House price fall could slice $100,000 from your home’s value

House prices in Sydney and Melbourne are likely to fall by up to $100,000 over the next year as the federal government’s overhaul of negative gearing and capital gains tax combine with interest rate settings to slow the property market.

As the nation’s auction clearance rate dropped to a six-year low last week, economists believe the next 12 months will track a fall of up to 8 per cent in prices in the country’s two largest cities and a slowdown in other capital cities that could spill over into the rest of the economy.

The government’s tax reforms, which include restricting negative gearing to new builds from the middle of next year and a return to the pre-1999 capital gains tax concession, were introduced into the Senate on Monday, with the Greens expected to support the proposals.

Opposition Leader Angus Taylor used the first question time since Labor last week expanded CGT carve-outs for small and innovative businesses to accuse Prime Minister Anthony Albanese of an “Olympic-level backflip” over the additional concessions.

The Greens are expected to support the tax legislation but are still negotiating with the government to delay the passage of its National Disability Insurance Scheme overhaul by a month to allow for a longer inquiry into the changes.

Albanese defended his government for having “thrown everything at housing supply”, arguing its budget was addressing a broken system that has prioritised investors over young first-home buyers.

“That’s why we’re reforming negative gearing and capital gains tax, so that hardworking Australians can actually see their hard work pay off, making a real difference,” he said.

A Resolve Political Monitor poll of 1801 people, released by this masthead on Monday, showed 54 per cent of those questioned supported lower house prices, compared with just 11 per cent who were opposed. Another 35 per cent said they were unsure or neutral.

House prices in Sydney and Melbourne started easing before the budget measures were announced. The relative unaffordability of homes in both cities coupled with three Reserve Bank interest rate increases since February meant median house prices had fallen in the March quarter by $75,000 and $42,000 respectively.

Since the budget’s release last month, all bank economists have updated their property price forecasts. All were tipping a slowdown before the budget but since then, each has increased the expected size of drops in Sydney and Melbourne.

NAB has the bleakest outlook, expecting a nationwide drop of 2 per cent this year, led by a 6 per cent drop in Sydney and a 7 per cent fall in Melbourne. It believes the market will regain ground in 2027 with overall prices increasing by 2 per cent.

Westpac is tipping flat prices this year but with Sydney (minus 3 per cent) and Melbourne (minus 4 per cent) to go backwards.

A drop of 7 per cent in Sydney would wipe around $100,000 from the value of a median house. The drop would be larger on more expensive properties, with lower-priced dwellings holding up due to stronger demand from first-time buyers.

A similar drop in Melbourne would cut the median price by about $75,000.

The falls would be smaller than those experienced in the 2022-23 period when the Reserve Bank started lifting interest rates and high inflation ate into the ability of buyers to take on larger mortgages. In both Sydney and Melbourne, median property prices fell by more than $100,000 over a 15-month period.

Prices also fell between 2017 and 2019, between 1989 and 1991, in 2008-09 and between 2010 and 2012.

AMP is tipping a 5 per cent nationwide decline over the next 12 months. Deputy chief economist Diana Mousina said this fall would be within the range of previous property corrections.

She said by any measure, Australian property was expensive with prices up by more than 50 per cent since early in the pandemic. It also meant Australian households carried far more debt and faced higher interest repayments as a share of income than almost every other major economy.

The government’s changes were likely to result in lower house price growth, she said, but that did not mean it would deliver a major hit to the economy.

“There is a persistent perception in Australia that falling home prices signal broader economic weakness,” she said.

“In reality, however, modest price declines – particularly after a period of strong gains – can simply reflect a rebalancing of the housing market.”

There are clear signs the property market is slowing. Data compiled by Cotality showed the national preliminary auction clearance rate fell to 47.4 per cent last week, its lowest reading since late April 2020.

The rate has been below 60 per cent in 10 of the past 12 weeks.

MPs were peppered with questions on Monday about their attitude toward falling house prices.

Social Services Minister Tanya Plibersek refused to be directly drawn on the issue, but she told the Seven Network that house prices had been growing too quickly, with the nation one of the most expensive property markets in the world.

“People just can’t keep up with that because they’ve been competing with property investors for those houses,” she said.

Shadow Treasurer Tim Wilson said he wanted incomes to go up on the lowest level of tax they could pay so Australians could afford house prices.

“Everybody wants house prices to be lower until they’ve bought their first home, then they want them to go up,” he said.

Taylor would not be drawn on whether house prices should fall, instead arguing he wanted housing to be more affordable.

“You know how you do that? You have lower interest rates, lower inflation and higher incomes. Higher real incomes, higher purchasing power of your pay packet,” he said.

Low-interest rates and higher incomes can combine to push up property prices. Sydney’s median house price climbed 37 per cent in the 12 months to mid-2021, when official interest rates fell to zero and overall incomes, partly due to the then JobKeeper program, climbed sharply.

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