommendations - Government’s medium-term fiscal strategy aims to reach a balanced budget by FY2019/20 and run budget surpluses thereafter. - The fiscal path is predicated on further cyclical revenue recovery and remains consistent with continued infrastructure programs and structural reforms under the baseline outlook. - Principle: running budget surpluses in good times has helped preserve fiscal discipline. - Recommendation: projected surpluses under the baseline outlook should not be cut short prematurely through permanent tax cuts or increases in current spending; some recent revenue strength may be more temporary than expected. - Concern: a rigid interpretation of the cap on Commonwealth tax revenue of 23.9 percent of GDP (formalized in the FY2018/19 budget) might not be consistent with the principle of running sustained surpluses in good times. - Consideration: a role for medium-term debt anchors as a complementary element in medium-term fiscal strategies. Options include occasional resetting of the budget balance anchor based on recent debt developments or replacing the budget balance anchor with a debt anchor, with flexibility over the cycle. ### Fiscal contingencies - If downside risks materialize, macroeconomic policy responses need flexibility; with limited conventional monetary policy space, fiscal stimulus would likely need to be part of an effective response. - Commonwealth government expects a return to budget surpluses as of FY2019/20. - FY2018/19 MYEFO showed a further improvement in the underlying cash balance of A$15.0 billion over the four years to FY2021/22. - Government actions in FY2018/19 budget: cancelled the 2019 increase in the Medicare levy and cut PIT for middle and lower income households over the next seven years. - Government formalized a speed limit on tax collection to remain below 23.9 percent of GDP. ### Key numeric references (fiscal) - FY2019/20 (target balanced budget year) - A$15.0 billion (improvement in underlying cash balance over four years to FY2021/22) - 23.9 percent of GDP (cap on Commonwealth tax revenue) - FY2021/22 (end of four-year window for cash balance improvement) - seven years (duration of planned PIT cuts) --- ### Staff views on macroeconomic rebalancing and labor market - Continued macroeconomic policy support is essential for completing rebalancing after the end of the mining investment boom. - Unemployment rate is approaching NAIRU, but labor market slack likely larger than indicated by implied cyclical unemployment rate. - Relatively high underemployment corroborates larger slack; greater role of adjustment along hours-worked dimension in this recovery. - Labor force participation increasing, especially for females and older workers—groups that tend to have stronger responses to cyclical changes. - Cyclical upward pressure on wages will likely emerge only with a substantial and uncertain lag once full employment is reached. - Infrastructure investment boost has been a catalyst for rebalancing; uncertainty remains whether rebound in private business investment is strong enough to offset drag from balance sheet constraints on private consumption and expected decline in residential investment. ### Key policy guidance (staff) - Maintain accommodative monetary policy until clearer evidence of upward pressures on wages and prices. - Emphasize commitment to inflation targets and provide clear guidance on when labor market conditions will merit policy normalization. - Normalization should be gradual given high household debt share. --- ### Macrofinancial policies — context - Authorities have pursued a two-track approach addressing asset- and liability-side bank vulnerabilities: - Regulatory emphasis on strong lending standards; caps limiting investor and interest-only lending were removed by end-2018. - Prudential interventions by APRA sought to lower systemic risks from rapid household credit growth and high debt at the outset of the housing boom. - APRA removed caps restricting a bank’s annual investor lending growth to 10 percent (effective as of July 1, 2018) and its interest-only lending to 30 percent of new loans (effective as of January 1, 2019). Removals were conditional on bank assurances of strong lending standards. - Capital adequacy framework refined in 2018: APRA established framework/timeline for minimum leverage ratio and proposed changes to increase banks’ loss-absorbing capacity; introduced tighter liquidity requirements including a net stable funding ratio in line with Basel III. ### FSAP stress test findings - Tests of ten largest banks to a combined shock (significant slowdown in China, sharp real estate correction, tightening global financial conditions) found solvency and liquidity relatively resilient; banks would still meet regulatory minima though some pressure on capital. - Liquidity stress tests revealed vulnerabilities to severe stress given reliance on wholesale funding. - Cross-border exposure risks noted to the United Kingdom, United States, Singapore, Hong Kong SAR, and parent-subsidiary linkages with New Zealand. ### AML/CFT and AUSTRAC - AUSTRAC has increased focus on institutions’ inherent ML/TF risks, prioritized higher risk institutions, and begun work to bring DNFBPs under AML/CFT regime. - Scope exists to increase number of onsite inspections and further improve sanctioning regime. ### Key numeric references (macrofinancial) - 10 percent (cap on annual investor lending growth removed, effective as of July 1, 2018) - 30 percent (cap on interest-only lending removed, effective as of January 1, 2019) - 2018 (year of capital adequacy refinements) - 2020 (planned next FATF assessment) --- ### Staff views on macrofinancial policies and recommendations - Financial vulnerabilities from household debt and house price overvaluation will stay elevated even under an orderly correction; household debt ratios will remain high over the next few years. - Prudential caps helped slow household credit growth and cool housing market; removal of investor lending benchmark had not been binding prior to removal. - Removal of cap on interest-only mortgages provides flexibility in pace of conversions to principal-and-interest loans; recent declines in share of interest-only loans is welcome and should be maintained. - Recommendation: hold the course on stricter lending standards; be prepared to reintroduce caps on interest-only loans if lending standard assurances prove insufficient. - Readiness of an extended macroprudential toolkit should be explored, including: - borrower-based restrictions such as loan-to-value caps, - income-based ratios such as limits on loan (or debt)-to-income, - refined debt-serviceability requirements. - Readiness requires addressing data, legal, and regulatory requirements. ### Regulatory and supervisory strengthening - Two domains for further reinforcement: - Strengthen systemic risk oversight: increase transparency of Council of Financial Regulators (CFR) work on systemic risk identification and mitigation; improve granularity and consistency of data collection/provision. - Bolster financial supervision and crisis management: increase independence and budgetary autonomy of regulatory agencies; strengthen supervisory approach in governance, risk management, and conduct; enhance stress testing for solvency, liquidity, and contagion risks; strengthen integration of systemic risk analysis and stress testing into supervision; complete resolution policy framework and expedite development of bank-specific resolution plans. - Recent announcements of additional funding for regulatory agencies are welcome. --- ### Authorities’ views (selected) - RBA: expects to keep policy rate on hold in near term given forecast of gradual progress on employment and inflation objectives; pickup in wage growth likely necessary for sustained