Basically, this is a you-break-it, you-bought-it situation.
Treasurer Jim Chalmers now owns house prices.
Whatever happens, he will be held responsible.
His changes to negative gearing and capital gains tax are monumental. Brave, bold, and in my personal opinion, pretty reasonable. But for the government they are very, very risky.
The changes to negative gearing affect buying an established home to use as an investment property. Losses you make can’t be subtracted from personal income before you calculate
income tax. So fewer investors will want to buy established homes. That is the policy intent.
The idea is to reduce demand so homes are available for first home buyers.
The change of capital gains tax has a similar purpose – the current system has been glorious for investors whose homes shot up. By changing the way capital gains tax is calculated, owners of fast-appreciating homes will pay more tax. That could further dampen demand for those homes, which are often established homes in capital cities.
So the plan is clear: Boot the investors to one side and clear the way for first home buyers.
The risk is if the housing market shifts suddenly and violently rather than gently.
Take the Reserve Bank of Australia, for example.
The new monetary policy board has been hiking interest rates vigorously. Both the last two meetings led to rate rises.
And there could be more.
If a mortgage is more expensive, people will borrow less. Which, usually, will make prices fall.
Even before the RBA hikes rates, the rise in consumer prices also leaves less money for property purchases, which could contribute to a softening property market.
As the next chart shows, property prices are already falling, at least in Sydney and Melbourne. Growth is ebbing in the other capitals for now. Will they fall too? Perth (+26 per cent) and Brisbane (+19.7 per cent) could easily be due for a correction after their last year of frothy hypergrowth.
Oil is sitting at $US106 per barrel at the time of writing, which is uncomfortably high.
We need it to fall for our economy to recover.
But that depends on US President Donald Trump, and the new supreme leader of Iran, Mojtaba Khamenei, whose dad was just killed by the US.
Neither man is the kind of calm, rational actor you’d hope to see at the negotiating table. Which means the situation in the Strait of Hormuz could get worse before it gets better.
Treasurer Jim Chalmers is just one of many people whose job depends on the Strait of Hormuz reopening.
If it doesn’t, and the economy continues to choke on high fuel prices and high interest rates, house prices could very easily begin to fall.
If they fall in a rapid and damaging way, the tax changes in the 2026-27 Budget could very easily become scapegoats.
They won’t be the only reason for a fall. But they will be one thing that was under his control.
So the changes are a risk.
Good government is about taking risk – political risk – to get policy benefit.
“Global uncertainty is not a reason to delay reform, it’s why we must move with urgency and ambition,” said the Treasurer on Tuesday night.
The benefit of the reform in this case, however, is frustratingly slight.
The budget papers modelled the expected upside from changing capital gains tax and negative gearing, in terms of how many first home buyers are truly helped into the market.
What they find is that it should, if it works as expected, get an extra 75,000 young people to become owner-occupiers in the next decade.
That’s not bad.
But it’s hardly a dramatic shift, is it? An extra 7500 people a year, in a population of over 25 million.
It just goes to show how big and slow-moving the housing market is, how expensive homes are, and how much political courage is needed to make even moderate change to the housing market in this country.
Jason Murphy is an economist | @jasemurphy.bsky.social. He is the author of the book Incentivology
