Property prices may drop but it’s decades of policy failure, not the budget, to blame

For decades, Australia’s property market has been defined by relentless price rises, reinforcing the old adage that real estate investment is “as safe as houses”.There’s now a wrinkle in that wisdom.Data from the three weekends since Labor handed down its budget suggest investors are not competing as vigorously at auctions after being told they won’t be able to negatively gear newly bought established properties beyond mid-next year.Auction clearance rates have dropped, home prices in several of Australia’s capital cities have begun to fall, and some analysts now expect price declines of up to 10%.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.It’s a perfect storm, or alignment of stars, depending on whether you want prices to go down or up.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.‘Get a fair crack at auctions’Labor’s capital gains discount and negative gearing changes are already prompting a shift in investor behaviour.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.The changes are reintroducing a level of responsible decision-making to a property market so often marked by speculative bidding.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.Last weekend, clearance rates – the percentage of properties successfully sold – across state capitals fell below 55%, the lowest since April 2020, with Sydney and Brisbane the weakest, according to Cotality data.This indicates the market is cooling and that there is a standoff between buyers and sellers over what properties are worth.Jim Chalmers noted on Monday that while there were a “number of factors at play” in the clearance rates, “if we are making it easier for first home buyers to get a fair crack at auctions, then that’s a good thing”.The difficulty with reforms is that someone always loses when the status quo is upended.Some first homeowners will have recently poured their bank account into a purchase to outbid an investor who wouldn’t have been interested in the property without the favourable tax settings that are now being erased.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.If Labor’s 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.There are also many tax and property consulting businesses that have been built around a negative gearing regime now being unwound.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.That trend should start to reverse – and that’s a good thing.‘That never happens’While improved affordability does not necessarily require property prices to fall – they just need to rise at a slower pace than incomes – it will require prices to be lower than they would have been under the pre-budget regime.The changes should also lead to less housing turnover, or churn, resulting in a more stable market.Some will be unhappy about that and fight the tax changes fiercely.Michael Fotheringham, the managing director of the Australian Housing and Urban Research Institute, says property market reforms always attract critics who say the sky is falling.“Every reform does mean some disruption, but before every reform in this sector, we hear it will lead to market collapse, and that we’re ruining the nation,” he says.“Extraordinarily, that never happens.”Indeed, there are at least two reasons that prices in Australia won’t fall too far.First, there is still a large housing shortfall, which has been the single biggest price driver of recent decades.Second, there are various demand-side measures including the government’s expanded first home buyer 5% deposit scheme.Even if prices were to correct – defined as a drop of at least 10% – home ownership will remain out of reach for many people even if they have a good job, given the severity of affordability issues in Australia.The recent market quivers have however raised a question over whether Australia’s “super cycle upswing” over the last 30 years has come to an end.AMP chief economist Shane Oliver says such predictions may be premature until the supply shortfall comes under control.In other words, until Australia starts building enough homes, it will remain unaffordable for most, and the real estate market will remain “as safe as houses”, even after the tax reforms.