The two-bedroom apartment across the street is for sale. I can’t help myself so I go to the open home inspection to browse. With my son and his partner about to move back into sharing my apartment, this one seems at least an interesting and possibly urgent prospect for them to contemplate.
The apartment is old but nice – much nicer than the similar sized apartment nearby I encouraged my daughter and husband to buy in August 2017. It’s also much, much cheaper. Oops. Alert readers may recall my reputation as a family property adviser is in tatters given mid-2017 coincided exactly with the peak in the Sydney property market. My daughter recalls it regularly.
Sydney prices have since fallen by nearly 14 per cent, translating to 10.9 per cent in the year to March 30, according to Corelogic. That includes 3.2 per cent in the last quarter. The rate of decline has actually been moderating in the last few months but falls are expected to continue this year. The uncertainty is how far and how long.
And that is before a prospective Labor government proceeds with its planned changes to wind back negative gearing and halve capital gains tax concessions from January 1. Even if there’s a slight spike to get into the market ahead of that deadline, most experts predict it will be modest with the impact likely to hit prices again in 2020.
So I regretfully put the enticing looking brochure from the home inspection into the bin. My son is relieved he doesn’t have to deter my usual enthusiasm for another generation getting started in the housing market. There’s certainly no incentive for prospective purchasers to rush these days. Not only is my personal history on judging prices badly in deficit, the future looks equally nerve-racking.
Nor am I alone in my confusion. Everyone from Philip Lowe at the Reserve Bank to Treasury economists are wondering about the impact of falling house prices on consumer confidence and spending as well as on the overall health of the economy.
As Lowe suggests, the national conversation seems to have swung seamlessly over the past 18 months from worrying house prices are too high to concerns house prices are falling too fast in Sydney and Melbourne.
Lowe still argues this is a manageable decline that won’t derail economic growth, particularly as this housing cycle is not associated with rising unemployment or rising interest rates. Plenty of others aren’t so optimistic.
The federal budget predicts a decline in dwelling investment of 7 per cent next financial year, for example, which Josh Frydenberg cites as a big concern.
This issue will also be a big part of the election campaign with the Coalition attacking Labor for its “dangerous” new housing taxes at the worst possible time given the fall in the market. Scott Morrison calls it a massive assault of middle Australia and the ability of ordinary people to get ahead.
Naturally, Labor’s Chris Bowen retorts the decline makes it the best possible time to do so as fewer people will be affected and that Labor’s policy will help first home buyers rather than investors with several rental properties.
But Labor’s policy on restricting negative gearing to new developments while halving capital gains tax concessions has certainly become far more controversial than in the 2016 campaign when the political focus was on housing unaffordability due to the soaring prices in Australia’s major cities.
In a recent report, SQM Research predicts Labor’s changes would cause already nervous investors to desert the market.
“Such a tax change during a housing downturn is in our opinion a risky move for the economy and so we encourage discussion of perhaps a phase in period for such legislation that would reduce the economic shock that this tax change could create,” says managing director Louis Christopher.
“While we take the view that negative gearing reform is a good thing over the long term, such reform should be executed as part of a wider property tax reform that should be phased in over time.”
Tim Lawless from Corelogic says there are many moving parts contributing to the uncertainty in the market with property transactions down by 20 per cent year on year in Sydney and Melbourne as buyers sit on their hands.
Corelogic is still predicting the bottom to be reached next year after an overall decline in prices of 18-20 per cent in those two key markets.
The precise impact of Labor’s policy is largely an unknown, Lawless suggests, although it will clearly act as a further disincentive. But he says this may be countered by rising rental yields and the strong chance of lower interest rates.
“They are potentially two factors which would cushion the blow,” he tells The Australian Financial Review. “The real danger economically is we see some acceleration in the negative wealth effect.”
He also argues the decline in credit availability from the banks has had a major impact on the market while the possible loosening of restrictions in future will affect the housing dynamic.
Not that there seems much chance of this any time soon. Despite bank CEOs insisting the drop off in credit is due more to lack of demand, restrictions in maximum loans and onerous, time consuming requirements for approvals certainly dampen momentum. That also flows through to the availability of credit for small business, given the degree of business lending linked to mortgages.
It means my son’s reluctance to climb on to the property ladder in case it turns into a snake is part of a much broader trend. My commitment to him – and my daughter? Not to go to any more open home inspections. Indefinitely.