inflation in target range; emphasized considerable uncertainty; noted mortgage lending rates remain low for high quality new mortgage loans despite higher bank funding costs. - Government: highlighted stronger budget outturn and earlier return to budget surpluses by the Commonwealth; FY2018/19 budget improvements provided space for policy measures described above; states also intend to increase infrastructure spending and run surpluses where possible but are concerned about capacity constraints. - Authorities agreed a severe negative shock might require combined monetary and fiscal response; unconventional monetary tools available; response would depend on nature of shock. - On financial supervision: officials noted banks remain strongly capitalized with considerable liquidity buffers and generally manage credit risk effectively; emphasized that enforcement of tightened lending and governance standards is now the main challenge. *Source: IMF staff report excerpt (Australia). ### 37. The authorities are in broad agreement with the thrust of the FSAP’s findings and ### 1ausea2019008 - 37. The authorities are in broad agreement with the thrust of the FSAP’s findings and ### Authorities’ response and transparency - The authorities are in broad agreement with the thrust of the FSAP’s findings and recommendations. - The CFR is taking steps to enhance the transparency of its operations and recently released its first quarterly statement following its December meeting. The statements will outline the main issues discussed at each CFR meeting. - Authorities noted shortfalls in the granularity and consistency of data to support analysis of supervisory and systemic risks and the formulation of policy. - Recommendation: additional investment in data and in analytical tools to address these shortfalls. ### Housing markets and policies — Context - The housing market correction is helping housing affordability by moderating foreign and domestic investor demand, enhancing opportunities for first-time home buyers and owner-occupiers. - Supply-side progress: use of City Deals to integrate planning and infrastructure delivery for new developments and redevelopments (example: City Deal for western Sydney around the new airport). - Two states introduced or announced housing-related tax policy measures discriminating between residents and non-residents since the last Article IV Consultation: - Western Australia: announced in its FY2017/18 budget a foreign purchaser duty (stamp duty) surcharge of 4 percent on residential property acquired by foreign individuals, corporations, and trusts to be introduced on January 1, 2019; the FY2018/19 budget increased the rate to 7 percent. - Tasmania: announced in its FY2018/19 budget a foreign purchaser duty surcharge of 3 percent on residential property acquired by foreign residents with an additional 0.5 percent of the dutiable value for all purchases of primary production land by foreign residents, effective July 1, 2018. - These measures would be assessed as capital flow management measures (CFMs) under the IMF’s Institutional View on Capital Flows. ### Housing markets and policies — Staff’s views and recommendations - Core assessment: - Housing supply reforms remain critical to restoring housing affordability; the housing market correction alone is unlikely to be sufficient for inclusive, broad-based affordability and growth. - Underlying demand for housing is expected to remain strong due to a robust economic growth outlook and high population growth in urban areas. - Planning, zoning, and other supply-side reforms affect supply and prices with long lags; therefore, supply reforms should not be delayed. - Role of City Deals: - City Deals are a useful catalyst for large-scale urban development/redevelopment but have limited reach; Regional Deals envisaged by the government would extend reach. - Some states should pursue further streamlining and consolidation in planning and zoning regulation. - Tax and housing-related policy recommendations: - Replace stamp duties with broader land taxes to strengthen incentives for efficient land use. - Within broader tax reform, consider: - Gradual lowering of capital gains discounts. - Limits on negative gearing for investors to reduce structural incentives for leveraged household investment in residential real estate. - A more limited capital gains tax exemption for owner-occupiers. - Reconsider housing policy measures discriminating nonresident buyers as foreign buyer role has started to decline; replace discriminatory measures with alternative non-discriminatory measures where possible (e.g., a general surcharge on all vacant property). ### Housing markets and policies — Authorities’ views - New South Wales and Victoria noted that the fall in housing prices in Sydney and Melbourne was larger than originally projected in their budgets. - Despite limited progress on zoning and planning reform, authorities expected house prices to find support from housing demand and supply factors. - Authorities highlighted City Deals as important tools to foster urban housing supply; 2018 deals agreed or announced included Darwin, Geelong, Hobart, and Perth. - Plans underway to pilot Regional Deals outside major urban areas. ### Fostering growth — Context - Government structural policy agenda targets areas identified by the Productivity Commission and the OECD. - Multifactor productivity growth increased but remains below some peers. - Policy efforts focused on: addressing infrastructure gaps, strengthening innovation and R&D capacity, reducing the gender gap in labor force participation, and lowering corporate and personal income tax rates. - Recent tax and revenue-sharing reforms: - Personal income tax (PIT) cuts announced in the FY2018/19 budget and approved by Parliament; the cuts will be phased in over seven years, starting this fiscal year, improving progressivity and favoring lower income groups. - Company tax reform: reduction to 25 percent by FY2021/22 legislated for small companies with turnover below A$50 million; reduction for larger companies was defeated in the Senate. - Horizontal fiscal equalization (HFE) reform completed in November 2018, revising GST redistribution to states. - Energy policy: 2017 energy price volatility motivated the 2017 Independent Review into the Future Security of the National Electricity Market (the “Finkel review”), leading to reforms and contributing to reduced electricity prices in 2018. No agreement yet on nationally integrated policies to meet greenhouse gas emissions commitments under the Paris Agreement. ### Fostering growth — Staff’s views and recommendations - Closing macro-critical gaps (infrastructure, gender equality, R&D, energy policy, and general tax reform) should strengthen productivity growth. - Infrastructure: - There is scope to further expand infrastructure spending to stimulate productivity. - Closing the infrastructure gap could raise GDP by about one percent in the medium term. - Average forecasted annual infrastructure gap of roughly 0.35 percent of GDP through 2040 for basic infrastructure (roads, rail, water, ports), plus an additional gap in social infrastructure (schools, hospitals, prisons) likely of a lesser magnitude. - Latest budget spending has greatly reduced near-term gaps, but planning for additional spending should be expedited given long project lead times and rapid population growth in Sydney and Melbourne. - Innovation and R&D: - Spending on R&D has increased over the past decade. - Main phase of NISA ending in FY2018/19, but funding for new research infrastructure over the next 12 years increased by A$1.9 billion. - R&D tax credit reform focused on reducing abuses by larger firms; staff suggests providing larger tax credits and incentives to benefit young firms (SMEs), perhaps targeted