A new report on Australia’s major housing markets has tipped Melbourne to rebound more quickly than Sydney and given a thumbs-up to Labor’s proposed negative gearing and capital gains tax reforms.
Melbourne is expected to make a quicker turnaround and see just “half the real price decline of that in Sydney” during the current financial year, with KPMG tipping falls of 4.2 per cent and 2.2 per cent respectively.
“We anticipate the Sydney and Melbourne dwelling markets to perform quite differently over the next few years,” the report said.
“In broad terms, we expect real prices for Sydney residential property to
continue to soften during FY19, bottom out in FY20, before experiencing
moderate growth in FY21.”
Melbourne prices are forecast to begin rising again in the 2019/20 financial year, with a 2.4 per cent price rise followed by 4.7 per cent in 2020/21.
Overall, KPMG expects the current downturn to produce peak-to-trough falls of -13 per cent in Sydney and -5 per cent in Melbourne.
Negative gearing and capital gains tax reforms ‘sound’
The report also gave the green-light to Labor’s proposed negative gearing and capital gains tax reforms.
“Overall, the policies proposed are sound, but their introduction would need to be managed carefully,” KPMG said.
Labor’s proposed reforms
- Capital Gains Tax – reduce the current discount for investors from 50 per cent to 25 per cent across all asset classes. No change to owner-occupied dwellings.
- Negative gearing – limit to newly built homes the current concession that allows property investors to offset losses against their taxable income. The reform would be ‘grandfathered’ in, and therefore have no impact on investors with existing negatively geared properties.
Foreign student effect ‘underestimated’
The report also highlighted the hidden impact that the more than 800,000 foreign students who live and study in Australia each year have on the supply and cost of housing in the major cities.
Foreign students are often excluded from the Australian Bureau of Statistics’ ‘Estimated Residential Population’ data, the report said, which could lead to “notable” underestimations of the true population and demand for housing.
In September 2018, there were more than 800,000 foreign students studying in Australia, of which 305,000 were located in New South Wales and nearly 260,000 were located in Victoria.
“Even adopting a higher occupancy rate of 3.5 foreign students per dwelling, the accommodation demand by foreign students is estimated to have been around 87,300 dwellings in Sydney and 78,500 dwellings in Melbourne in 2018,” the report said.
“Our analysis also shows that foreign students studying in New South Wales and Victoria have been taking an increasing proportion of the new stock of accommodation entering the market each year.”
KPMG found the number of homes required to
accommodate foreign students and graduates remaining in Australia has risen dramatically over the past two decades.
In 2000, foreign students and graduates represented around 10 per cent of the incremental dwelling stock entering the market. That figure rose to more than 50 per cent in NSW and 40 per cent Victoria in the years just prior to the global financial crisis.
“Since 2013, proportionate demand has stayed around the 30 per cent level for New South Wales and around the mid-20 per cents in Victoria,” KPMG said.
Residential investment down
Residential property investors, who experts say fuelled the historic price booms in Sydney and Melbourne, will take “some time to return to the market”, KPMG said.
Lending to investors as a proportion of total lending to purchase residential real estate fell from 39.2 per cent in the June quarter of 2017 to 31.7 per cent in October 2018, figures show.
There has also been a “sharp decline” in foreign investment in Australian residential property, KPMG said.
Data from the Foreign Investment Review Board (FIRB) shows that less than 13,200 residential properties in Australia were purchased by foreign investors in 2016-17, compared to 40,100 homes the previous financial year.