By James Graham
To say this year’s Federal Budget has ruffled some feathers would be an understatement.
The Albanese government announced major reforms to two tax breaks long seen as politically untouchable – negative gearing and the capital gains tax discount.
In response, some banks are reportedly tightening their lending to property investors. And there are early reports of lower attendance at open homes, suggesting buyer caution.
The government’s budget changes are not yet law. But two weeks on from budget night, are we already beginning to see the first ripple effects hitting the Australian property market?
And how much of what we’re seeing in the housing market right now – such as falling sales at auction – can really be attributed just to the budget?
Auction sales have been sliding for months
Auction clearance rates – the percentage of listed properties successfully sold at auction – fell the week after budget. Despite a slight rebound last week, they remain lower than usual.
The longer-term average rate sits in the mid-60s – meaning more than six out of ten homes successfully sell at auction. The rate has now slipped to around 50–60 percent nationally, so it is clearly down.
But auction activity was already trending down months before the budget was announced, as interest rate hikes and economic uncertainty subdued the market.
Competing forecasts on house prices
Based on Treasury modelling, the Federal Government estimates house prices will still grow – but by 2 percent less than they would have without these tax reforms over the next couple of years.
Similarly, forecasts by the Commonwealth Bank predict slower growth over the next couple of years, not an outright fall.
Previous research estimating the effect of removing negative gearing on the Australian housing market suggested house prices would fall by just 1 percent, while homeownership for young people could rise by up to 3 percent.
At the other end of the scale, investment bank Morgan Stanley made a bold prediction: that housing could see “one of the largest price corrections over the past 40 years”, with falls of up to 10 percent.
However, as noted by most analysts, Australia’s property market was already softening ahead of the budget. Borrowers have endured three interest rate hikes already this year, with further increases still possible.
For young people feeling locked out of the housing market, the media storm surrounding possible house price falls since the budget may be hard to understand.
House price growth has been highly volatile over the past two decades, from slight falls in some years to spikes of 10–20 percent in others.
But it has averaged about 8 percent per year – still far faster than the growth in most people’s wages.
The median home value is now more than eight times median Australian household income. That means homeownership is far less affordable than it once was.
Different markets, different impacts
Looking to where things might be headed, another important nuance arises from the fact investors and prospective owner-occupiers operate in different markets. That means the changes could impact prices unevenly across Australia.
Research has shown investors are far more likely to buy small properties, preferring apartments over houses. Investors purchase 25 percent of all one-bedroom properties, compared to only 16 percent of three-bedroom properties and just 10 percent of four-bedroom properties.
For those seeking to buy an inner-city apartment, where investors are more active, the government’s reforms may have a bigger impact on prices.
But for those buying family homes on the outskirts of the city, these changes may have only a small impact because investors were never as active in those housing markets in the first place.
Over the next few months, the Australian property market may continue to weaken, especially with the possibility of further interest rate rises before the end of this year.
In the short term, it does appear that many home buyers, investors and banks have reacted cautiously to this Federal Budget.
But it would be wrong to attribute the current cooling down of the market entirely to the reforms announced in the budget.
James Graham is a Senior Lecturer in Economics at the University of Sydney. This article was first published by The Conversation
