Sydney house prices fall as tax reforms cool auction market

Sydney house prices fall as tax reforms cool auction market

Sydney residential property values have entered a period of decline, with average home prices dropping $75,000 in the three months leading up to June. This decline, according to Australian Bureau of Statistics data, represents the second largest nominal fall ever recorded for the city.

The downturn is most visible at auctions, where buyer confidence has collapsed. Sydney has recorded seven consecutive weeks of clearance rates below 50 per cent. In the week prior to last, the final clearance rate hit 41.7 per cent, the lowest level since April 2020. Some measures from SQM Research place that figure even lower at 31.9 per cent, levels reminiscent of the 2008 Global Financial Crisis.

Market activity has slowed across various regions. PropTrack data from the last four weeks shows clearance rates of just 26 per cent on the Central Coast and 34 per cent in Blacktown. The northern beaches, north shore, and Hills District recorded success rates between 37 and 38 per cent. These figures contrast sharply with the 60-80 per cent success rates seen in these regions last year.

Budget reforms drive investor retreat

Analysts point to the federal budget announced in May as a primary driver of the volatility. The Albanese government introduced tax reforms including cuts to capital gains tax concessions and negative gearing benefits. These changes passed parliament last week and are set to take effect in July 2027.

Additionally, a deal with the Greens means self-managed super funds (SMSFs) can no longer be used to borrow for investment properties. According to independent economist Peter Esho, founder of Flexdoc, these policies have primarily impacted the lower end of the investor market, reducing confidence and causing investors to retreat.

Because investors often compete at the same price points as first-time buyers, Esho says this retreat may open the market to those buyers. However, he notes a paradox where sentiment-driven first home buyers are often hesitant to enter a market that is not rising.

Louis Christopher, director of SQM Research, described the situation as a downturn that will last some time, attributing the fall to a combination of interest rate hikes in February, the Iran war, and the May budget. He predicts Sydney home prices could fall 9 per cent this year, potentially scrubbing $100,000 off average dwelling values. ANZ and Commonwealth Bank have provided similar projections of falls up to 8.4 per cent and 6 per cent, respectively.

Impact on first home buyers

For some prospective owners, the cooling market offers a glimmer of hope. Ruban Parajuli and Arya Katel, both 25, recently attended an auction in Glebe, noting that areas previously untouchable have come into a touching range.

But for others, the drops are insufficient. Hamish Sutton, a 35-year-old lawyer who has rented for 18 years, stated that prices remain unaffordable and he is limited to seeking lower-value apartment stock.

Broader data highlights the struggle for entry. A report from REA Group and Commonwealth Bank found that a typical first home buying household — aged 25-39 and earning $129,000 per year — could afford only 17 per cent of properties sold last year. This is the lowest level of affordability since 1995. In New South Wales, an average-income household must save for approximately 6.9 years to secure a 20 per cent deposit.

Government interventions and future outlook

The federal government has downplayed the impact of its tax shifts. A spokesperson for Housing Minister Clare O’Neil stated:

"The changes in the budget mean house prices will be 2 per cent lower than they would otherwise have been."

Spokesperson for Clare O’Neil, via realestate.com.au

To counteract affordability barriers, the government is expanding the Home Guarantee Scheme (HGS) starting 1 October 2025. The updated scheme will feature unlimited places, the removal of income caps, and higher property price caps, potentially around $1.5 million for Sydney. This allows eligible buyers to purchase with a 5 per cent deposit without paying lenders mortgage insurance.

This federal support can be combined with New South Wales state assistance, including the First Home Owner Grant of $10,000 for new builds and stamp duty concessions for properties up to $1 million.

While these measures may help buyers enter the market, some analysts warn they could create short-term upward pressure on prices for entry-to-mid tier properties during the Spring selling season of October and November. This demand bulge is expected to coincide with the traditional seasonal increase in listings.