Australia's property tax overhaul risks a housing slump like New Zealand's

In May, the Australian government, led by Treasurer Jim Chalmers, introduced a major property tax reform in the federal Budget. The changes restrict negative gearing on residential investments to qualifying new builds and replace the 50 per cent capital gains tax discount with inflation indexation and a minimum 30 per cent tax rate on real gains. The policy aims to curb property investor activity, reduce price growth, and improve housing affordability for first home buyers. However, the property market has deteriorated sharply since the announcement, with national values falling 1.6 per cent from their March peak, including a 0.7 per cent drop in July alone—the worst monthly result in nearly four years. Sydney and Melbourne saw declines of 1.4 per cent and 1.2 per cent respectively. The Reserve Bank's forecasts did not anticipate such a rapid weakening.

The policy draws comparisons to New Zealand, where a similar attempt to curb property investors in 2021 was followed by a prolonged housing slump. In New Zealand, the official cash rate was just 0.25 per cent when the tax package was announced, and house prices continued rising before peaking late that year. However, as interest rates rose from 0.25 per cent in October 2021 to 5.5 per cent by May 2023, house prices fell about 15 per cent in nominal terms and remained weak for years. Using Real Estate Institute of New Zealand data, economist Dr. Oliver calculates that prices are now more than 30 per cent lower in real terms, more than four and a half years after the peak. The New Zealand government eventually dumped the policy, but the damage to the market was significant.

Australia is starting from a more fragile position than New Zealand did. The Australian market was already weakening before the Budget, and the tax changes have accelerated the decline. Labor argues that fewer investors chasing established properties will help first home buyers, while retaining negative gearing for new builds will redirect investment into additional supply. Treasury estimates the changes will produce 75,000 additional owner-occupiers over a decade and cause prices to grow about 2 per cent less than they otherwise would have. However, critics point out that lower prices do not automatically help first home buyers when higher interest rates have destroyed borrowing capacity. A post-Budget NAB survey found the local investor share of new home sales fell from 19.9 per cent to 14.8 per cent, threatening a construction sector already in crisis.

The situation raises an uncomfortable question: is Australia starting down the same path as New Zealand? Dr. Oliver warns that Australians' belief that home prices always trend higher could shatter just as it did in New Zealand and Canada. The signs are there, but it is too early to call. Labor needs prices to fall enough to claim an affordability victory, but not so much as to trigger a deeper correction. The policy similarities are evident, and the market's reaction suggests that the gamble may be backfiring.