Government's profound shift in thinking on property

The Federal budget announcement that deductions for travel costs and certain depreciation allowances will no longer be available to landlords of residential property is a potential game-changer for residential property. These changes, combined with other changes to curb foreign buyer demand, are relatively small in terms of their market impact. But make no mistake, this represents a profound shift in thinking and action from the Government.

For over 30 years, fiscal policy has been relentlessly supportive for residential property prices. Now, the Government is signaling for the first time that it will take measures to actively slow demand for housing. This is an acknowledgment that we have backed ourselves into a corner on residential house prices, and that we must now find ways to stifle future price growth without causing a substantial correction.

It's a very fine line to walk. A major fall in house prices would be very destabilising for our economy. Labour's response, with mooted changes to negative gearing, is even more profound and would likely have a much larger negative impact on the markets.

The Budget announcement in itself is not going to lead to a material change in tax collected. But we are predicting it will be the start of a subtle shift in investor behaviour. Over the last two years, we've seen a lessening in almost all the major factors that have supported housing price growth for the past 30 years. We're not picking a major crash in prices. But we are certainly entering a period of significantly heightened risk.

The Federal Government (budget announcements) and APRA (implementing tighter controls on bank lending) have combined to heighten regulatory risk. On top of that, it's likely we have seen the bottom of the interest rate cycle, we have muted wage growth, plus much less attractive conditions and harder financing for foreign investors. Lower immigration and a general over-valuation in almost all asset markets are additional risk factors. The negative influences are piling up.

Our greatest collective challenge over the next few years is to walk a fine line of keeping housing prices and debt levels relatively stable, while allowing our economy, wages and incomes to grow. It's an incredibly difficult balance to get right.

Residential property ownership has been heavily supported, some would even say subsidised, over the past 30 years by household debt (mortgages) growing substantially faster than household incomes. Here's two charts published by the RBA, which illustrate the point (you can get them free from the RBA website - just search "RBA chart pack"). They show growth in credit (debt) in total terms and by sector.

It's likely that any major fall in house prices will be proceeded by a fall in the availability of loans, leading to a reduction in loan growth, or even a contraction in credit. Keep an eye out for a significant fall in these graphs - or even better, talk to mortgage brokers regularly about what they're seeing in the market. Any major reduction in the availability of loans is likely to be a sign that credit growth is slowing and a decent correction is coming.