The Property Apocalypse Has Been Overcooked

Depending on what you read at the moment, you could be excused for thinking that the Australian property market is in total meltdown.

Projections of looming price falls of 10% or more have become quite commonplace and the rise in passed in auctions is now being treated like a sign that the whole deck of cards could soon collapse.

While it is true that the property market has cooled rapidly in Australia and that the changes to negative gearing and capital gains tax have fed into that, it is far from certain that these early signs of a softening market are anything like as savage as they are being portrayed.

Can Buyers Win the Tug-of-War?

Like any market, the property one is always a game of tug of war between buyers and sellers and if you take even a medium-term view of that tug of war, the sellers have been winning for a long time.

It is only a sign of an active market – and deliberate government policy choice – if the buyers start to find prices trending back into their affordability zone instead of inflating wildly out of reach.

With property there are markets within markets and no city, town, suburb or even street being the same.

Some sellers are still getting great prices and some are finding buyers scarce and stingy, which has always been the case.

Small but Decisive Market Switch

However there has been a small but decisive shift in the long-booming market, although the overall numbers nationwide show that it has only led to a 0.4% fall in national house prices.

In the biggest markets of Sydney and Melbourne, prices have fallen by 1.2% and 1% respectively in the last month, with prices rising a little in Brisbane and Perth.

Of course, a mild fall like this is not unusual after a period of strong, above inflation price rises and that has certainly been the experience of the overall market for some time.

Houses Increasing by $70,000 a Year

Using long term measures, since John Howard reduced CGT in 2000, house prices have increased five-fold and the average home has increased in value by about $70,000 a year over the past five years.

It has absolutely been the case that some people’s houses have been earning more than they do—without any tax, mind you.

This sort of price growth is not sustainable if we want people on average wages to be able to save for and afford to buy somewhere to live—even if that place to live may be morphing from a house and land into an apartment or unit.

If houses keep rising in price much faster than incomes – which they have been doing for a very long time – then the cohort of house buyers will keep contracting towards those who are already quite wealthy or are able to rely on big payments from the bank of mum and dad.

That brings with it mortgage stress for many that just scrape into property ownership and also lots of rental stress as well for those remaining just short of reaching their home ownership dream.

Owner-Occupiers Crowded Out

Indeed, the expansion of the rental property as an asset class has been a big contributor to the medium-term rise in property prices with secondary house ownership expanding to 3.2 million properties in 2022—a 43% rise on the number in 2006.

Such strong growth in the secondary sector has played a big part in the price increases over that time as potential landlords fought it out with traditional home buyers and more often than not came out the winners.

It is through changing the tax stimulus for such behaviour – including negative gearing and CGT changes – that the government is hoping to slow down the growth in property prices to be more in line with wage growth.

By slowing down the growth in rental property owners the overall housing market should become less crowded and allow more households to become owner-occupiers.

Interest Rates Also Crucial

As always with the property and other markets there are some other factors at work here as well and the level of interest rates is one that plays a very big role in house prices—particularly at times of high inflation and global uncertainty due to the Iran war.

In summary, it is a time to be alert but not alarmed about the state of the Australian property market.

If prices soften a little and allow for more owner occupiers to take the place of landlords, it won’t be a tragedy for equality and aspiration in society.

And it is always worth remembering that house prices have risen from around 4.5 times average wages in the 1970s to almost 14 times now.

It is unlikely that clock will ever wind all the way back to those times but a mild price slowdown now shouldn’t be regarded as a national tragedy.