The global financial crisis showed there are few things more damaging to economies than a house price bust.

Not only are people's homes generally their greatest single financial asset, they are also the bedrock of bank lending (well over half in Australia) and their construction is one of the top generators of employment and economic activity.

Since the US sub-prime housing bust sparked the global financial crisis in 2007-08, economists have been searching for ways of preventing the kind of bubble that led to such a catastrophic bust.

Higher interest rates are one option, but they affect the entire economy and are not a good idea if growth and inflation are weak - after all, there is not much point in trying to prevent a housing-inspired recession by inducing an interest rate-inspired one.

Macroprudential policies to cool overheated housing markets have become popular, with support from international bodies such as the International Monetary Fund (IMF), and have been implemented in New Zealand and, later on, in Australia.

However, experience on both sides of the Tasman shows that they can have limited effectiveness and unintended consequences - such as shifting buyers to other markets less affected by the regulations, favouring existing owners over first time buyers or causing people to change the purpose of their loan, i.e. from investor to owner-occupier.

A new working paper from the IMF suggests a complimentary solution - raise property taxes.

There is a statistically significant correlation between higher property taxes and lower house price volatility. ( Supplied: IMF )

In full economic jargon, after studying US property markets with a wide variety of property tax rates, the IMF's Tigran Poghosyan concluded:

"A 0.5 per cent increase in property tax rates (one standard deviation in the total sample) leads to 0.5-5.5 per cent decline in house price volatility depending on the empirical specification and the measure of volatility," he noted in the report.

"Instrumental variable and GMM regressions suggest that this relationship is causal, with increases in property tax rates leading to a reduction in house price volatility."

In other words, there is a notable reduction in volatility that can be observed when property taxes are higher and analysis shows that this lessened volatility is due to the higher taxes and not other factors.

Low taxes encourage house prices to 'overshoot' in booms

This is because a low-tax environment encourages people to jump into booms, creating extreme price pressures as housing supply (which is inherently slow to market) fails to keep up with a sudden increase in demand.

Even more people then enter the market as they witness the low-taxed financial gains being enjoyed by owners and investors.

"Lower property tax rates will lead to higher volatility of house prices following an exogenous demand shock," Dr Poghosyan's report concluded.

"In the long-run (equilibrium), the property tax rate itself does not induce the price volatility, but can exacerbate or dampen the impact of shocks.

"The key implication is that the volatility of house prices (or overshooting) during this transition is larger in the presence of a more generous tax treatment."

House price moves are much higher with property taxes set at 1 per cent than at 3 per cent. ( Supplied: IMF )

Dr Poghosyan does not see higher property taxes as a cure-all for volatility in housing markets, but does recommend it as a useful adjunct to other policies.

"The key policy implication is that property taxation could usefully complement other tools, including monetary and macroprudential, in reducing house price volatility," he said.

"The objective is to reduce incentives for debt-financed home ownership permanently."

Australia currently has record levels of housing debt compared to incomes - 131.5 per cent compared to around 50 per cent 20 years ago on RBA figures.

According to a 2015 report by the Grattan Institute, Australia also has a lower rate of recurrent taxes (as opposed to one-off transaction charges, such as stamp duty) than comparable developed nations.

The Grattan Institute found Australia's recurrent property taxes are much lower than similar OECD nations. ( Supplied: Grattan Institute )

Given that, and the recent boom in some markets (such as Sydney and Melbourne) and bust in others (notably mining regions), Australian would seem to be a prime candidate for the IMF's suggestion of increased land taxes as a measure to help contain volatility in home prices.