Federal Budget: Ord Minett’s Malcolm Wood says ‘overvalued’ property market set for major hit

A financial adviser has warned Australians that an “extremely overvalued” property market will take a hit from rate hikes, Federal Budget tax changes and a potential economic downturn.

Ord Minnett head of research Malcolm Wood on Wednesday said slower spending growth and looming tax hikes created a “heightened risk of disruption” amid international threats, including the Middle East war.

The Federal Budget adjusted the treatment of capital gains tax discount from a clean 50 per cent to a dynamic figure based on inflation — making investors worse off in periods of low inflation.

Negative gearing on future purchases of existing homes was removed, too, with new builds and assets held on Budget night exempted.

“These changes should significantly impact the Australian housing market,” Mr Wood said.

“(By) driving a large decline in home sales as negatively-geared investors hold onto properties, a large decline in home prices as investors leave an overstretched established market and a double-digit decline in housing investment as investors step back amidst uncertainty.”

Mr Wood said property investors would now need lower prices or higher rents to justify buying, which would “significantly disrupt” the rental market.

“Investors who need to sell will find no investor demand,” he said.

“Owner-occupiers should emerge as prices fall, but are constrained by affordability at current mortgage rates.

“The loss of investors should mean lower sales volumes and home prices.”

The Reserve Bank’s three rate hikes since February will also slow demand and add to reasons for caution.

Mr Wood said the country’s property market had an “extreme valuation” of 6.5 times disposable income, much higher than the US.

Household debt was much higher than in the US, too.

HSBC’s Paul Bloxham last week tipped house prices would fall in the second half of the year thanks to rate rises and the tax changes.

“Housing prices have already fallen in recent months in Australia’s two largest cities, Sydney and Melbourne, and price growth is slowing in the other capital cities,” he said.

“Timely indicators show sharply lower auction clearance rates, a sharp fall in investor loan approvals in (March quarter), and a weakening in surveyed consumer sentiment, including on the question of whether ‘now is a good time to buy a home’.”

Perth and Brisbane were also set to cool as investor demand pulled back.

Yet Your Property Your Wealth investment strategist Darren Walsh was more optimistic, telling The Nightly on Tuesday the Budget changes would push up prices in greenfield areas.