Australia will jail foreigners who purchase homes illegally as the government seeks to slow a surge in house prices, Prime Minister Tony Abbott said.

Sentences may stretch to three years and fines to A$637,500 ($607,000) for illicit buyers, with penalties also on third parties knowingly complicit in violations, Prime Minister Tony Abbott said Saturday in Sydney. The steps are needed to give the public confidence that foreign-investment rules on property purchases are being enforced, he said.

The penalties will tighten scrutiny on overseas buyers at a time when record-low interest rates are driving up Sydney property prices five times faster than wages. A company owned by Chinese billionaire Hui Ka Yan's Evergrande Real Estate Group Ltd. -- which illegally bought a A$39 million mansion overlooking Sydney Harbour -- has sold the site to an Australian citizen, Treasurer Joe Hockey's office said Friday.

"What we want to do is ensure that illegal foreign investment is not unnecessarily driving up prices," Abbott said. "If you don't play by the rules there will be a tough penalty regime in place, and those penalties will be enforced."

Overseas buyers are only allowed to purchase newly built homes in Australia and need the permission of the Foreign Investment Review Board. Approved overseas purchases of Australian homes more than doubled to A$34.7 billion in the year ended June, with China overtaking the U.S. as the biggest source of capital, the board said in its annual report Thursday.

Least-Affordable

Sydney ranked third among the least-affordable major metropolitan housing markets worldwide, after Hong Kong and Vancouver, according to a report in January by Demographia.

Melbourne placed sixth in the report, ahead of London in seventh place. New York ranked 15th, tied with the Western Australian capital of Perth and just behind Adelaide.

In Victoria state, foreigners buying houses will pay a new tax equivalent to 3 percent of the purchase price, the Age newspaper reported Saturday. The measures will raise about A$279 million over four years, the newspaper quoted state Treasurer Tim Pallas as saying ahead of his first budget on Tuesday.

Risks to Australia's economy from property speculation and household debt will be one of the main issues studied by an International Monetary Fund team visiting the country next month, the Australian Financial Review quoted the fund's local mission chief as saying today.

They'll also consider whether the issue should be dealt with using monetary policy or government regulation of loan-to- value ratios, bank capital requirements or risk weightings, the paper quoted the IMF's James Daniel as saying.

Price Gains

House prices increased 15 percent in Sydney and 11 percent in Melbourne over the 12 months to April 30, according to data from CoreLogic RP Data. The median dwelling price in Sydney was A$732,500, the data showed.

Under the new law, individual buyers found guilty of breaching foreign investment rules will face penalties of A$127,500 or three years imprisonment. A higher A$637,500 fine will apply to companies.

Third parties who assist investors in breaching the rules will face fines of A$42,500 for individuals and A$212,500 for companies, according to an e-mailed statement from the prime minister's office.

The government plans to introduce legislation on the measures later this year and ensure the changes are enacted on Dec. 1.

'A Fair Go'

"What we want to do is to maximize the opportunities for Australians to buy a home at the best possible price," Abbott said. "We want people to be absolutely confident that local people are getting a fair go."

Abbott declined to comment on a report in the Australian newspaper today saying the government would introduce changes to pension payments so that a reduced rate of pension growth only applied to wealthier Australians. "I'm just not going to engage in pre-budget speculation," he said.

The budget, due May 12, "will be measured, responsible, and fair," he said. "It's a budget that will be good for jobs, growth, and opportunity."

The Daily Telegraph newspaper this week reported that that some members of the government were considering calling an early election the week after the election, even as they trail the opposition Labor party in opinion polls.

"When the public elected us they intended us to govern for three years," Abbott said, when asked about the article. "That's what we intend to do."