to specific sectors. - Further innovation work in education recommended, aligned with Australia 2030: Prosperity through Innovation and Productivity Commission’s Shifting the Dial. - Tax reform: - Broad tax reform would support productivity and inclusive growth. - The share of direct taxes in Australia’s federal tax revenue is higher than the OECD average. - Recommendation: combine CIT and PIT reforms with measures to raise GST revenues in a revenue-neutral manner to rebalance toward indirect taxation. - To increase GST revenues: first broaden the tax base, then consider appropriate tax rate; offset regressive impacts via an income-based tax rebate scheme funded in part by reducing overly generous tax concessions. - Shift from land transfer stamp duties to a general land tax on efficiency grounds. - Energy policy: - Continued progress on energy policy should reduce investment uncertainty. - Clarification of policies to achieve greenhouse emissions targets will help reduce uncertainty. - Trade: - Staff welcomes authorities’ commitment to the global multilateral trading system; Australia has maintained highly open trade and investment regimes and ratified CPTPP (TPP-11). ### Fostering growth — Authorities’ views - Energy reform: Commonwealth and states undertook reforms to gas market, networks, wholesale and retail electricity markets; pursuing further reforms per ACCC recommendations to improve competition and reduce electricity prices. - Most recommendations of the Finkel review have been or will be implemented, including establishment of the Energy Security Board. - Commonwealth commitment: reduce carbon emissions by 26 to 28 percent on 2005 levels by 2030 (as in the Paris Agreement) and on track to meet its 2020 Kyoto target. - Innovation: NISA has delivered additional R&D infrastructure funding; R&D tax credit regime reformed for more efficient private-sector use; implementation of recommendations from the 2030 Strategic Plan for the Australian Innovation, Science, and Research System. - Tax reform: authorities agree on the merit of tax reform but note difficult political economy; CIT reform plan defeated but PIT reform and HFE mechanism reforms passed. - Under HFE reform (from FY2021/22): GST will transition over six years to equalizing to the fiscal capacity of the stronger of either New South Wales or Victoria; all states will be better off at least until FY2026/27 when it will be revisited by the Productivity Commission. - Trade: government remains committed to free trade, pursuing RCEP and other bilateral agreements, supports WTO measures and reforms. ### Staff appraisal — macro outlook and policy stance - Economic rebalancing has advanced: growth picked up to rates above potential in the first half of 2018 but slowed in 2018Q3. - Labor market: strong employment growth and declining unemployment; wage growth remained weak; inflation hovered just below the lower end of the RBA’s target range. - External position: current account deficit shrinking in 2017-18; external position broadly consistent with medium-term fundamentals and desired policies. - Outlook and risks: - Economy expected to reach full employment over the next two to three years, but downside risks to the growth outlook have increased. - Strong growth in private and public investment should more than offset weaker dwelling investment as the housing market correction continues. - Constraints: growth in resource exports will be constrained by capacity; modest wage growth, high household debt, and declining house prices will weigh on private consumption near term. - Balance of risks is tilted to the downside given global risk deterioration and potential deeper housing market correction. - Policy recommendations: - Maintain macroeconomic policy support until full employment and inflation in the target range are firmly within reach. - The infrastructure investment boost will be a critical source of near-term demand strength. - With the cash rate at 1.5 percent, monetary policy is appropriately accommodative; normalization should depend on firmer upward pressures on prices. - Fiscal policy: government’s medium-term fiscal plans target budget surpluses from FY2019/20; surpluses should not be precluded by premature permanent tax cuts or expenditure increases given uncertainty about cyclical vs. structural revenue strength. - Consider a complementary role for a debt anchor in Australia’s fiscal framework given large medium-term swings in net public-debt-to-GDP ratios since the GFC. *Source: 1ausea2019008 - 37. The authorities are in broad agreement with the thrust of the FSAP’s findings and* ### 60. With limited conventional monetary policy space, the macroeconomic policy response ### 60. With limited conventional monetary policy space, the macroeconomic policy response ### Monetary and fiscal policy response - With limited conventional monetary policy space, the macroeconomic policy response needs to be flexible if downside risks to growth materialize. - Discretionary fiscal stimulus may need to complement monetary easing in economic downturns more frequently than it has in the past. - With substantial fiscal space, the effectiveness of the fiscal policy response will depend critically on the readiness for deployment. ### Macroprudential policy and household debt - Managing financial vulnerabilities from high household debt requires macro-prudential policy to hold the course on lending standards. - Macroprudential interventions have helped reducing heightened credit risk and reinforcing sound lending standards. - With a cooling housing market, household credit growth has moderated, and the need for temporary prudential intervention to manage risks to financial stability has declined. - Significant structural financial system vulnerabilities remain, and household debt will remain high, with an orderly housing market correction. - Recommendations: - Maintain improved lending standards. - Further strengthen banks’ resilience through refining the capital adequacy framework. - Expand and strengthen the macroprudential toolkit to provide more flexible responses to future financial stability risks. ### Systemic risk oversight, supervision, and resolution - The systemic risk oversight of the financial sector could be strengthened. - The transparency of the work of the CFR on systemic risks should be strengthened, following FSAP recommendations. - Supervision and financial crisis management arrangements should be further improved in several areas, including: - Increased independence and budgetary autonomy of the regulatory agencies. - A strengthened supervisory approach. - An enhanced stress testing framework. - The authorities should also: - Strengthen the integration of systemic risk analysis and stress testing into supervisory processes. - Complete the resolution policy framework. - Expedite the development of bank-specific resolution plans. ### Housing supply and tax policy - Housing supply reforms are critical to restoring housing affordability. - The ongoing price correction will help mitigate pressures on affordability. - With the baseline demand outlook for housing still robust and no signs of significant oversupply, meeting needs of a growing urban population will require strengthening the supply response beyond the current cycle through continued reform. - In the context of broader tax reform, changing key tax policy parameters affecting housing demand and land use, including replacing stamp duties with broad-based land taxes, would strengthen the effectiveness of supply-side measures. - Housing policy measures discriminating between resident and nonresident buyers should be reconsidered as the role of the latter in residential real estate market has started to decline. ### Structural policy agenda - The structural policy agenda appropriately