Saying there’s an upside to falling house prices is sacrilege. But Labor needs to admit it
Updated ,first published
Politics and the Australian property market are not the place to look for consistency.
In October last year, when the Albanian government expanded its 5 per cent deposit scheme for first-time homebuyers, the fear from the Coalition, real estate experts and the media was that this would increase house prices.
“Everyone except the Treasury is saying this will increase prices so people will be disadvantaged,” a Channel Seven interlocutor told Housing Minister Clare O’Neil on the morning of October 1.
Fast forward to 30 June and Channel Nine Treasurer Jim Chalmers was asked about the “fairness” of falling house prices.
“What do you think about the 10 million people who own a home in Australia, because it shows it’s not fair to them,” he was asked.
No matter which way home prices move — and they move in both directions — everyone has an opinion about what’s “bad” or “good.” Unfortunately, the facts are few and far between.
This is where 30 to 40 years of Australia’s tax, banking, financial services, immigration and urban planning policy have brought this nation. Collectively, we have spent decades turning our shelter into an investment opportunity or tax opportunity.
National home values as measured by Cotality have fallen. Those who try to attribute this decline solely to the government’s tax policy – made public only seven weeks ago – are delusional.
Melbourne’s property market has been in decline since late last year. The decline in the Sydney market started in February.
In other markets such as Perth and Brisbane, values are still rising, albeit more slowly.
This is exactly what you would expect when the Federal Reserve increases interest rates by a total of 0.75 percentage points in two and a half months. On an average NSW mortgage of $860,000, this rate increase is worth $400 in extra monthly repayments.
The fact that the NSW mortgage loan is now $860,000 (up $400,000 in the last decade) should be a signal that the market has reached an inflection point in affordability, which is another big problem in the price correction story.
Just hours before Cotality published its data, the Housing Industry Association reported that affordability had collapsed in all major markets, falling to its lowest level since the association began tracking in 1994.
To buy a typical house in Sydney and now Brisbane, you need 2.1 times the median income. In other words, a couple where each earns an average income cannot afford to buy a house.
The problem of our crazy house prices is also an issue. Now with prices coming down, the concern has become “all” people facing negative equity.
Earlier this year, the Federal Reserve, which tracks risks to the nation’s banks, noted that about 0.4 percent of all mortgage holders had negative equity. Last month, governor Michele Bullock told a Senate hearing that “practically no one is in negative parity.”
Before the pandemic, about 2 percent of borrowers had negative equity.
Nationally, average house values fell by more than 4 per cent in the 12 months to May 2019; There were much larger declines in Sydney and Melbourne.
Sydney’s house values fell by 15 per cent between mid-2017 and mid-2019, while in Melbourne they fell by more than 11 per cent.
But don’t worry if you don’t remember the fears of falling prices or negative equity at the time. Apart from consternation about the Perth property market (where prices fell by 25 per cent), the government at the time did not have a single question about negative equity.
This was certainly not the concern of morning television or radio shock jocks masquerading as real estate experts.
Then NAB chairman Phil Chronican said he was comfortable with the level of negative equity in 2019 because the unemployment rate was “low”. At the time these comments were made, unemployment was half a percentage point higher than it is today, and the proportion of people working was lower.
The government cannot deny that tax changes have not affected the property market. Reducing investors’ incentive to buy in the market is a feature of the budget, not a mistake.
Fewer investors, with at least 80 percent purchasing existing housing stock, means less demand. Demand ultimately drives prices up.
But the government is afraid to admit that a slowdown, or even a short-term decline, in prices would actually be economically positive. The Central Bank will certainly not be displeased (given that high house prices encourage people to use their property as a debit card).
To suggest that there is some upside to lowering prices is effectively desecrating the altar of the Australian property bulls.
But prices are falling even without government intervention.
Apart from the 2017-2019 period (which obviously ended when the Central Bank started lowering interest rates), prices fell in 2008, 2010, early 2020 and then until 2022.
Despite these corrections, Australia has become arguably the cheapest property market in the developed world.
This is the real crisis facing this country.
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up for our weekly Inside Politics newsletter.
Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
