Treasury says investor tax changes will barely dent prices, but economists, banks and the Coalition reckon the modelling underestimates the damage
Treasurer Jim Chalmers (pictured) is defending Treasury's Budget forecast that the government's investor tax changes will shave only 2% off national house prices over two years, even as fresh data shows the downturn deepening and rival modelling from banks and independent economists pointing to falls several times larger.
National home values fell for a fifth straight month in August, down 3.6% from their peak, with Sydney's slide – now 7.1% – outpacing the depth of the 2022–23 correction driven by 425 basis points of Reserve Bank of Australia (RBA) rate hikes.
Yet Chalmers has rejected calls from the opposition to release the full economic modelling behind Treasury's projections, telling reporters this week the assumptions relate to "the next couple of years, not the last couple of months”.
Coalition and economists plead for transparency
The pressure on the Treasury is coming from more than one direction.
Opposition housing spokesman Andrew Bragg trashed the opaque modelling as not “worth the paper it's written on”. His central concern is Treasury's own estimate that the changes to negative gearing and capital gains tax (CGT) will result in 35,000 fewer homes built over a decade – a supply hit he argues will now be compounded by the government's last-minute deal with the Greens banning self-managed superannuation funds (SMSFs) from borrowing to invest in residential property.
Former Treasury economist Peter Downes has broadly backed that scepticism, though for different reasons. He argued the bigger driver of the current downturn is rising global real interest rates rather than the tax changes alone, but says Treasury's $2-a-week rent estimate looks implausibly small next to his own modelling, which points to rents rising an extra 6% above trend by 2029 – roughly $2,000 a year for a typical renter.
Downes put the discrepancy down to an honest error rather than deliberate understatement.
Bank forecasts running well ahead of Treasury
Commercial bank forecasts following Labor’s bombshell 12 May Budget ranged from a 1–2% peak-to-trough fall (Bank of America) to 5% falls from Commonwealth Bank of Australia (CBA), AMP and Morgan Stanley.
That gap has since widened significantly. Just this week, CBA downgraded its housing forecast to a 9% peak-to-trough national fall, with senior economist Trent Saunders noting "the adjustment over the past three months has been larger and faster than we anticipated”.
CBA now expects Sydney and Melbourne to fall roughly 13% and 12% respectively, and – notably – has extended its downgrade to Perth, Brisbane and Adelaide, cities previously considered insulated by tight supply.
AMP chief economist Shane Oliver's independent modelling also sits closer to CBA's than to Treasury's.
Oliver now expects a 10% top-to-bottom national fall, revised up from an earlier 7% estimate, with Sydney houses down around 13% and capital city prices overall down 11%. He estimates the correction is only around 35% complete, with a bottom unlikely before the June quarter of 2027.
Oliver's analysis frames the investor tax changes as one part of what he describes as "a near perfect storm" also comprising higher-for-longer interest rates, record-poor affordability and weak buyer confidence – with the RBA still expected to lift the cash rate at least once more this year.
The distance between Treasury's number and everyone else's is more than a rounding error – the estimates represent an entirely different reality to what’s fundamentally happening in the market.
Investor demand the real pressure point
Where Treasury's numbers look most exposed is on investor behaviour. RBA analysis cited in Oliver's research shows that removing negative gearing is equivalent to roughly a 60-basis-point increase in mortgage rates for an investor targeting a typical 4% rental yield – a material repricing that banks say is already showing up in a more than 20% fall in investor housing finance applications since the Budget, with Westpac reporting a 20% drop in mortgage applications within three weeks of the changes taking effect.
Broker network data tells a similar story: investor mortgage applications was the sharpest decline of any borrower category tracked in Loan Market Group's most recent market report.
Oliver's modelling suggests investors chasing a higher after-tax yield could push the adjustment through either a 20% price fall, a 25% rent increase, or – more likely in the near term – some mix skewed toward price rather than rent.
Given that real estate is the backbone of the Australian economy, it's concerning that the chasm between private and government house price projections is so vast, but the truth will out as the downcycle either deepens or plateaus.
In the meantime, Bragg has pledged to pursue Treasury on the contentious modelling; whether Chalmers agrees to play ball remains to be seen.
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