targets innovation, infrastructure gaps, tax reform, and energy policy, although progress has been limited in some areas. - Infrastructure spending envelope could be further increased to close remaining gaps to relieve congestion and maintain existing infrastructure capital. - Tax reform would benefit from a broader approach, focusing on a greater role in the tax system for more efficient taxes with stable bases, such as the GST and land taxes, while reducing tax concessions. - Clarifying energy and greenhouse gas emissions policies would reduce policy uncertainty and catalyze investment in at least the energy sector, if not more broadly in the economy. ### Recommendation on Article IV timing - It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Box 1 — Implications of Greater Female and Old-Age Labor Force Participation: key findings - Labor force participation (LFPR) drives short- and long-term movements in labor supply; cyclical and structural components have macroeconomic implications. - Aggregate LFPR rose from 63.8 percent in 2000 to 66.3 percent in 2017. - Prime-age female and old-age LFPRs increased by 7 and 12 percentage points over 2000-17, respectively; LFPR for prime-age men remained flat. - A pickup in female and old-age LFPRs in 2017 contributed significantly to a rebound in labor inputs growth: total hours worked grew 3.2 percent (year-over-year) in 2017Q4. - Population share aged 65 and above rose from 12.5 percent in 2000 to 15.6 percent in 2017. - Over 2000-17, labor force grew by 1.9 percent annually; LFPR increase contributed 0.2 percentage points, while working age population growth contributed 1.7 percentage points. - LFPR is responsive to cyclical labor market conditions: recent cycle started in 2011, unemployment peaked in 2014, LFPR declined over 2011-14 and rebounded since 2014 as labor market tightened. - The LFPR has a significant cyclical component with large cyclical sensitivity for the young, prime-age females, and old-age males. - Rising labor force participation by females and old-age people may have flattened Australia’s labor supply curve, possibly weakening the transmission channel from aggregate demand to wages. ### Box 2 — Australia’s Housing Price Correction: key findings - National housing prices peaked in 2017Q3. - Based on the price index released by the Australian Bureau of Statistics, housing prices have declined 2.3 percent in real terms since 2017Q3. - The price correction has been led by declines in Sydney and Melbourne, which account for about 60 percent of the nation’s housing value. - Australia has experienced five national housing price downturns over the past 3 decades; in three episodes, housing prices fell by more than 5 percent in real terms. - The 1989-91 downturn coincided with a recession; the other two major downturns occurred during the Global Financial Crisis in 2008 and in the final stretch of the mining investment boom, when monetary policy was normalized and Australian banks raised the level and quality of their capital. *IMF staff summary of the content unit* ### Box 2. Australia’s Housing Price Correction in Perspective (concluded) ### Box 2. Australia’s Housing Price Correction in Perspective (concluded) ### Housing market downturn: features and drivers - Common features with past episodes: - Occurs against a domestic environment of strong growth, relatively low interest rates, and low unemployment, as in 2010-12. - Price corrections in Sydney and Melbourne are sharper than the national average. - Important differences from past episodes: - Slowdown in mortgage credit growth (notably investor and interest-only loans) has not coincided with monetary policy tightening. - Banks have strengthened lending standards in response to tightening macroprudential measures rather than a higher policy rate. ### International context and common factors - Advanced-economy housing markets that cooled after booms include Canada, Sweden, and the United Kingdom. - Shared drivers across these markets and Australia: - Low interest rates. - Relatively strong growth. - Foreign investor interest (to varying degrees). - Bottoming out of global interest rates and tightening macroprudential policies likely common contributors to cooling. ### Macroeconomic adjustment and rebalancing after the mining boom - Growth and investment patterns: - Growth picked up in 2018H1 but remains lower on average than pre-Global Financial Crisis. - Mining investment declined sharply after a long boom but appears close to bottoming out. - Rebalancing from domestic to external sources of growth has moderated the growth impact of the mining bust. - Private consumption grew ahead of income in past years; business investment has begun to strengthen and residential investment rebounded in 2018. - Indicators and projections (Table 1 highlights): - Real GDP growth (y/y % change) series shows recent readings; projection path indicates Real GDP around 2.6 percent in 2019–2024 (annual projections line in Table 1: 2019 2.7, 2020 2.6, 2021 2.6, 2022 2.6, 2023 2.6, 2024 2.6). - Output gap (percent of potential) projected to be around 0.0 in 2022–2024 (Table 1: Output gap entries include -0.2, -0.1, -0.1, 0.0, 0.0). ### Housing market imbalances and vulnerabilities - Valuation and affordability: - Australia experienced large house price increases similar to other buoyant markets. - Upward shifts in valuation metrics and downward shifts in affordability metrics are evident. - Household debt ratios among the highest in advanced economies. - Residential investment and recent readings: - High house prices triggered a minor residential investment boom. - Recent indicator readings suggest a cooling in the housing market. - Exact house price statistics (Table 1 and Figure notes): - House price index series: 2014 120, 2015 131, 2016 141, 2017 148, 2018 141, 2019 135, 2020 136, 2021 137, 2022 141, 2023 144, 2024 148. - House price % change series: 2014 6.7, 2015 8.7, 2016 7.7, 2017 5.0, 2018 -4.4, 2019 -4.1, 2020 0.3, 2021 1.0, 2022 2.5, 2023 2.5, 2024 2.5. - House price-to-income, capital cities (ratio) by year: 2014 4.2, 2015 4.5, 2016 4.7, 2017 4.8, 2018 4.5, 2019 4.1, 2020 3.9, 2021 3.8, 2022 3.7, 2023 3.6, 2024 3.5. - Household debt (percent of disposable income): 2014 167, 2015 173, 2016 180, 2017 187, 2018 188, 2019 176, 2020 174, 2021 171, 2022 169, 2023 167, 2024 165. ### Monetary policy stance and financial conditions - Reserve Bank of Australia policy: - The RBA has kept the policy rate at 1.5 percent since August 2016. - Market expectations: markets expect policy rates to remain stable at 1.5 percent in 2019 (Figure descriptions). - Inflation, wages, and yields: - Consumer price inflation rose from its 2016 low, driven by a pickup in nontradable inflation. - Wage growth has started to pick up. - Yield curves and yield levels: 10-year treasury bond yield (percent, avg) series in Table 1 shows 2018 2.8, 2019 3.2, 2020 3.5, 2021 4.0, 2022 4.5, 2023 5.0, 2024 5.1. - Financial conditions: - Financial conditions have remained stable, with increases in domestic money market rates offset by real currency depreciation. ### Banking system resilience - Key indicators: - Major banks are highly rated and profitable after higher capital and liquidity requirements. - Return on equity: Australia series shows recent levels (Figure 6): 2018 Return on Equity around 12–14 percent for major banks; Table 5 lists Return on equity 2018Q3 19.7 percent (banking sector). - Tier 1 capital and risk-weighted assets: Tier 1 capital ratio increased; Table 5 shows Regulatory capital to risk-weighted assets 2018Q3 14.7 percent; Regulatory Tier I capital to risk-weighted assets 2018Q3 12.7 percent. - Banks’ lending concentrated in housing: banks’ lending to housing increased as share of total lending. - Funding profile: reduced share of