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Our analysis compares the 25th and 75th percentile of property values across eight capital cities. In January, cheaper houses were outperforming more expensive houses by an average of 1.3 percentage points over three months. For units, the advantage was similarly strong.
By September, this had completely reversed. More expensive houses were outperforming by 0.18 percentage points, while the advantage for higher-priced units was 0.32 percentage points.
This doesn't mean expensive homes are suddenly booming. Prices are generally weakening across the market. What has changed is that cheaper properties are now falling faster. The main driver of this is the Budget's changes to negative gearing and capital gains tax and the subsequent withdrawal of investors.
Property investors have traditionally concentrated heavily on the affordable end of the established housing market. These properties generally offer lower entry prices and attractive rental yields, making them particularly appealing to investors.
The Budget substantially reduced the tax advantages of purchasing established investment properties after 12 May. This has already changed the financial attractiveness of buying an investment property. The result has been a withdrawal of investor demand from precisely the market segment that had previously benefited from strong first home buyer activity.
Higher interest rates have added to the slowdown, but the Budget changes help explain why the relative performance of cheaper and more expensive properties has shifted so dramatically.
For first home buyers, it creates a dilemma. Before purchasing, they understandably want prices to be as affordable as possible. Reducing investor competition can help them enter the market, particularly when combined with the 5% deposit scheme. But once they have purchased, their priorities change. Like every other homeowner, they want their property to increase in value. And this is where the longer-term consequences become more complicated.
Investors are unlikely to return quickly. My earlier analysis found that rental yields would need to increase from around 3.95 per cent to 5.15 per cent to compensate for the Budget changes. This would require rents to rise by approximately 30 per cent, property prices to fall by 23 per cent, or some combination of the two. Until that happens, cheaper properties are likely to continue underperforming, even when the broader market recovers.
