With the high likelihood of an ALP win at the next Federal election, and with it changes to negative gearing and capital gains tax, fear is rippling through the investment property market.
In fact, according to RiskWise Property Research CEO Doron Peleg, price reductions accelerated over the last quarter following the day of the Liberal leadership spill of Malcom Turnbull by Scott Morrison on August 24. In addition, since the Wentworth by-election auction results have been noticeably lower.
This is evidenced by last week’s auction results which saw Sydney have the worse preliminary clearance rates in a decade at 47.7 per cent and Melbourne at a preliminary low of 50.5 per cent.
“The Liberal Party’s leadership spill that saw Scott Morrison become the new Prime Minister effectively put Labor’s probability of winning the next Federal election at 80 per cent, making potential changes to negative gearing and capital gains tax highly likely,” Mr Peleg said.
“From that point of time, we have seen a significant reduction in consumer sentiment in the residential property sector and major drops in the auction clearance rates.”
Mr Peleg said a few months ago before the leadership spill, the likelihood of a Labor win was lower and changes to negative gearing and capital gains tax were less likely. He said while there had already been a slump in Australian house prices, based on CoreLogic data, this fall actually followed a similar pattern to other downturns in the past.
“At that point of time it was nothing we hadn’t seen before and was in line with previous downturns,” he said.
CoreLogic figures show in the downturn of 2003-2006, dwelling values in Sydney fell 7.1 per cent in the space of 12 months, and during the GFC they fell 7.0 per cent. Dwelling values in Sydney have also fallen by 5.6 per cent since peaking in July last year, which is comparable to the previous downturns.
However, since the leadership spill, figures from Westpac’s Melbourne Institute Consumer Sentiment Index have shown consumer confidence on residential property continues to deteriorate.
“The ‘time to buy a dwelling’ index has fallen 5.7 per cent in the past two months,” Mr Peleg said.
“Consumer expectations for house prices also fell 7.4 per cent in October to their lowest point ever with the biggest drop in Victoria, likely an effect of falling Melbourne housing prices.
“While tighter credit restrictions and other factors have contributed to the current downturn, the significantly increased likelihood that Labor will win the next Federal election – which will be called on or before May 18, 2019 – and make changes to negative gearing and capital gains tax has definitely been a contributing factor to price reductions.
“In fact, these price reductions have accelerated over the last quarter and we have seen that auction clearance results are very low.”
He said the risk of material price reductions had also increased lately, particularly due to tighter lending standards and buyer expectations for price reductions due to the potential changes in negative gearing and capital gains tax.
“This is similar to AMP Capital’s view, who while initially expecting falls of 15 per cent in Sydney and Melbourne spread out to 2020 (about 5 per cent per annum), have revised their estimate to 20 per cent falls due to tighter credit restrictions and fears of low capital growth due to changes in the tax,” he said.
“According to AMP, this would take average prices back to first half of 2015 in those two cities. Nationally they estimate a fall of nearly 10 per cent to 2020 – previously expected to be 5 per cent.
“So we can see with the increased likelihood of Labor winning the next election, it has already impacted the housing market.
“These changes are very likely to impact the market from now until their full implementation and we won’t see any improvement until the market has adjusted to the new lower prices and reduced investor activity.”