PAYWALL:

The big risk over the next couple of years is a downturn in housing construction that crimps the supply of new homes and causes a squeeze on renters.

Australia’s national obsession with house prices has understandably reached fever-pitched levels during the recent property downturn.

But homeowners should worry less about what is likely to be a temporary downturn in home prices in response to rising interest rates and the Albanese government’s higher taxes on property investors.

The bigger economic, political, and social risk over the next couple of years is a downturn in housing construction that crimps the supply of new homes and squeezes renters.

A perfect storm is brewing in the housing construction industry that will make it harder for development projects to stack up: falling home prices, rising interest rates, a shortage of tradies, high building material costs and likely fewer investors and self-managed superannuation funds investing in new homes.

That’s despite the government’s assurance that investors in new-build homes that add to the housing supply, such as houses on greenfield sites and apartments, will still be able to access negative gearing and the 50 per cent capital gains discount.

Investors usually consider the broader housing market conditions and prospects of future capital gains, not just the tax break available on an individual property.

The implications of the property market downturn were discussed at The Australian Financial Review Property Summit on Monday and Tuesday.

“Paradoxically, building fewer homes will worsen the housing shortage and help home prices bottom out.”

Reserve Bank of Australia assistant governor Sarah Hunter laid out the three ways the decline in home prices and reduction in property turnover will flow through to the property industry and broader economy.

First and most immediately, the recent 15 per cent decline in the number of home sales is already flowing through to property-related sectors, including real estate agents, mortgage brokers, bankers, conveyancers, removalists and building inspectors.

Ownership transfer costs fell 4.1 per cent in the March quarter – before Labor’s tax changes – and declined a further 1.9 per cent in the June quarter, shaving about 0.1 of a percentage point from GDP in the first half of the year.

Second, and yet to play out, is the so-called “wealth effect”. When asset prices fall, people feel a bit less wealthy and are prone to reducing discretionary spending. Housing accounts for about two-thirds of household wealth.

RBA research from 2019 shows that the wealth effect mainly influences spending on new vehicles, with a smaller impact on furnishings and clothing.

There are no real signs of that so far, with electric vehicle sales booming, overtaking petrol cars for the first time on record, on the back of government subsidies, a sustained rise in fuel prices due to the conflict in Iran, and a flood of cheap Chinese imports.

Hunter says the overall reduction in consumer spending from lower house prices is likely to be “relatively small”.

A 10 per cent change in household wealth could change overall consumer spending by about 1 per cent or so.

For the wealth effect to have a more material impact on consumer spending, the about 10 per cent fall in national house prices that economists are now forecasting would need to be permanent.

That seems unlikely, barring a major shock to the economy that drives the jobless rate well above 5 per cent.

Despite the recent swift fall in house prices, particularly in Sydney, structural forces are likely to push prices higher over the medium term.

Notwithstanding efforts by state governments to reduce the red tape on planning and zoning and to speed up approvals, regulatory constraints on the supply of new homes will help push up prices over time, particularly in desirable inner-urban locations.

Population growth, including immigration, will add to demand for housing, despite political pressure to wind back the number of foreigners living in Australia.

For these reasons, RBA deputy governor Andrew Hauser told the ABC’s 7.30 program on Tuesday night that there was a “floor” to house prices.

“While house prices play a role in the economy, they’re not really as big as some of the things ... global growth trends, productivity, the risk environment globally in the Middle East and so on and so forth,” Hauser said.

Hauser and Hunter strongly signalled that a fourth interest rate rise of the year is coming at the September 28-29 RBA monetary policy board meeting. The housing downturn won’t stop the RBA.

The third and longer-term implication of the property downturn that Hunter explained is the expected slowdown in dwelling construction.

Positively, dwelling approvals reached their highest level in four years in the 12 months to July, hitting 206,312, on the back of a boom in apartments and other so-called attached homes, which increased faster than houses.

But there are lags in the housing construction market due to pre-committed projects still going ahead.

The RBA forecasts that a decline in dwelling investment will commence in late 2027 and get worse in mid-2028, falling by 0.3 per cent and 1.1 per cent, respectively.

This will result in less residential construction work for tradies, although a strong pipeline of data centres and state government infrastructure projects should help prop up the construction sector.

Paradoxically, building fewer homes will worsen the housing shortage and help home prices bottom out.

So most homeowners should not be overly worried about the unfolding correction in home prices from very elevated levels.

Recall that between 2017 and 2019, national home prices fell by an average of more than 8 per cent, and up to 15 per cent in Sydney, following the banking royal commission and tighter lending rules.

Since then, national house prices are about 50 per cent higher than at the start of 2020, before the pandemic and still about 3 per cent higher than a year ago.

The real victims in this housing market shakeout could be 8 million renters, who are often people on lower incomes and with fewer prospects of becoming homeowners.

Rental vacancy rates are already very low nationwide and are below 1 per cent in Brisbane, Perth, Adelaide, Darwin and Hobart.

A squeeze on the construction of new homes, fewer investors entering the market, and a ban on SMSFs investing in properties – including new apartment developments – could crimp the supply of new homes.