short-term offshore wholesale funding; increased funding from domestic deposits. - Non-performing loans to total gross loans were low: Table 5 reports 2018Q3 nonperforming loans to total gross loans 0.9 percent. ### Public finances and infrastructure focus - Fiscal position and trends: - General government net lending/borrowing trajectory: Table 1 net lending/borrowing for 2018 -1.2 percent of GDP; projections show improvement toward 0.0 percent of GDP by 2022–2024. - Gross debt (percent of GDP) series from Table 1: 2018 40.7, 2019 41.4, 2020 40.8, 2021 40.1, 2022 39.3, 2023 37.9, 2024 36.7. - Net debt (percent of GDP) series: 2018 18.4, 2019 19.3, 2020 20.6, 2021 20.3, 2022 19.8, 2023 19.1, 2024 17.0. - Infrastructure: - Governments increased infrastructure investment relative to the FY2017/18 budgets; announced infrastructure spending is shown as percent of GDP (Figure 5). ### External position, current account, and real exchange rate assessment - Current account and external balances: - Current account balance: 2018 projection of -2.4 percent of GDP; CA in 2017 was -2.6 percent of GDP. - Staff projection: Projected CA -2.4; Cyclically Adjusted CA -2.6. - EBA CA Norm reported as -0.6; EBA CA Gap -2.0. - Staff-adjusted CA gap assessed around -1.0 (Staff Adj. -1.0; Staff CA Gap -1.0). - Staff view: adjusted 2018 CA gap assessed to be in the range of -0.5 to -1.5 percent of GDP. - Net international investment position (NIIP): - NIIP around -54 percent of GDP at end-2017; improved by 3 percent of GDP in 2017 relative to 2016. - NIIP expected to remain around -53 percent of GDP over the medium term. - Real exchange rate (REER) assessment: - REER appreciated by 2.9 percent in 2017 relative to 2016 average; as of December 2017 REER about 11 percent above its thirty-year average. - Up to November 2018, REER depreciated by 4.8 percent relative to the 2017 average. - Staff assesses the 2017 REER to be 0 to 17 percent above the level implied by fundamentals; real depreciation in 2018 narrowed overvaluation to 0 to 13 percent. - Technical note: for 2018, REER index and level models imply an overvaluation of 2 and 13 percent respectively; CA gap implies overvaluation of 5 percent (with elasticity 0.2); ES approach suggests REER broadly in line. ### Policy considerations and potential responses - Macroprudential and supervisory: - Banks tightened lending standards in response to macroprudential measures; this has contributed to the slowdown in mortgage credit growth, particularly investor and interest-only loans. - Monetary policy: - If growth weakens or commodity prices fall again, further monetary accommodation would be warranted; the RBA policy rate has been 1.5 percent since August 2016. - External and FX posture: - Australia’s floating exchange rate regime and strong fiscal position limit external vulnerabilities; FX intervention needs are limited given liabilities largely in A$ and hedged foreign-currency asset position. - Fiscal stance: - Public finances remain focused on infrastructure and lowering debt; Commonwealth consolidation continues while States and Territories maintain small deficits. *Source: IMF staff summary of "Box 2. Australia’s Housing Price Correction in Perspective (concluded)" from the provided IMF country report content.* ### Annex I. External Sector Assessment ### 1ausea2019008 - Annex I. External Sector Assessment ### Risk Assessment Matrix — Domestic risks - Stronger recovery momentum - Likelihood: M - Time horizon: Short term - Impact: M - Findings: - Non-mining business investment could recover faster with higher public infrastructure investment, which would boost domestic demand and growth. - The Australian dollar would likely appreciate; monetary policy tightening if output gap closes faster than expected and inflation is above the target range mid-point. - Policies to reduce impact: - Monetary policy tightening if output gap closes faster than expected and inflation is above the target range mid-point. - Slowing of economic recovery - Likelihood: M - Time horizon: Short to medium term - Impact: M - Findings: - Consumption growth could be weaker with continued low wage growth and a higher incidence of part-time work, leading to weaker growth and an economic downturn. - Policies to reduce impact: - Monetary policy easing; combined with easier fiscal policy if policy interest rates approaches the zero lower bound. - Severe Housing market downturn - Likelihood: L/M - Time horizon: Short to medium term - Impact: H - Findings: - A sharp housing market correction would lower residential investment and private consumption, and thereby growth. - A negative feedback loop of declining house prices, higher non-performing loans, tighter bank credit, and lower activity could amplify the downturn. - Policies to reduce impact: - Monetary policy easing; fiscal policy stimulus; measures to facilitate mortgage debt restructuring, including selected fiscal intervention. ### Risk Assessment Matrix — External risks - Weaker growth in China - Likelihood: S-T disorderly deleveraging or M-T insufficient progress in rebalancing and deleveraging; specify L (disorderly deleveraging) / M (insufficient progress in deleveraging, rebalancing) - Time horizon: Short to medium term - Impact: H - Findings: - A disorderly deleveraging and insufficient progress in rebalancing in China resulting in large commodity price declines would lead to a downturn in Australia. - Could be exacerbated by an acceleration in the trade dispute with the United States. - Policies to reduce impact: - Combined monetary policy and fiscal policy easing if the policy interest rate approaches the zero lower bound; structural fiscal measures to facilitate adjustment in commodity sectors and regions, including active labor market policies. - Weaker-than-expected global growth - Likelihood: M - Time horizon: Medium term - Impact: M - Findings: - Lower growth in these economies would result in lower commodity prices and commodity consumption, and thereby lead to a downturn in Australia. - Policies to reduce impact: - Monetary policy easing; combined with easier fiscal policy if policy interest rate approaches the zero lower bound. Structural and fiscal reforms to raise productivity. - Sharp tightening of global financial conditions - Likelihood: M - Time horizon: Short term - Impact: M - Findings: - Australia would be affected through direct asset price channels, their impact on international funding conditions of Australian banks, and spillovers from their broader effects on global growth and commodity prices. - Much would depend on investor sentiment toward Australia. - Policies to reduce impact: - The exchange rate would likely act as a shock absorber and dampen the impact; monetary policy easing as needed. - Unsustainable macroeconomic policies - Likelihood: M - Time horizon: Short to medium term - Impact: M - Findings: - A sharp tightening of global financial conditions could spill over into internationally integrated domestic financial markets, raising funding costs and lowering disposable income of debtors, with the impact also depending on the response of the Australian dollar. - Policies to reduce impact: - The exchange rate would likely act as a shock absorber and dampen the impact; monetary policy easing as needed. - Rising protectionism and retreat from multilateralism - Likelihood: H - Time horizon: Short to medium term - Impact: H - Findings: - A rise in protectionism in large economies would reverse trade liberalization and regional integration, reduce global growth and commodity prices and increase financial market volatility. - If China faces a strong impact, it would work directly through trade in commodities, tourism and education services. - Policies to reduce impact: - Monetary policy easing; combined with easier fiscal policy if