House prices forecast to fall following property tax changes: AMP | The Business | ABC NEWS

The day after sweeping changes to property taxes, real estate agents are digesting the news.

What's my gut emotional reaction?Annoyance.People keep coming for property investors.Like, why?

Following tax changes in Victoria, Toby Campbell has already been selling to fewer investors.

This could be the nail in the coffin for a lot of them, where they're like, it's just too hard, I'll sell up my own rental property.

Winding back investor demand is part of the reason why Labor is changing tax concessions on rental properties.

These concessions have fundamentally distorted our housing market.The current tax arrangements tip the balance against first home buyers and that's why we're changing them.

Young Australians will be kneecapped on multiple fronts.As they're saving for a deposit, they're going to pay higher rents.Then the government is going to apply more taxes on their first home deposit if it's invested.

Tax breaks on loss -making rentals are being phased out, with negative gearing now only allowed on properties that were bought before budget night on May 12 and on new builds from July next year.From then, the capital gains tax discount is also being axed, reverting back to taxing real gains above inflation.Since the capital gains tax discount was introduced 25 years ago, we've seen house prices soar by hundreds of thousands of dollars.After years of falling home ownership, the government is hoping that its changes will help 75 ,000 more Australians into home ownership over the next decade, while modestly slowing house price growth by about 2 % over a couple of years, and only pushing up rents by less than $2 a week.

So the estimates that Treasury has put out look broadly consistent with our estimates of how these tax reforms will impactboth house prices and rents and that is that they'll have a pretty minimal impact.

One leading economist is predicting that property prices will drop as interest rates are also rising.

I think it will vary from city to city but on average the falls could be around 5 % or so.

Even this drop won't erase the double digit gains on house prices that has seen people like Alicia Hart give up on home ownership in recent years.It seems like these changes probably won't amount to too much for people who have already been iced out of a housing market.The single mum tried to buy a few years ago but found herself competing with investors.My general vibe is it's a little bit too late, that this is something that should have been addressed while houses were still affordable for the everyday, normal Australian.Australia's housing crisis is a problem that has been decades in the making, and these changes are not going to instantaneously wind back 30 years of booming prices.That means that affordability is going to remain a problem for Australians for years to come.

But after breaking an election promise to do this, Labor is hoping that it reads with voters.

I think it's cool that they're trying to finally do something about the generational inequity.

Because of the increase in CGT, I'm going to either hang on or sell it for more.

The intergenerational debate about housing far from over.

The chief economist of Australia's biggest mortgage lender is warning housing headwinds are growing.Commonwealth Bank's Luke Yeaman joined me earlier.Welcome.How do you view the likely impact of the CGT and negative gearing changes on investors' appetite?for property?

Look, there's no doubt it's going to see investor appetite drop a little, and we've looked at this closely, particularly the negative gearing changes.I think capital gains tax is a little bit more uncertain because it does depend on the expected growth rate and the asset value, it depends on inflation now that we've moved to an indexation system.So I think for indexation, it's a little bit less clear, but for negative gearing, there's no doubt a benefit in the tax system that favoured investors in established housing has now been taken away.And we did some analysis around this.It depends a lot on the individual circumstances of the property and the investor, but it could be the equivalent of a 90 to 150 basis point increase in interest rates.So that's the sort of immediate effect on the cash flow of an investor in an established property.

So there's no doubt we're going to see a drop off there, but we still think that it's manageable and it won't see a big crash in the market, maybe a decline in house prices in the order of around 3 % over a number of years.

Okay.Will the changes support a boost to the supply of new homes?

But clearly the government's wanted to quarantine that element.So they have made sure that there are still incentives in the system.tax incentives to encourage new supply.So overall, we do not expect to see much of a drop in overall supply or that much of an increase in rents.But it's possible that where currently there are big focuses in apartments and townhouses and that aspect of the investment market, you could see some more volatility in that aspect.

So you've said the changes could hit house prices by 3%.What impact will those reforms have also on rents?

Look, on rents, we don't expect to see too much of an impact.I think the direction is up.So rents will probably be a little bit higher as you see investors trying to claw back some of the loss through the tax system through rents directly.But the analysis we've done suggests that it's going to be a relatively modest effect overall.