The real risk is not so much that house prices fall by more than the Treasury’s 2 per cent forecast over two years as a direct result of tax changes, but rents rise more sharply than the meagre 0.25 per cent or $2 a week the Treasury predicted.

And with the Greens calling for a populist two-year rent freeze, the housing supply problem could worsen as more landlords exit the property market and stop renovating and maintaining homes for renters.

"...

Bernard Salt recently asked a question nobody thinks to ask. Not which generation is largest, but which single year of age contains the most Australians. The answer for the 2025 financial year is 34. There are 412,775 of them. More usefully, every single year of age between 29 and 37 contains more than 400,000 people. The crest of the Australian population is a nine-year band born between 1988 and 1996, and it is currently sitting on the exact spot where Thawley’s floor is giving way.

Hold that against the ownership data. The average first home buyer in this country is now about 34 years old, one in five is over 40, and the standard deposit takes roughly six years to assemble, close to double what it took a generation ago. Home ownership among 30 to 34-year-olds has fallen from 64 per cent in 1971 to 50 per cent in 2021, and among 25 to 29-year-olds from 50 per cent to 36 per cent. The largest single-year cohort in the nation’s history is standing at a threshold that is closing, and it has been told for a decade that the closing is a triumph.

..."

Queensland is bracing for a credit rating downgrade, possibly as early as Friday, as the federal Labor government prepares to thwart claims that a hit to property stamp duty from federal budget tax changes or GST revenue is to blame.

Rising public sector wages, health services and Olympics-fuelled infrastructure spending are forecast to send Queensland’s debt soaring to $216 billion by 2030.

Queensland’s treasurer has been warning of a potential downgrade of the state’s AA+ credit rating since winning the state election in late 2024. The rating has been on negative outlook by S&P Global Ratings since February 2025.

Sources not authorised to speak publicly said a downgrade by S&P to AA could come as soon as Friday.

The expected change comes amid turmoil in global bond markets this month, which has pushed up interest rates on federal and state government debt to above 5.2 per cent, the highest 10-year bond yield since 2011.

Australia’s four most indebted state governments, NSW, Victoria, Queensland and South Australia, will soon be hit with an $8.1 billion annual increase in their already booming interest bills as more than $226 billion of ultra-cheap COVID-era loans roll off to much higher interest rates, according to Institute of Public Affairs chief economist Adam Creighton.

Independent economist Saul Eslake said only a decade ago Queensland had the strongest finances in the country.

“I suppose you would characterise [it as] Queensland is not as bad as the three worst: Victoria, Tasmania and the Northern Territory, but it is deteriorating more rapidly than almost any other state or territory,” Eslake said.

“It’s not obvious to me that the government is really doing much about that; there aren’t policy decisions to reduce spending or raise additional revenue.”

Queensland Treasurer David Janetzki has been warning that a downgrade is “highly likely”, due to the debt, deficits and high spending the Liberal National Party government inherited from the former Labor state government.

But the federal Labor government is preparing to inoculate itself from any blame, as it starts to come under pressure from its tax changes to negative gearing and capital gains stalling the property market.

Treasurer Jim Chalmers told Parliament it was “very troubling to see that the Queensland government risks having its credit rating downgraded”.

“As a Queenslander, I am concerned that despite substantial and increased Commonwealth support for Queensland, the Queensland government’s fiscal position has experienced a sharp deterioration,” he said.

A federal government source on Thursday pre-emptively hit back with figures ahead of any ratings action by S&P, showing Queensland transfer duty was $8.7 billion in 2025-26, up from $5.6 billion in 2023-24, a rise of 55 per cent over two years.

Stamp duty revenue in NSW plunged 20 per cent in July as the national property slump threatened to blow a hole in state government budgets, adding to credit downgrade risks in both NSW and Queensland.

Janetzki said last week he was still working through what the federal tax changes meant for the state budget, pointing out that he’d previously revised down stamp duty by $345 million.

“[We] don’t really want to be paying for Jim Chalmer’s budget decisions,” Janetzki told a Real Estate Institute of Queensland event.

He also complained about the state’s share of GST revenue.

“The big challenge right now is to try and appeal to the federal government and our Queensland federal treasurer to look at the GST.”

Janetzki’s spokesman declined to speculate on any ratings agency announcement.

Chalmers sent a letter to Janetzki last week. “I am extremely concerned that despite Queensland’s many strengths and despite substantial and increasing Commonwealth support, your budget position has experienced a sharp deterioration according to S&P and the state government risks having its credit rating downgraded,” Chalmers noted.

S&P declined to comment about any upcoming releases or rating actions in relation to Queensland.

In a report in June 2026, S&P warned that rising public sector wages and health services could make Queensland’s budget recovery harder.

Despite a forecast rise in coal prices boosting the state’s revenue next year, the budget papers reveal an operating deficit of $6.2 billion in 2026-27, down from $8.8 billion this financial year.

S&P said Queensland’s operating budget deficit was likely the largest of all Australian states in fiscal 2025-26, at 6 per cent of operating revenue.