Housing Market Freeze: A Perfect Storm of Deterrents

The Australian housing market is facing a perfect storm of factors that are driving a surge in “buyers’ strikes” and a sharp decline in auction clearance rates. According to Domain, nearly half of properties under the hammer last week went unsold, casting a shadow over the already fragile property market.

Interest rate rises and economic uncertainty have certainly contributed to the decline, but it’s the government’s decision to abolish negative gearing on established homes that has dealt the final blow. This move will increase the upfront cost for property investors by 90-155 basis point equivalent in interest rates, sending shockwaves through the market.

Major banks such as Commonwealth Bank and Westpac are forecasting weak growth this calendar year, but even these predictions are being tempered by reality. SQM’s managing director Louis Christopher notes that Sydney prices are expected to fall by 9%, while Melbourne prices will decline by 7% this year.

The government’s policies aimed at curbing investor activity may have unintended consequences. The removal of negative gearing and the replacement of the capital gains tax discount with inflation indexing will reduce borrowing capacity by 10-20%. This will exacerbate the already acute shortage of housing supply, making it even harder for investors to afford homes.

History has shown that when investor home lending is crimped, house prices react negatively. The 2014 and 2017 macro prudential measures, which aimed to squeeze out investors and make way for first-home buyers, are a stark reminder of this phenomenon. The current policy changes may have been designed to achieve the opposite effect, but it’s clear that the market is now in chaos.

Younger buyers who took advantage of the government’s 5% deposit scheme are particularly vulnerable to a decline in house prices. A negative equity position would be catastrophic for those who thought they were finally on the path to homeownership. The Australian housing market has been hit by a barrage of negative shocks: interest rate rises, economic uncertainty, and now, tax-unfriendly budget changes.

Policymakers must take note of the warning signs. The perfect storm brewing in the housing market demands a more nuanced approach. It’s no longer just about curbing investor activity or making way for first-home buyers; it’s about addressing the fundamental issues driving this downturn: affordability, supply, and economic uncertainty.

As the market adapts to these changes, investors and homebuyers alike must be prepared for a potentially bumpy ride ahead. The question on everyone’s lips now is: what’s next? Will the government revisit its policies or stick to its guns? One thing is certain – the outcome will have far-reaching consequences for the entire market.

The housing market freeze has arrived with a vengeance, and it’s time for policymakers to take action to prevent a catastrophic collapse of the market. Anything less would be a dereliction of duty.