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Property prices set to fall further before the next growth cycle begins
Two weeks out from one of the most significant budget decisions in decades, the housing market is likely to remain resilient to the changes, with the fundamentals continuing to support activity.
According to the latest report from the REA Group, despite the economic headwinds presented by the government’s latest budget, the nation’s housing market will likely remain solid.
According to REA Group’s latest Market Insight, with two-thirds of investors negatively geared, the effects of the budget would likely be gradual, with modelling indicating modest and manageable changes ahead.
The report said that an increased uncertainty in investor sentiment was likely to be the most significant impact of the new tax regulation.
In the short term, leading up to 1 July 2027, dwelling prices would likely dip further, with the budget exacerbating the existing decline already seen across Sydney and Melbourne, similar to the impact of the rate hikes.
Beyond 1 July 2027, the report found that home prices would rise, but at a more marginal rate than they would have otherwise.
REA said the slow growth would likely become a trend continuing into the long term, with growth tipped to be between 1 and 5 per cent lower than modelling suggested prior to the reforms.
When it came to stock entering the market, the data showed a slight increase in housing turnover, as some investors were spurred into action by the changes.
However, the report warned that grandfathering negative gearing would likely have the opposite effect, with investors holding on to their assets.
REA tipped the changes to cause a “lock-in” effect for investors in the medium term, as they could still use the old capital gains tax (CGT) discount and negative gearing, discouraging investors from acting.
The report said that once the full suite of changes came into effect on 1 July 2027, new housing supply would see a small jump as investors opt to buy newly built homes rather than existing dwellings.
“This is likely to support the viability of some developments and see a modest increase in new construction in the medium term,” the report said.
“However, supply constraints remain a key factor and will temper the effect.”
According to REA’s research, the long-term outlook for new housing supply was ambiguous, with a slight decrease likely.
On the rental front, the report warned that while the reforms would play a major role in shaping the market going forward, renters were likely to be the demographic most affected.
“While reforms to negative gearing and CGT are designed to discourage investors and (modestly) boost home ownership, renters may be the hardest hit.”
According to the report, reducing investor activity in the property market could leave renters stung by rising costs at a time when they can least afford it.
“By restricting negative gearing and the capital gains discount to new builds, new rental supply may not be added where it is needed most.”
The report suggested that rental supply could be added in outer growth areas farther from key amenities, rather than in locations that needed additional dwellings.
“While there may be downward pressure on rents in these areas from the added supply, the reduced supply in existing areas could see rents in those areas increase by more than aggregate estimates imply.”
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