Treasurer Jim Chalmers was warned in confidential Treasury advice that planned tax changes would put downward pressure on house prices, increase rents and reduce housing supply.

The official advice prepared in the lead-up to the budget was released under a freedom of information (FOI) request on Monday night.

The budget advice predicted that house prices would rise by about two per cent less than would otherwise have been the case over a two-year period.

“Modestly lower housing supply and higher costs for investors are estimated to place modest upward pressure on rents,’’ the FOI documents state.

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“Rents are expected to be 0.25 per cent higher and increase soon after the negative gearing policy commences.

“While housing supply is lower under the policy changes, this impact is small and occurs over an extended period (around 10 years).”

The documents appear to be largely in line with budget forecasts that the impact would be modest, with rents predicted to increase just $2 per week as a direct result of the changes.

This is not a prediction that rents will rise overall, but relates purely to the component sparked by the changes to negative gearing for new landlords.

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However, questions have emerged about the accuracy of the Treasury forecasts amid predictions Australia is heading towards the biggest housing downturn in 40 years.

The heavily redacted Treasury documents note that modelling is “subject to significant uncertainty”.

“The Australian literature on the economic impact of similar reforms shows a wide range of estimated effects, in part due to different policy specifications and modelling choices across studies (including the calibration of shocks),’’ the document states.

“Treasury’s preliminary modelling produces broadly similar impacts on dwelling prices to other studies.

“Impacts on the dwelling stock and rental prices are at the lower end of comparable studies, partly reflecting that the policy changes have been designed to limit the impact on housing supply.

“The modelling reflects average impacts across the economy based on owner-occupier and investor households investing in a single type of dwelling asset.

“It does not separately identify distributional impacts across households, between different types of dwellings, or between

different geographical areas.”

Housing downturn

Australia is on track for one of the biggest housing downturns in 40 years but the government has doubled down, insisting it’s good news for first-home buyers.

The trajectory of the housing market has dominated question time with the Liberal Party hammering the Albanese Government over house prices.

Prices have jumped by up to 75 per cent in the last five years in Adelaide, 120 per cent in Brisbane, 109 per cent in Perth and 57 per cent in Sydney.

But rising interest rates and tax changes to negative gearing and capital gains tax have now hit the housing market, with predictions that prices could fall by as much as 18 per cent annually in Sydney.

Prices previously dropped by 8.2 per cent over 19 months in 2017-19 and 8.1 per cent over 2022-23.

“Sydney house prices are plummeting so fast that they are on track for the biggest crash in 40 years. The Prime Minister has not been transparent with Australians on modelling,” Liberal frontbencher Tim Wilson said in question time.

“Do you still stand by treasury that property prices will fall by only 2 per cent?.”

Minister for Housing Clare O’Neil said that the question was “accurate in one sense that house prices are softening across the country” but insisted it wasn’t unprecedented.

“This is the fourth time that we have seen this occur in a decade in our country,” she said.

“Now, I’m asked about the role that the tax changes have played in this, and Speaker, the Government could not have been more transparent about this in the federal budget.

“Treasury modelling suggests the reform will increase the owner occupier share of the housing market, resulting in around 75,000 additional owner occupiers across the decade.

“This is equivalent to reversing around 10 years of deadlines in home ownership rate.”

The context that the Coalition was omitting, Ms O’Neil said, was the fact that house prices had gone up by a whopping 400 per cent over the last 25 years.

“What I would say to the parliament is we put what is happening in the property market in context,” she said.

“I want to remind the parliament we have seen house price growth of 400 per cent in the last 25 years.

“In fact, the member opposite asked me about Sydney house prices, he might like to remind himself in the 9 years those opposite were in power, house prices have doubled.

“We’ve seen house prices grow by 50 per cent in the last six years. Now, that’s the context that is really important here, I know those opposite don’t have anything sensible to say about this.

“Our side of the parliament wants to see first homeowners have a realistic shot at getting in the housing market.

“We’ve got a broken housing market in this country, a Government trying to do something about it, and the opposition who are the last man standing defending a broken system. We’re very happy to stand on the side of first homeowners when it comes to this debate.”

Earlier, Liberal leader Angus Taylor noted that the Property Council had described Labor’s tax changes as “as a ram raid on house prices.”

‘Intergenerational inequity’

But the Treasurer hit back, noting that Liberal frontbencher Tim Wilson had himself previously suggested he wanted price growth to slow.

“I’ve got a quote here, a transcript, of what the Shadow Treasurer in a podcast on 14 July ‘20-’21 said about house prices,” he said.

“Would you like to hear what the Shadow Treasurer said? I’m quoting the Shadow Treasurer. ”I said quite publicly I would like to slow the growth in the price of housing.”

Cotality research director Tim Lawless said whether you call it a correction, or a ‘crash’ of a softening of the market was largely semantics.

“What we are seeing now is part of a typical cycle in that housing downturns generally follow periods of upswing,” he told news.com.au.

“The speed of this downturn is not quite as fast as the short and sharp drop in values we saw as interest rose from their emergency lows from the middle of 2022, but values are falling faster than they were through the 2017-19 downturn.”