For decades, Australia\u2019s property market has been defined by relentless price rises, reinforcing the old adage that real estate investment is \u201cas safe as houses\u201d.<\/p>\n
There\u2019s now a wrinkle in that wisdom.<\/p>\n
Data from the three weekends since Labor handed down its budget<\/a> suggest investors are not competing as vigorously at auctions after being told they won\u2019t be able to negatively gear newly bought established properties beyond mid-next year.<\/p>\n Auction clearance rates have dropped, home prices in several of Australia\u2019s capital cities have begun to fall<\/a>, and some analysts now expect price declines of up to 10%.<\/p>\n There are, of course, contributing factors to price movements and forecasts beyond the budget reforms, namely rising interest rates, stretched household budgets and a pessimistic global economic outlook.<\/p>\n It\u2019s a perfect storm, or alignment of stars, depending on whether you want prices to go down or up.<\/p>\n Any drop in the property market would not, however, show there is a problem with the tax reforms; it would more accurately expose the policy failings of three decades that encouraged unchecked price growth and an affordability crunch.<\/p>\n \u2018Get a fair crack at auctions\u2019<\/p>\n Labor\u2019s capital gains discount and negative gearing changes are already prompting a shift in investor behaviour.<\/p>\n Instead of relying on tax-enhanced speculation, investors are now compelled to evaluate established properties based on financial metrics, such as rental yield and growth prospects.<\/p>\n The changes are reintroducing a level of responsible decision-making to a property market so often marked by speculative bidding.<\/p>\n Reports from recent auctions suggest this transition is already under way, with observers noting unfamiliar scenes where most of the buyers actually want to live in the home they are bidding on.<\/p>\n Graph showing share of new home loans belonging to investors v first home buyers v other owner occupiers<\/a><\/p>\n Last weekend, clearance rates \u2013 the percentage of properties successfully sold \u2013 across state capitals fell below 55%, the lowest since April 2020, with Sydney and Brisbane the weakest, according to Cotality data.<\/p>\n This indicates the market is cooling and that there is a standoff between buyers and sellers over what properties are worth.<\/p>\n Jim Chalmers noted on Monday that while there were a \u201cnumber of factors at play\u201d in the clearance rates, \u201cif we are making it easier for first home buyers to get a fair crack at auctions, then that\u2019s a good thing\u201d.<\/p>\n The difficulty with reforms is that someone always loses when the status quo is upended.<\/p>\n Some first homeowners will have recently poured their bank account into a purchase to outbid an investor who wouldn\u2019t have been interested in the property without the favourable tax settings that are now being erased.<\/p>\n Those homeowners may now be worried about winding up in negative equity, which occurs when the market value of a property falls below the size of the home loan.<\/p>\n If Labor\u2019s reforms weigh on prices already subdued by rising interest rates, homeowners will naturally cut their spending because they feel poorer, with knock-on effects on other parts of the economy, such as hospitality.<\/p>\n There are also many tax and property consulting businesses that have been built around a negative gearing regime now being unwound.<\/p>\n On the flip side, the pre-budget system was fuelling inequity in Australia, and the longer it went on, the worse it got, with the proportion of housing stock owned by investors relentlessly rising over the last 25 years to the detriment of people who just wanted to live in their own home.<\/p>\n That trend should start to reverse \u2013 and that\u2019s a good thing.<\/p>\n \u2018That never happens\u2019<\/p>\n While improved affordability does not necessarily require property prices to fall \u2013 they just need to rise at a slower pace than incomes \u2013 it will require prices to be lower than they would have been under the pre-budget regime.<\/p>\n The changes should also lead to less housing turnover, or churn, resulting in a more stable market.<\/p>\n Some will be unhappy about that and fight the tax changes fiercely.<\/p>\n