House prices could plummet by up to 15% over the next four years under the Labor Party, a report by SQM Research has claimed.
The report, which investigates the housing market effects of the Labor Party’s proposal to change negative gearing, forecasts house prices could drop by up to 3% in FR2018, up to 8% in FY2019 and up to 4% in FY2020.
That figure, however, forecasts the worst-case scenario and assumes there is no further cut to the cash rate.
The average loss could be as little as 4% over the same period if the Reserve Bank lowered rates by 50 basis points from their current level, according to the report.
“Our analysis suggests the market impact would last by around three years with sales falling significantly in year one and a correction to take affect with dwelling prices falling the most in the second year,” managing director of SQM Research, Louis Christopher said.
“We think there would be a possible response to this event with the RBA
cutting rates, thereby mitigating some of the potential price falls. We don’t think the market will crash per say, but it will be felt by the economy. We then expect the market to return to equilibrium from year three.”
The report also warns of high risk in the off-the-plan apartment market sector.
According to the report, investors seeking to benefit from the new concession by buying new off-the-plan developments are exposed to a “substantial risk” of their property being valued below purchase price, especially if the investor is seeking to sell their investment within the first three years.
“In short, there will be a market impact if Labor’s Negative Gearing Policy is legislated,” managing director of SQM Research, Louis Christopher, said.
“We strongly encourage Labor to consider some of the investor issues, particularly surrounding the distortion their policy may create on pricing of off-the-plan developments and the likely losses investors in those properties would face come resale time to those who won’t have the tax concession.
“While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform that should include a broad based land tax and the elimination of stamp duties. Such reform should have a phase in period of up to three years. Doing so would reduce the risks of a significant downturn which would likely have wider ramifications on the economy.”