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Australia’s house prices have fallen for 13 consecutive months, with average Australian capital city prices now down 4% from their peak. The once booming cities of Sydney and Melbourne have led the falls over the last year; while falls in Perth and Darwin, which started several years ago as the mining investment boom ended, have continued. Bucking the national trend, prices in Brisbane and Adelaide have risen slightly.

There are a number of well-known factors helping drive prices lower including:

  • The rising supply of units in Sydney and Melbourne;
  • A tightening of bank credit, which began before, but is being reinforced by the Financial Services Royal Commission;
  • Reduced foreign demand due to Australian authorities making it harder to buy – Chinese real estate investment in Australia has slumped 70% since 2015; and
  • Affordability issues.

Another factor

But there is another factor starting to bite, particularly in Sydney and Melbourne, that could have a significant impact on how far prices fall in the next few years: a potential change of government.

The Labor Party is leading the Coalition 55 points to 45 points on a two-party preferred basis according to Newspoll.

Labor, if elected, is proposing to reform negative gearing by limiting it to apply only to newly-built properties in the future, however pre-existing property investments will be exempt.

Labor also want to halve the capital gains discount for newly acquired assets, which currently stands at 50% providing the asset has been owned for more than one year.

Both changes will begin from a yet-to-be-announced date should it win the election.

Labor’s policy is designed to reduce investor demand for housing, making it more affordable for owner-occupiers to enter the market.

Price impact

These proposals would obviously make the tax concessions available to investors far less attractive. And if investors withdraw from the housing market, it will remove a big chunk of demand and that’s going to have an ongoing negative impact on prices.

Even though the changes don’t directly impact those investors buying in today they should figure in investors’ thinking as it may mean less demand for their property when they want to sell several years down the track and hence reduced potential for capital growth.

I think this is now beginning to affect the housing market, particularly in Sydney and Melbourne where investors have played a significant role, accounting for up to 50% of demand.

On the one hand, Labor’s policy may have merit if it results in more affordable housing. But it could do this by accentuating price falls over the next year or two, perhaps longer, depending on when the changes kick in.

Cautious on housing

The rough estimates I’ve seen suggest Sydney would be the hardest hit by Labor’s policies, with prices falling over 9% as a result of those tax changes. Melbourne would be less affected, and the other states a little bit less again.

Labor’s proposals, and the outcome of the 2019 federal election, are creating negative uncertainty in the housing market, particularly in Sydney and Melbourne.

It adds to the case for why I expect the top-to-bottom falls across the nation to be nearly 10% out to 2020, but the falls to be in the order of 20% out to 2020 for the major capital cities of Sydney and Melbourne.

It also means that, while there is still a role for residential property in portfolios, investors should be cautious about housing as an investment right now.

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