Australian housing was already cooling before the budget – but how cold it gets depends on two key factors

After negative gearing and capital gains tax changes were revealed in the 12 May budget, housing data has begun to show how they may affect Australia’s property market. Illustration: Victoria Hart/Guardian Design View image in fullscreen After negative gearing and capital gains tax changes were revealed in the 12 May budget, housing data has begun to show how they may affect Australia’s property market. Illustration: Victoria Hart/Guardian Design Analysis Australian housing was already cooling before the budget – but how cold it gets depends on two key factors Jonathan Barrett Most economists believe the chronic undersupply of homes will eventually push prices higher once interest rates ease and the tax changes are priced in Get our breaking news email , free app or daily news podcast The government’s property tax changes have become one of the defining political issues of Labor’s second term, drawing fierce criticism from opponents who argue they represent an “assault on aspiration” that will destroy home values. In the three weeks after the negative gearing and capital gains tax changes were revealed in the 12 May budget, housing data has begun to show how they may affect Australia’s property market. Here’s what the data shows, and what could happen next. Impact on house prices ‘comparatively modest’ A lot of the heat was already coming out of the property sector leading into May due to interest rate hikes, constrained household finances and an oil crisis, all of which tempered buying activity. This was especially true in the country’s two biggest housing markets, Sydney and Melbourne, which had recorded modest price falls. Prices in the state capitals started to tick up in early May, before reversing after the budget, leading to a flat month overall, monthly pricing shows. Sydney and Melbourne went negative. The budget date is significant because investors buying after 12 May will not be able to negatively gear their properties beyond mid next year, with the notable exception of those buying new homes, a feature designed to encourage more supply. House prices are falling in Australia. That’s a good thing – if you believe housing is a basic human need | Saul Eslake Read more While Treasury expects the tax changes to create a two percentage point drag on property prices over two years, AMP chief economist Shane Oliver is forecasting a 5% hit over 12 months. Sign up for the Breaking News Australia email That is to say, in Oliver’s model, if prices were going to be flat over the coming year without Labor’s changes, they will now be down 5%. “The impact will be fairly quick, it won’t be occurring over 10 years, it will happen over the short term,” says Oliver. “Investors will hold back in the near term until rental yields improve.” The market reaction to the budget changes has been faster than expected, according to Commonwealth Bank economists, which increases the chance of a sharper near-term slowdown in prices. But CBA says the impact is “modest