The auction market faced a key test on the first weekend after the budget curbed investor tax breaks, and the results came in favouring buyers.
But it’s not as simple as buyers being able to take their pick of any property they choose, and neither have investors dropped out of the market entirely.
The preliminary auction clearance rate looked different in each of the largest cities.
Sydney’s auction clearance rate fell to 51 per cent on Domain data, four percentage points lower than the previous week’s preliminary result, and on some measures the weakest since auctions were interrupted by social-distancing measures in 2020.
Melbourne’s preliminary result went in the opposite direction and rose four points from the previous week to 60 per cent (preliminary rates are usually revised a few percentage points lower once more auction results are collected during the week).
An auction clearance rate of 60 per cent is considered a balanced market, and anything below that indicates prices are likely to be falling. Melbourne’s early read is still likely to be revised down to negative territory.
Both results indicate weak markets, but Sydney’s market tends to have more investor activity, so it makes sense that Sydney’s clearance rate was lower after the federal budget.
Some investors decided not to bid this weekend once they heard the budget would limit negative gearing tax concessions to newly built properties, while grandfathering existing arrangements, and scrap capital gains tax discount in favour of taxing above-inflation gains. Investors in new builds may choose the old capital gains tax discount.
Investors have been trying to understand the detail of the changes and whether they should reconsider their investment strategy.
Melbourne agents were also dealing with investors dropping out, but Melbourne’s market has already been favouring first home buyers for some time, due to its relatively more affordable price point and an increase to land tax for second home owners that began in 2024.
LJ Hooker head of research Mathew Tiller notes that first home buyers in the Victorian capital have been able to take advantage of federal government low-deposit schemes.
“We’ve had probably a little bit more first home buyer activity in Melbourne over the past 12 months compared to Sydney just due to the affordability down there,” he said. “Slower price growth over the last couple of years has made that market a lot more affordable than where Sydney is.
“That buyer cohort is not affected by the federal budget coming out and they’ve obviously been actively participating in the federal government incentives over the course of the last 12 months.”
The budget is not the only factor. The auction market was already at levels seen during 2022, which was about the same time as prices were in their steepest downturn on record and the Reserve Bank was lifting the cash rate from almost zero.
This year’s unexpected three rate hikes and the risk of more have already been making buyers cautious and unwilling to pay too much. Buyers also face a rising cost of living and feel uncertain about the economic fallout from war in the Middle East. Vendors who have adjusted their expectations quickly have had a better chance of getting their homes sold.
Domain chief of research and economics Dr Nicola Powell pointed out that the clearance rate recorded “quite a dip” in April, and sellers withdrew their homes from auction.
“We were already seeing weakness unravelling across our major auction markets,” she said. “But I think this weekend confirms that further jitters have been added as a result.”
But for sellers, the glass is half full as well as half empty.
Powell notes that despite the price-sensitivity among buyers, there has been a flight to quality homes.
There are still plenty of buyers in the market, and the most sought-after homes are selling under competition. Buyers who expect a bargain for a standout home may be disappointed.
There are also investors still in the market, perhaps attracted to the long-term capital growth potential, and investors who pulled back over the weekend may return once they better understand the changes.
SQM Research managing director Louis Christopher said the tax changes “scared off a lot of buyers, particularly the investors”.
“They’ll come back once the housing market has adjusted,” he said.
But meanwhile, the auction market is tipped to remain weak.
“It is likely to stay poor for the remainder of the year. Back in 2020 when we were getting these types of clearance rates, the government shortly after started to flag stimulus to the economy,” he said.
“I cannot see the Reserve Bank of Australia flagging interest rate cuts any time soon, and indeed there’s a risk interest rates will go up. And I cannot see the federal government immediately after these tax announcements making changes to suit investors.”
Elizabeth Redman is the national property editor at The Age and The Sydney Morning Herald.Connect via X or email.