Australian dwelling values are facing mounting pressures, with property data provider Cotality reporting significant annual deflation in major capital cities. Melbourne saw an 11 per cent annual decline, while Sydney experienced a 13 per cent drop. Though Brisbane and Perth prices are still appreciating, their momentum is rapidly fading, Brisbane barely climbing at a 3 per cent rate. Nationally, home values are contracting at an annual pace of 6 per cent, a trend anticipated to worsen. Cotality’s historical records indicate similar peak-to-trough corrections, with recent daily data showing the 2017-19 loss peaked around 11 per cent and 2022-23 approached 10 per cent.
The housing market’s challenges are largely attributed to Canberra’s budget policies and Reserve Bank of Australia (RBA) interest rate increases. Over half of all investment properties are negatively geared, according to Tax Office data. Federal government changes to negative gearing and increased capital gains tax rates are set to impact a substantial portion of this market. Kieran Davies, chief macro strategist at investment firm Coolabah, suggests these tax changes, while complex to model, effectively equate to a significant mortgage rate shock.
Davies’ analysis indicates these tax changes for negatively geared properties are comparable to a 2 to 2.75 percentage point increase in mortgage rates. With negatively geared investors representing one-fifth of new lending, the overall market impact is akin to a half-percentage-point RBA tightening. Applying the Saunders-Tulip framework, this is projected to lower real house prices by 3 to 5 per cent over one year, and by a cumulative 4 to 9 per cent over two years. This potential decline in the $12.6 trillion residential property market could influence future RBA policy, even with forecasts for further rate hikes due to high core inflation. Such a downturn also poses challenges for Australian equities and superannuation funds, particularly given their reliance on bank stocks, whose valuations are influenced more by regulatory factors than fundamentals.
