The property market is in a state of flux, and it's not just the young and aspiring investors who are feeling the pinch. Joshua Goodfellow, an 18-year-old small model train business owner from New South Wales, has been searching for his first home for two months, but a perfect storm of interest rate hikes, Labor's tax reforms, and global economic and geopolitical uncertainty has forced him to hit the pause button. This is not an isolated case; the first weekend after the May 12 federal budget saw fewer than half the homes listed for auction change hands, with the clearance rate dropping to 43.1 per cent, according to Cotality data.
The market is in a state of caution, with buyers taking longer to make decisions, fewer active bidders, and open-home attendance softening. This is a clear sign that uncertainty is weighing on buyer confidence. Loan Market data shows a 23 per cent fall in investor mortgage applications and a 12 per cent drop in first home-buyer applications at the end of May.
The changes to housing investment tax settings are a major factor in this shift. The removal of negative gearing and the replacement of the 50 per cent capital gains tax discount with inflation indexing are expected to reduce the borrowing capacity of investors by between 10 and 20 per cent. This has forced many investors to press pause and reassess their strategy, with some even reconsidering whether it's the right move at this stage.
The impact of these changes is likely to result in a 'fairly sharp pullback in investment activity', according to Cotality's research director, Tim Lawless. However, Ray White chief economist Nerida Conisbee argues that investor activity had already been declining due to higher interest rates, and the budget has added a second shock of 'stage fright' by creating uncertainty over tax treatment and future returns.
So, is now really a good time to buy? For those who are financially ready, it could be a good opportunity. When sentiment weakens, buyers generally have more negotiating power, with less competition and sellers becoming more realistic. However, the housing market downturn is likely to last while three things remain unsolved: interest rates, the final shape of the budget tax changes, and global economic uncertainty.
The market is in a state of recalibration, and one area of concern is the impact a shrinking investment pool will have on the future of rental supply. With a market already short of rental supply, weaker investor activity risks making the rental problem worse, not better. The next few months will be crucial in determining the future of the market, and it's clear that the dust needs to settle before buyers and investors can make informed decisions.
