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Why housing prices won’t crash

Posted on Jun 12, 2016

House prices in Australia have grown at an unprecedented rate since 2004. A healthy economy fuelled by a strong mining sector, coupled with sustained low interest rates and a mixture of favourable tax settings have made the property market a desirable investment choice for Australians over the last decade. Consequently, property prices have increased to the point of unaffordability in many major Australian capital cities.

Many first home buyers are locked out of the market, with established investors regularly buying a second, third or fourth investment property in order to offset personal income taxes. In addition, population growth has far outstripped new property construction, leading to a gap between supply and demand that is further fuelling house price growth.

The McKell Institute’s Switching Gears report into negative gearing, recommends a discontinuation of negative gearing allowances for existing housing stock, and a grandfathering of current allowances for those who are already negatively geared. Under this proposal, negative gearing would still be allowed for newly constructed properties. These recommendations have since been adopted by the Federal Opposition in its housing affordability platform. Opponents of the changes have argued that under this proposal property prices would fall, thereby ensuring that the overall wealth of the 67 per cent of Australians who own property will decrease.

Economic modelling determines the likely outcomes in the property market, over a 10-year period, house prices will continue to grow under both current settings and the proposed negative gearing changes.

Under current arrangements, house prices across Australia’s 8 capital cities are forecast to grow at 3.09% per year, while under proposed negative gearing changes, house prices are also forecast to grow, albeit at a more modest 2.60 % per year across the same 8 cities.

Adrian Lee is a Senior Lecturer in the Finance Discipline at the University of Technology, Sydney.

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