Australia's housing market is showing signs of a sharp deterioration, prompting comparisons to New Zealand's experience with a significant property downturn following similar government interventions. The Reserve Bank of Australia reported a 1.6 percent drop in national property values from their March peak, with a 0.7 percent fall in July alone, the most substantial monthly decline in nearly four years. Sydney and Melbourne saw declines of 1.4 percent and 1.2 percent, respectively.
This downturn has coincided with a sharp drop in mortgage applications, particularly from investors, following the May budget announcements that included significant property tax reforms. The proportion of investor applications fell by 28 percent, suggesting that Labor's tax changes have exacerbated a broader market slowdown driven by rising interest rates.
Labor's reforms include restricting negative gearing on residential investments to qualifying new builds and replacing the 50 percent capital gains tax discount with inflation indexation and a minimum 30 percent tax rate on real gains. The government argues these measures will help first-home buyers by reducing competition from investors and stimulate new housing supply. However, economists express skepticism, warning that reduced investor interest could lead to less housing supply overall and potentially make new builds less accessible for first-home buyers.
ANZ, for example, has revised its forecast for capital city prices, now predicting a 4.3 percent fall this year and another 3.4 percent decline next year, citing interest rates, tax changes, and global uncertainty.
Treasury estimates suggest these changes will lead to approximately 75,000 additional owner-occupiers over a decade and reduce price growth by about 2 percent. However, an early NAB survey indicated that the investor share of new home sales fell significantly after the budget, raising concerns about the construction sector. Treasury's own modeling also forecasts a decrease of 35,000 homes built due to the policy changes.
New Zealand's experience offers a cautionary tale. In March 2021, the Jacinda Ardern government introduced similar measures, including removing the ability for investors to deduct mortgage interest and imposing capital gains taxes on residential properties sold within 10 years. These changes were implemented alongside tighter lending restrictions and rising interest rates. Australian national property values have slipped 1.6 per cent from their March peak.
Following these reforms, New Zealand house prices fell approximately 15 percent in nominal terms and have remained weak. Some economists estimate the real decline to be over 30 percent. While official analysis in New Zealand could not isolate the exact impact of the tax reforms from other market factors like rising rates, the reforms did not achieve the intended outcome of simply transferring properties to first-home buyers. The subsequent National government reversed many of these policies.
Economist Leith van Onselen suggests that Australia's housing market may be undergoing a psychological shift, moving from a fear of missing out to a fear of overpaying. He warns that Australia could experience a prolonged correction if the current downturn deepens, potentially shattering the long-held belief in ever-rising home prices.
However, van Onselen also notes that a significant correction could lead to a more normalized housing market where prices rise moderately in line with incomes. The current situation presents a challenge for the Labor government, which aims to improve affordability without triggering a severe market collapse or exacerbating rental shortages.
Australia's policy approach differs from New Zealand's in specifics, but the timing of Labor's reforms—amidst rising interest rates, a struggling construction sector, and a tight rental market—is seen as a significant gamble with potentially far-reaching consequences.