policy interest rate approaches the zero lower bound. - Continued pursuit of open market policies for trade. - Intensification of the risks of fragmentation and security dislocation - Likelihood: H - Time horizon: Short to medium term - Impact: M - Findings: - Escalated tensions in parts of the Middle East, Africa, Asia, and Europe could lead to some small decrease in external demand for Australia. - It could experience safe-haven capital, leading to a stronger Australian dollar, which could result in a slower pickup in economic activity and inflation. - Policies to reduce impact: - Monetary policy easing; combined with easier fiscal policy if policy interest rate approaches the zero lower bound. - Sizable deviations from baseline energy prices - Likelihood: M - Time horizon: Short to medium term - Impact: L - Findings: - If oil prices increase sharply due to steeper-than-anticipated export declines, real consumer income would be lower. - Prices could drop significantly if downside global growth risks materialize or supply exceeds expectations. - Coal and LNG sectors would be hurt, as would the coal mining states. - Policies to reduce impact: - The exchange rate would likely act as a shock absorber and dampen the impact; monetary policy response if needed. ### External Debt Sustainability — Key scenario figures (Figure 1) - Baseline external debt: 112 (external debt in percent of GDP) - Interest-rate shock scenario: 115 (external debt in percent of GDP) - Historical scenario: 109 (external debt in percent of GDP) - CA shock scenario: 114 (external debt in percent of GDP) - Growth shock scenario: 114 (external debt in percent of GDP) - Combined shock scenario: 115 (external debt in percent of GDP) - Real depreciation shock (one-time real depreciation of 30 percent in 2018 with 80 percent of fx denominated external debts hedged): 115 (external debt in percent of GDP) - Notes: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. ### Public Sector Debt Sustainability Analysis — Baseline scenario (Figure 2) - As of January 03, 2019 - Nominal gross public debt (percent of GDP) by year: - 2016: 23.7 - 2017: 40.5 - 2018: 40.7 - 2019: 40.5 - 2020: 41.0 - 2021: 41.0 - 2022: 39.3 - 2023: 38.4 - 2023 (projection in one table): 37.0 - Public gross financing needs (in percent of GDP) by year: - 2016: 2.9 - 2017: 2.6 - 2018: 1.6 - 2019: 3.6 - 2020: 3.7 - 2021: 3.2 - 2022: 2.9 - 2023: 2.6 - 2023 (projection elsewhere): 3.3 - Real GDP growth (in percent) by year: - 2016: 2.8 - 2017: 2.8 - 2018: 2.4 - 2019: 3.0 - 2020: 2.7 - 2021: 2.6 - 2022: 2.6 - 2023: 2.6 - Inflation (GDP deflator, in percent) by year: - 2016: 2.4 - 2017: 1.0 - 2018: 3.6 - 2019: 1.7 - 2020: 1.0 - 2021: 2.1 - 2022: 2.1 - 2023: 2.3 - 2023 (projection elsewhere): 2.6 - Nominal GDP growth (in percent) by year: - 2016: 5.3 - 2017: 3.9 - 2018: 6.1 - 2019: 4.8 - 2020: 3.7 - 2021: 4.8 - 2022: 4.8 - 2023: 5.0 - 2023 (projection elsewhere): 5.3 - Effective interest rate (in percent) by year: - 2016: 5.9 - 2017: 3.9 - 2018: 3.6 - 2019: 3.0 - 2020: 3.0 - 2021: 3.0 - 2022: 3.0 - 2023: 3.1 - 2023 (projection elsewhere): 3.2 - Sovereign spreads: - EMBIG (bp): -37 - 5y CDS (bp): 78 - Ratings: - Moody's: Aaa - S&P's: AAA - Fitch: AAA - Cumulative change in gross public sector debt (percent of GDP): - 2016: 3.1 - 2017: 2.8 - 2018: 0.1 - 2019: -0.2 - 2020: 0.5 - 2021: -0.8 - 2022: -0.8 - 2023: -0.9 - cumulative: -1.5 and -3.7 (table entries) - Identified debt-creating flows (percent of GDP) by category and cumulative: - Primary deficit (percent of GDP): - 2016: 2.4 - 2017: 1.6 - 2018: 0.6 - 2019: 0.3 - 2020: 0.5 - 2021: -0.2 - 2022: -0.8 - 2023: -0.9 - cumulative: -0.8 and -1.8 (table entries) - Primary (noninterest) revenue and grants (percent of GDP): - 2016: 32.9 - 2017: 34.3 - 2018: 34.5 - 2019: 35.1 - 2020: 35.5 - 2021: 35.5 - 2022: 35.3 - 2023: 35.2 - cumulative: 35.1 and 211.8 (table entries) - Primary (noninterest) expenditure (percent of GDP): - 2016: 35.4 - 2017: 35.9 - 2018: 35.0 - 2019: 35.4 - 2020: 36.1 - 2021: 35.3 - 2022: 34.5 - 2023: 34.3 - cumulative: 34.3 and 209.9 (table entries) - Automatic debt dynamics (percent of GDP) cumulative: -3.8 - Interest rate/growth differential contribution cumulative: -3.8 - Of which: real interest rate cumulative: 2.4 - Of which: real GDP growth cumulative: -6.2 - Other identified debt-creating flows (percent of GDP) cumulative: 4.8 - Stock-flow adjustment, incl. asset change cumulative: 4.8 - Residual, including asset changes cumulative: -2.8 - Assumptions note 9/: Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. - Debt-stabilizing primary balance: -0.2 (balance primary) ### Public DSA — Composition and alternative scenarios (Figure 3) - Underlying assumptions (in percent) — Baseline: - Real GDP growth: 3.0 (2018), 2.7 (2019), 2.6 (2020), 2.6 (2021), 2.6 (2022), 2.6 (2023) - Inflation: 1.7 (2018), 1.0 (2019), 2.1 (2020), 2.1 (2021), 2.3 (2022), 2.6 (2023) - Primary Balance: -0.3 (2018), -0.5 (2019), 0.2 (2020), 0.8 (2021), 0.9 (2022), 0.8 (2023) - Effective interest rate: 3.0 (2018), 3.0 (2019), 3.0 (2020), 3.0 (2021), 3.1 (2022), 3.2 (2023) - Historical scenario assumptions (in percent): - Real GDP growth: 3.0 (2018), 2.6 (2019), 2.6 (2020), 2.6 (2021), 2.6 (2022), 2.6 (2023) - Inflation: 1.7 (2018), 1.0 (2019), 2.1 (2020), 2.1 (2021), 2.3 (2022), 2.6 (2023) - Primary Balance: -0.3 (2018), -2.5 (2019), -2.5 (2020), -2.5 (2021), -2.5 (2022), -2.5 (2023) - Effective interest rate: 3.0 (2018), 3.0 (2019), 3.3 (2020), 3.6 (2021), 4.0 (2022), 4.3 (2023) - Constant Primary Balance Scenario assumptions (in percent): - Real GDP growth: same as baseline - Inflation: same as baseline - Primary Balance: -0.3 each year 2018–2023 - Effective interest rate: same as baseline - Composition of public debt and public gross financing needs are presented by maturity (medium and long-term vs short-term) and by currency (local currency-denominated vs foreign currency-denominated) across projections (figures shown in the source). ### Selected Key Macroprudential Policy Measures, 2014–18 (Annex IV) - Dec 2014 — APRA - Speed limit curtailing annual growth in a bank's investor housing lending to 10 percent; - Serviceability assessments for new mortgage lending to include interest rate buffers of at least 2 percentage points above the effective variable rate applied for the term of the loan, and a minimum floor assessment rate of at least 7 percent to allow borrowers to accommodate future increases in interest rates; and - Supervisors would be alert to high levels of higher-risk mortgage lending with: - high LVR and/or loan-to-income ratio - owner-occupier loans with lengthy interest-only periods - Dec 2014 — ASIC - A review of interest-only home loan was undertaken to determine whether lenders' lending practices complied with responsible lending obligations. - 2015 — APRA - Hypothetical Borrower Exercise (HBE) to assess and compare lending standards across ADIs using serviceability assessments for four hypothetical mortgage borrowers as of December 31, 2014. - Second HBE in late 2015: ADIs least conservative in December 2014 reported a significant drop in calculated net income surplus using September 2015 policies. - Jul 2015 — APRA - Announced an increase in capital adequacy requirements for residential mortgage exposures for ADIs accredited to use the IRB approach effective July 1, 2016. - Requires increase of average risk weights to at least 25 percent from about 16 percent, equivalent of increasing minimum capital requirements for major banks by approximately 80 basis points. - Jan 2016 — APRA - Countercyclical capital buffer (Basel III) incorporated; Australian jurisdictional buffer applying from January 1, 2016 will be zero percent of risk-weighted assets until APRA determines otherwise. - Oct 2016 — APRA - Released for consultation a