OK, but there are risks to those forecasts, aren't there?I mean, just today we saw the ABS say there was a drop inthe number of new loans in the March quarter by 3 .8%.Did that take your economists by surprise?

It was a bigger drop than we'd expected.We've seen recently very strong growth in investor credit overall.We've seen strength in that aspect of the market and the Reserve Bank's been watching that closely as well as they're trying to think about how restrictive interest rates are or are not.So the drop today was certainly a bit more than we'd expected.So we'll have to watch closely going forward how that plays out.What we said overall in our budget analysis was we'd previously forecast national house price growth of about 5 % in 2026.

Given the extra interest rate hike that we've seen recently and now these changes in the budget, we expect prices now to be around 3 per cent.But we did highlight that there is a risk that investors will turn a bit more negative and sentiment will turn sour and you could see some more volatility and perhaps an even bigger drop than that.So we have to watch that closely.Are housing headwinds growing?Look, there's no doubt that's the case.When you have an interest rate hiking cycle, we've now had three interest rate rises.

It's possible there'll be a further interest rate hike from here.It's not our current central case forecast, but the risks are certainly there, depending on how inflation plays out from here.And so whenever interest rates are rising, you're going to see a bit of downward pressure in the housing market.And now you have this extra overlay of the changes to negative gearing and capital gains tax.And investors, I think, will be sitting down over the next few weeks and carefully looking at the detail and trying to work out what it means for their overall investment portfolio.But it's certainly the case that those two things together, higher interest rates and these tax changes in the budget, should see some of the heat come out of the housing market from here.

Do you think we're going to see some first home buyers who purchased using the government's 5 % deposit scheme find themselves with negative equity?

Look, it's possible.It's possible.I think, fundamentally, we don't see large areas of stress across the housing market or across government households and consumers.

And yet property arrears are increasing.

They've come up a little, that's true.but they're still at very low levels overall.And when we look at the household sector overall...Household balance sheets to us look very strong.There's been a good increase in household savings.And the data that we see in almost real time across our book shows that household consumption has so far held up quite well in the face of some of these global shocks, higher fuel prices and now higher interest rates as well.

That could turn.We still expect to see household consumption slow a little over the coming months into the rest of this year.But at this stage, it looks like households have held up relatively well.

Looking at the budget in its entirety, you've written that it could be viewed as a missed opportunity.Why?

I think there's two aspects in that regard.One is, on inflation, I don't think the budget is going to see the Reserve Bank hike rates, I don't think it's going to see them fundamentally change their view of the cash rate path from here.

Is that because it isn't considered expansionary?

Look, we said it was neutral to mildly expansionary, but it's relatively marginal.At the end of the day, the budget position hasn't moved a lot since the MIFO estimates in those first couple of years when inflation is going to be at its hottest.So we haven't seen big shifts there, but the government did spend in 26, 27, the first financial year of the budget, they did spend about $8 billion in new money.And where the missed opportunity comes in there is there was an opportunity to do more to take demand out of the economy and give the RBA some more flexibility and give them some more headroom in the event that inflation stays sticky.Because we know inflation is going to be a big challenge from here.We don't know yet where the war in Iran will go next.

But if the RBA finds itself having to push against demand more strongly, there was an opportunity there for the government to restrict spending and give them some more flexibility.So that's the first missed opportunity.The second one, I think, is there is some reform in this budget.Obviously, the changes to housing taxation are major reform, but there had been talk prior to the budget of possible changes to corporate tax.the corporate tax system, or to personal tax, more broad -based fundamental reform.We didn't see that last night in the budget.

Hopefully we still see that.Over the next few budgets, leading up to the next federal election, there is certainly some room to move now that they've made some structural changes and improvements to the long -term trajectory of the budget.

Is that something that would help drive productivity growth higher?

It would.I think we've got to constantly work to improve productivity in the country.There are some good things in the budget last night around cutting red tape and speeding up approvals that are going to help and boosting tech adoption.they're going to help at the margin, but they're not going to really shift the dial materially on productivity.I think you would need to see larger scale reform of the tax system or other changes that could help drive that more fundamental shift.And I think they'd clearly been considering that in the lead up to the budget.

I think the money probably just wasn't there at the end of the day, given the other pressures across the budget.But hopefully we'll see that in the future.

Luke Yeaman, thank you.

Thanks.