I’m an economist. The biggest property correction in 40 years is coming… The higher end of the market is going to get ‘spanked’

One of Australia’s leading economists has warned Anthony Albanese’s crackdown on property investors could trigger Australia’s biggest house price correction in four decades, arguing the controversial changes have landed at the ‘worst possible time’.

MacroBusiness economist Leith van Onselen said reforms to negative gearing and capital gains tax concessions risk accelerating a downturn already underway as high interest rates, weak consumer confidence and rising unemployment weigh on the market.

‘I think we’re going to have the biggest property price correction in 40 years,’ he told the Follio Property Podcast.

‘The biggest in 40 years, according to Cotality, is only 8.2 per cent nationally, which is not that much, but I think we’re going to beat that.

‘The bottom 40 per cent could hold up pretty well. It’ll be the sort of higher end that’ll probably get spanked.’

The changes, announced by the Albanese government as part of its housing affordability agenda, are designed to reduce investor demand and improve access for first-home buyers.

Under the changes, which take effect from July 1, 2027, investors will no longer be able to claim tax deductions for property losses against wage income, while the CGT discount has been reduced, making investment properties less attractive to some buyers.

Van Onselen said the policy changes would have been more effective if they had been introduced during a market upswing rather than at a time when property values were already facing downward pressure, as the 25-year ‘super cycle’ came to an end.

‘The capital gains and negative gearing changes to property are very poorly timed,’ he said.

‘We’ve got a housing market that is at a cyclical peak, the RBA has just hiked rates three times, we’ve got the highest cash rate in 15 years, and financial markets think it’s going to go higher again, so we’re going to get another rate hike.

‘We’re already in a downswing, sentiment’s terrible, we’ve got the war in the Middle East, we’ve got rising unemployment now.

‘We’re probably already looking at a fairly decent property price correction nationally, and now the government’s basically put more downward momentum on that with these changes.’

Van Onselen also challenged the popular view that migration is the primary driver of house price growth, arguing easy access to credit has played a far bigger role.

But his concerns extend beyond Australia, with the economist pointing to a cautionary tale across the Tasman, where tighter restrictions on property investors were followed by a sharp housing downturn before a subsequent government unwound many of the measures.

‘They’ve had a property price crash. Now the new government’s come in and totally undone all their rules,’ he said.

‘I wouldn’t be surprised if we end up following New Zealand at some point. It could take a couple of years, but if we end up having a decent-sized correction people will get annoyed about it.’

AMP chief economist Shane Oliver also believes house prices have further to fall, though he forecasts a much more moderate decline.

National dwelling values have already fallen about 1 per cent from their peak after surging 26 per cent over the previous three years.

‘We now expect a 2 per cent fall in property prices this calendar year and a 6 per cent fall over the next 12 months,’ Mr Oliver said.

‘If unemployment rises substantially, the fall is likely to be greater.’

However, he said a chronic housing shortage would help limit the depth of any downturn.

Home building approvals remain below the Housing Accord target of 240,000 homes a year, with rising mortgage rates threatening to further slow new construction and worsen Australia’s housing supply shortage.

Despite forecasting lower house prices, van Onselen said they would ultimately improve affordability for younger Australians trying to enter the market.

The economist, who owns his home outright, said he was more concerned about the next generation’s ability to buy property than preserving paper wealth.

‘I do care about my children’s ability to get into a home and not have to mortgage themselves to the hilt,’ he said.

‘Selfishly, I know I’m going to have to help them in.

‘You could get a good freestanding house on a good block of land for $1.5million in a nice area of Melbourne instead of $3million. Well, that’s better for me, right? I don’t have to help them as much.’

Looking ahead, van Onselen has broken with the consensus among economists, predicting unemployment will rise more sharply than the Reserve Bank expects. As a result, he believes further rate hikes may be off the table. 

‘I wouldn’t be surprised if we don’t get any more rate hikes this year,’ he said.