revised draft of Prudential Practice Guide APG 223 Residential Mortgage Lending to incorporate measures announced or communicated since 2014. - 2016 — APRA - Conducted a thematic review of commercial property lending over 2016. - 2016 — ASIC - Reviewed the lending practices of 11 large mortgage brokers to promote responsible lending and consumer confidence in the credit industry. - Mar 2017 — APRA - Limit the flow of new interest-only lending to 30 percent of new residential mortgage lending, and within that: - Strict internal limits on the volume of interest-only lending at loan-to-valuation ratios (LVRs) above 80 percent; and - Strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 percent; and - Restraint on lending growth in higher risk segments of the portfolio, e.g. high LTI loans, high LVR loans and very long-term loans. - Apr 2018 — APRA - The 10 percent investment lending growth benchmark will no longer apply from July 1, 2018 where an ADI has been operating below it for at least the past 6 months, and the ADI’s Board has provided the required assurance to APRA on both lending policies and practices: - Interest rate buffers above 2 percentage points over the loan product rate, and interest rate floors above 7 percent; - application of these interest rate buffers and floors to both a borrower’s new and existing debt commitments; - discounts on uncertain and variable income, with haircuts of at least 20 percent for most types of non-salary income and expected rental income; - for interest-only loans, an assessment of serviceability for the period over which the principal and interest repayments apply; - prudently managing overrides to lending policies, with risk tolerances set by the Board on the extent of exceptions to serviceability policy (negative serviceability) and serviceability verification waivers; and - developing internal risk appetite limits on the proportion of new lending at very high debt to income levels (where debt is greater than 6 times a borrower’s income), and policy limits on maximum debt to income levels for individual borrowers. - Dec 2018 — APRA - For ADIs that have provided the necessary assurances on their lending standards and are no longer subject to the investor loan growth benchmark of 10 percent, the interest-only benchmark will also no longer apply, effective from January 1, 2019. - For other ADIs, it will be removed concurrently with the removal of the investor loan growth benchmark. - Note 1: ADIs with levels of interest-only loans below the benchmark are expected to remain below it and not increase the share of new interest-only loans materially from current levels. *Source: 1ausea2019008 - Annex I. External Sector Assessment (PDF).* ### Annex V. Key FSAP Recommendations ### Annex V. Key FSAP Recommendations ### Banking and Insurance Supervision - Strengthen the independence of APRA and ASIC, by removing constraints on policy making powers and providing greater budgetary and funding autonomy; strengthen ASICs enforcement powers and expand their use to mitigate misconduct (Treasury, APRA, ASIC). — ST - Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA). — ST - Strengthen the integration of systemic risk analysis and stress testing into supervisory processes (APRA, RBA). — I ### Financial Stability Analysis - Commission and implement results of a comprehensive forward-looking review of potential data needs. Improve the quantity, quality, granularity and consistency of data available to the CFR agencies to support financial supervision, systemic risk oversight and policy formulation (CFR agencies). — MT - Enhance the authorities’ monitoring, modeling and stress testing framework for assessing solvency, liquidity and contagion risk. Draw on the results to inform policy formulation and evaluation (CFR agencies). — ST - Encourage further maturity extension and lower use of overseas wholesale funding (APRA). — I ### Systemic Risk Oversight and Macroprudential Policy - Raise formalization and transparency of the CFR and accountability of its member agencies through publishing meeting records as well as publication and presentation of an Annual Report to Parliament by CFR agency Heads (CFR agencies). — I - Undertake a CFR review of the readiness to apply an expanded set of policies to address systemic risks, including data and legal/regulatory requirements; and address impediments to their deployment (CFR agencies). — I - Commission analysis by the CFR member agencies on relevant financial stability policy issues, including: policies affecting household leverage; as well as factors affecting international investment flows and their implications for real estate markets (CFR agencies). — MT ### Financial Crisis Management and Safety Nets - Complete the resolution policy framework and expedite development of resolution plans for large and mid-sized banks and financial conglomerates, and subject them to annual supervisory review (APRA, Treasury). — ST - Extend resolution funding options by expanding loss-absorption capacity for large and mid-sized banks and introduce statutory powers (APRA, Treasury). — ST - Advance mutual understanding between the Australia and New Zealand resolution authorities on cross-border bank resolution modalities, through the Trans-Tasman Banking Council (CFR agencies). — ST ### Financial Market Infrastructures - Strengthen independence of RBA and ASIC for supervisory oversight, enhance enforcement powers and promote compliance with regulatory requirements (RBA, ASIC, Treasury). — I - Finalize the resolution regime for FMIs in line with the FSB Key Attributes (RBA, ASIC, Treasury). — ST ### Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT) - Expand the AML/CFT regime to cover all designated non-financial businesses and professions (DNFBPs), and strengthen AML/CFT supervision by: improving data collection and risk analysis; increasing oversight of controls and compliance; and undertaking more formal enforcement action in the event of breaches (Department of Home Affairs, Treasury, AUSTRAC). — I *Annex V. Key FSAP Recommendations (from provided source content)* ### 5.0 percent, its equal lowest level since June 2011. Both underlying and headline inflation ### 1ausea2019008 - 5.0 percent, its equal lowest level since June 2011. Both underlying and headline inflation ### Macroeconomic outlook and inflation - Headline inflation at 5.0 percent, its equal lowest level since June 2011. - Both underlying and headline inflation remain subdued, reflecting: - modest wage growth; - continued strong retail competition; - impact of government child care policy initiatives. - The Government released its Mid-Year Economic and Fiscal Outlook (MYEFO) update in December 2018, which forecast: - a smaller fiscal deficit in 2018-19 than in the Budget; - a return to surplus in 2019-20. - Australia ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11); TPP-11 entered into force on December 30, 2018 for the first group of countries including Australia. ### Labor market, wages, and inflation dynamics - Labor market conditions are strong with: - robust employment growth; - a historically high participation rate; - the unemployment rate at its equal lowest level since June 2011, around the estimated level of the NAIRU. - Continued strength in labor market outcomes is expected to support a gradual pick-up in wage and price growth. - Slower wages growth, inflation and inflation expectations have been characteristic of the post-crisis era; Australia’s slow recovery in wages growth also reflects adjustments following the unwinding of high commodity prices after the terms of trade boom. ### Monetary policy and buffers - Authorities and staff broadly agree monetary policy settings remain appropriate. - The accommodative stance of monetary policy: - supports stability and