Sydney and Melbourne property prices fall as Labor's housing tax changes and higher interest rates suppress demand

Australia’s housing market continued its downturn in May, with Sydney and Melbourne property values falling amid higher interest rates and Labor’s recent tax reforms. Sydney’s dwelling values dropped 0.9% last month, marking a 2.1% decline over three months, while Melbourne’s values fell 0.8%, bringing quarterly losses to 2.3%. The median house price in Sydney dropped from over $1.6 million in February to about $1.58 million, and Melbourne’s median house price slipped to $958,000. The decline follows Treasurer Jim Chalmers’ budget announcement in May, which introduced changes to negative gearing and capital gains tax, alongside the Reserve Bank’s rate hike to 4.35%. Auction clearance rates across capital cities averaged 50% in late May, the lowest since the pandemic. Housing Minister Clare O’Neil dismissed claims the tax reforms were the primary driver of price falls, instead attributing the slowdown mainly to rising interest rates, though Treasury forecasts predict a 2% price reduction from the reforms. Industry analysts warn the market has not yet fully reflected the reforms’ impact. Azura Financial’s Tom Hawley noted that recent data reflects pre-reform sales and predicted further deterioration, as investor borrowing capacity has already fallen by up to 15%. Economists, including Barrenjoey’s Jonathan McMenamin, expect another rate rise in August due to persistent inflation, with the RBA’s preferred measure still projected at 4% annually—well above its 2.5% target. This would push mortgage repayments to new highs, further dampening buyer confidence. The combined effects of tighter monetary policy and tax adjustments are expected to weigh heavily on the market in coming months. Experts suggest the full impact of Labor’s housing reforms will become clearer as more recent transactions are recorded, potentially deepening the downturn. Meanwhile, first-time buyers face continued challenges as supply remains constrained and borrowing costs rise.