The federal budget’s abolition of negative gearing and changes to capital gains tax (CGT) have stymied investor demand for residential property and sent the market into a broad-based correction.
The property industry is clearly upset, with backlash still running strong 10 weeks after the budget changes were delivered.
A survey of 265 industry professionals by the Australian Property Institute cited Labor’s budget tax changes as the biggest driver of the decline in home values, ahead of this year’s three interest rate increases by the Reserve Bank of Australia (RBA).
Property prices have fallen across the nation, and capital city auction clearance rates have remained below 50% for eight weeks in a row in the wake of the announcement.
Treasury modelling released as part of the budget changes suggested that the negative gearing and CGT changes would only reduce dwelling price growth by around 2% “over a couple of years relative to no tax policy change”, primarily by reducing investor demand for established properties.
However, API chief economist Sherman Chan told Sky News that the federal budget featured misguided estimates that tax changes would slow home price growth.
“When the government announced the changes to CGT and negative gearing, that was based on a range of assumptions”, she said.
“Now we’ve surveyed property valuers to see what they are witnessing on the ground… and it’s turning out that it’s not quite going according to the government’s plan”.
Chan argued that the tax changes are hurting the housing market far more than the RBA’s three rate hikes.
“The interest rate front definitely has an impact on the property sector across different asset classes, not just housing, but also in terms of industrial, agricultural, office, retail”, she said.
“But right now, for the housing market, it is the government’s tax reforms that have really rattled coffers and people are still digesting what the implications are and people are assessing their options”.
“That’s why from our survey, what we’ve found is that it is most commonly chosen reason as to why there are downward pressures on property prices”.
The reality is that Australian housing became too expensive and detached too far from households’ capacity to pay.
Chart by Shane Oliver (AMP)
While the industry may not like it, this is the housing correction that Australia has to have.
Ultimately, if homes are to become more affordable, prices must fall back to a level that people can afford.