confidence; - is consistent with further progress towards full employment and reducing underemployment; - aims for inflation to return gradually toward the mid-point of the target. - The Reserve Bank of Australia (RBA) will provide clear guidance on its reaction function to allow the public to form views on the potential path of interest rates. - Australia has policy buffers if an adverse shock materializes: - conventional and unconventional monetary policy levers; - significant fiscal space; - a fully flexible exchange rate acting as a buffer. ### External position and net liabilities - The current account deficit reflects strong investment outcomes not fully met by domestic savings, typical for resource endowed and sparsely populated countries. - While Australia has a net foreign liability position, it has a net foreign currency asset position because the bulk of foreign liabilities are issued in, or hedged back into, Australian dollars. - Banking sector hedging practices: - banks hedge foreign currency liabilities matching the duration of hedges with underlying liabilities; - over the past decade Australia has tended to issue debt with longer term maturities. - Result: net external liabilities have a relatively robust structure, minimizing exposure to exchange rate and macro-financial risks identified in the FSAP. - The current account deficit is expected to remain toward the low end of its recent historical range, and net foreign liabilities have been stable as a share of GDP over the past decade. ### Fiscal policy, growth strategy, and infrastructure - The Government maintains a responsible fiscal stance and a plan to lift potential growth via: - boosting productivity through lower taxes; - targeted spending; - investment in infrastructure. - Fiscal projections and constraints: - fiscal position projected to return to surplus in 2019-20; - continued strong fiscal discipline will ensure that these surpluses exceed 1 percent of GDP in the medium term. - average real payments growth is now the lowest in fifty years. - Authorities note staff’s suggestion to incorporate a medium-term debt anchor and will weigh this against maintaining flexibility to respond to economic changes. - On infrastructure: - Australian authorities note IMF advice that further increases in infrastructure spending could be considered given assessed fiscal space; - quality of investment matters; Infrastructure Australia prioritizes nationally significant projects underpinned by robust business cases; - some capacity constraints and skills shortages are emerging at current investment levels, which could be amplified by further increases in infrastructure spending. - authorities emphasize preserving fiscal space as a buffer given the current point in the cycle and Australia’s small open economy status. ### Trade policy and external integration - Australia remains committed to open trade, investment and immigration and a cooperative multilateral trading framework. - The TPP-11 commencement on December 30, 2018 is Australia’s first trade agreement with Canada and Mexico and offers opportunities for Australia and partners. - Australia’s free trade agreements currently cover 70 percent of its total two-way trade and will rise to 88 percent when current negotiations are completed. ### Housing market and household balance sheets - Recent cooling of the housing market is welcome after significant and sustained price increases. - Capital city housing prices remain around 40 percent higher than in 2012 despite recent falls in the two largest cities. - Authorities expect the housing correction’s wealth-effect impact on consumption to be relatively small due to: - strong employment growth and labor market outcomes; - underlying demand supported by population growth. - Supply-side reforms needed: planning and zoning restrictions that impede supply with long lags should be addressed. - Household debt dynamics and resilience: - household debt is elevated relative to incomes and has been rising as moderate debt growth outpaced low household income growth in recent years; - household balance sheets are generally strong; - housing credit growth has not been unusually strong; - many households have built significant mortgage buffers, with mortgage buffers doubled since 2008; - debt distribution is skewed toward high income households: households in the top two income quintiles hold over 60 percent of Australian household debt. ### Tax policy and negative gearing - Authorities consider staff’s assessment that tax policy changes would reduce structural incentives for leveraged investment to be a misunderstanding of Australia’s comprehensive income tax system. - Negative gearing (ability to offset costs incurred in earning income against all sources of income) is described as a fundamental element of a comprehensive income tax system and “in no way is it concessional.” - Authorities caution that limiting such deductions would move away from a comprehensive income tax system and risk higher costs and distortions. ### Financial sector soundness, FSAP, and supervision - Australian authorities welcome FSAP recommendations and commit to continued improvement in regulatory frameworks and supervision. - Financial system soundness indicators: - Australian banks' capital ratios are around 50 percent higher than a decade earlier; - banks have switched to more stable funding sources and increased holdings of liquid assets; - charges for bad debts are at historic lows; - stress testing shows banks are resilient to significant shocks. - The 2018 FSAP occurred amid significant financial sector reforms and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. - FSAP recommendations will be considered alongside reforms from the 2014 Financial System Inquiry (FSI) and the Productivity Commission’s review into ‘Competition in the Australian Financial System.’ - Implemented FSI recommendations include: - ensuring banks have ‘unquestionably strong’ capital ratios; - strengthening and testing the crisis management framework; - moving to industry funding for the Australian Securities and Investments Commission. - Authorities emphasize that some staff assessments and recommendations should be better grounded in Australia’s governance structure and systemic risk context, consistent with the IEO evaluation calling for advice anchored in local circumstances. ### Regulatory governance, coordination, and recent actions - Authorities dispute IMF assessment of regulatory independence, arguing that Australia’s checks and balances do not compromise operational independence of regulators. - Government announced additional funding for the Australian Securities and Investments Commission and Australian Prudential Regulation Authority in the 2nd half of 2018. - Australia’s approach to managing financial risks is highly collaborative across agencies, coordinated through the non-statutory Council of Financial Regulators (CFR), comprising: - the Reserve Bank of Australia; - the Australian Prudential Regulation Authority; - the Australian Securities and Investments Commission; - The Treasury. - CFR transparency has been enhanced via a quarterly statement on activities, modernization of the CFR website, and expanded coverage in the RBA’s Financial Stability Review. - Prudential policy adjustments: - caps limiting investor and interest-only housing lending have been removed after meeting the objective of strengthening resilience; removal reflects the cessation of temporary measures rather than a loosening of prudential policy. - CFR agencies considered a broad range of tools and the evidence suggests the Australian approach has been successful in managing financial stability risks. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019008.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019008.pdf_