Economist Warns of Major Housing Correction in Australia Amidst Policy Changes

Australia may be poised for its most substantial property market correction in four decades, according to economist Leith van Onselen. He contends that recent changes to negative gearing and capital gains tax concessions, implemented as part of the Albanese government's housing affordability agenda, could exacerbate an existing downturn.

These reforms, set to take effect from July 1, 2027, will prevent investors from claiming tax deductions for property losses against their wage income and reduce the capital gains tax discount. Van Onselen argues that the timing of these changes is particularly unfavorable, as they coincide with a period of high interest rates, weakening consumer confidence, and rising unemployment.

"I think we're going to have the biggest property price correction in 40 years," van Onselen stated in an interview on the Follio Property Podcast. He suggested that while the lower end of the market might remain stable, the higher end is particularly vulnerable.

Van Onselen noted that the policy changes would have been more effective if introduced during a market upswing, rather than when the market is already experiencing downward pressure following a 25-year cycle. He pointed to New Zealand's experience, where stricter investor regulations preceded a sharp housing downturn, leading to a subsequent rollback of measures by the new government.

"The capital gains and negative gearing changes to property are very poorly timed," he said. "We've got a housing market that is at a cyclical peak, the RBA has just hiked rates three times, we've got the highest cash rate in 15 years, and financial markets think it's going to go higher again."

While national dwelling values have seen a slight decrease from their peak after a significant surge in recent years, AMP chief economist Shane Oliver forecasts a more moderate decline of approximately 2% for the current calendar year and 6% over the next 12 months. However, he cautioned that a substantial rise in unemployment could lead to a greater fall.

Despite potential price drops, van Onselen believes the reforms could ultimately improve housing affordability for younger Australians attempting to enter the market. He expressed greater concern for the next generation's ability to purchase property than for the preservation of existing wealth.

IMAGE2 A chronic housing shortage is limiting the depth of the housing downturn in Australia.

Oliver also highlighted that a persistent housing shortage is likely to cushion the severity of any downturn. Current home building approvals remain below the government's target, and rising mortgage rates could further impede new construction, potentially worsening the supply issue.