{"id":24123,"date":"2026-06-03T15:59:27","date_gmt":"2026-06-03T15:59:27","guid":{"rendered":"https:\/\/www.europesays.com\/australia\/24123\/"},"modified":"2026-06-03T15:59:27","modified_gmt":"2026-06-03T15:59:27","slug":"morgan-stanley-house-prices-must-drop-20-to-lure-investors-back","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/australia\/24123\/","title":{"rendered":"Morgan Stanley: House prices must drop 20% to lure investors back"},"content":{"rendered":"

Want investors back in the housing market? Prices need to drop as much as 20 per cent. That\u2019s the verdict from Morgan Stanley chief economist Chris Read on what Jim Chalmers\u2019 tax changes have done to established residential property.<\/p>\n

In a detailed new analysis of Jim Chalmers budget impact on housing investors, Mr Read says gross rental yields – currently 3.5 per cent – would also need to rise by 50 to 100 basis points to restore the after-tax economics that investors previously enjoyed. <\/p>\n

With rents unlikely to absorb all of that adjustment quickly, he said the larger share of the shift is expected to come through lower prices.<\/p>\n

\u201cFor a new investor in established housing, the price required to restore the old after-tax economics is meaningfully lower,\u201d Mr Read said in a 10-page research report. \u201cIf rents rise only modestly, our yield equivalence work points to a required price decline of around 15-20 per cent.\u201d<\/p>\n

Mr Read stressed that figure is not a forecast for the whole housing market, because owner-occupiers and new-build investors will partly replace lost demand. <\/p>\n

But for the marginal investor in established property, he said \u201cthe clearing price has moved materially lower.\u201d<\/p>\n

It comes after Mr Read forecast that national house prices would fall 5-10 per cent – one of the largest corrections in 40 years<\/a> – as the combined weight of the budget tax changes and the Reserve Bank\u2019s rate rises bear down on the market.<\/p>\n

The established housing investor model has relied on high leverage, low rental yields and confidence in strong capital gains, with negative gearing cushioning the cash flow pain along the way. <\/p>\n

Mr Read said both supports have now been weakened, particularly for existing dwellings. \u201cThe \u2018negative cash flow today, capital gain tomorrow\u2019 case becomes harder to justify, forcing the marginal investor to demand a higher yield, use less leverage, or pay a lower entry price,\u201d he said.<\/p>\n

The numbers back that up. Morgan Stanley estimates the tax changes cut the internal rate of return for a typical housing investor by around 90 basis points – to 7.41 from 8.28 per cent. Under some assumptions, the drag reaches 165 basis points. The impact is larger where rental yields are low, leverage is high, capital gains are strong or holding periods are longer.<\/p>\n

The first post-budget housing data is in – and it\u2019s not pretty<\/a><\/p>\n

The cash-flow hit may be even more immediately painful than the return figures suggest. Because rental losses on newly purchased established properties can no longer be offset against wages, borrowing capacity falls by as much as 25 per cent for investors on the top marginal tax rate. Even for investors constrained by bank serviceability tests rather than cash flow, the reduction in borrowing capacity is around 17 per cent.<\/p>\n

Mr Read said the RBA is likely to view any housing-led slowdown as evidence that policy has become more restrictive, weighing on consumer spending and the labour market. Morgan Stanley expects the RBA to stay on hold for the rest of 2026.<\/p>\n

The ripple effects are showing up on the sharemarket too. Morgan Stanley analyst Melinda Baxter has cut her view on Australian consumer discretionary stocks to a cautious stance, warning that a housing downturn poses real risk to fiscal 2027 earnings.<\/p>\n

\u201cHousing has shifted from a tailwind to a domestic demand risk,\u201d Ms Baxter said.<\/p>\n

Hardware retailers face the most direct hit. Wesfarmers – through Bunnings – and Metcash, via its IHG hardware business, are most exposed, with fewer property transactions meaning less renovation activity and weaker trade demand. JB Hi-Fi and Harvey Norman also face headwinds through softer spending on electronics, appliances and furniture.<\/p>\n

\u201cWe continue to prefer staples over discretionary,\u201d said Ms Baxter, with the housing outlook compounding what is already a weak consumer backdrop.<\/p>\n

Morgan Stanley also warned of material earnings risk across banks, residential developers, digital real estate platforms and housing-linked industrials that is \u201cnot reflected in current forecasts\u201d – a sign the market may still be underestimating the full reach of the budget\u2019s changes.<\/p>\n

Read related topics:Federal Budget 2026<\/a>\"David<\/a>David Rogers<\/a>Markets Editor<\/p>\n

David Rogers began writing about financial markets in 1987. He has worked for Standard & Poor’s, Thomson Financial, BridgeNews, Tolhurst Noall, Dow Jones Newswires and The Wall Street Journal. David has extensive real-time reporting experience in economics, foreign exchange, equities, commodities and bonds.<\/p>\n","protected":false},"excerpt":{"rendered":"Want investors back in the housing market? Prices need to drop as much as 20 per cent. That\u2019s…\n","protected":false},"author":2,"featured_media":24124,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[22489,22,23,133,21,22476,22462,22475,22470,22463,11671,2038,131,22490,22461,22497,22496,22487,12440,22473,22483,22479,22468,22467,2280,22482,22477,22492,4541,22493,22464,22485,3180,11118,22472,22484,22486,22495,22466,22499,3977,355,120,2952,22494,22465,3035,22471,22478,22469,20438,22481,5839,11055,22498,22480,22491,22488,22474],"class_list":["post-24123","post","type-post","status-publish","format-standard","has-post-thumbnail","category-australia","tag-after-tax-economics","tag-au","tag-australia","tag-australia-and-new-zealand","tag-austrlia","tag-bank-serviceability-tests","tag-basis-points","tag-borrowing-capacity-falls","tag-budget-body-blow","tag-budget-tax","tag-capital-gains","tag-capital-gains-tax","tag-cash-flow","tag-chris-read","tag-consumer-backdrop","tag-david-rogers","tag-digital-real-estate","tag-domestic-demand-risk","tag-established-housing","tag-established-housing-investor","tag-gains-tax-reforms","tag-gross-rental-yields","tag-hardware-business","tag-hardware-retailers","tag-harvey-norman","tag-housing-investor","tag-housing-investor-model","tag-housing-investors-face","tag-housing-market","tag-housing-outlook-compounding","tag-housing-tax-changes","tag-investment-case","tag-jim-chalmers","tag-labour-market","tag-lower-entry-price","tag-marginal-investor","tag-marginal-tax-rate","tag-melinda-baxter","tag-morgan-stanley","tag-negative-cash-flow","tag-negative-gearing","tag-new-south-wales","tag-oceania","tag-price-guide","tag-property-transactions-meaning","tag-rate-rises","tag-real-estate","tag-real-estate-platforms","tag-renovation-activity","tag-rental-yields","tag-rents-rise","tag-required-price-decline","tag-reserve-bank","tag-tax-changes","tag-tax-shake-up","tag-tempe","tag-typical-housing-investor","tag-warning-prices","tag-yield-equivalence-work"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/posts\/24123","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/comments?post=24123"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/posts\/24123\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/media\/24124"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/media?parent=24123"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/categories?post=24123"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/australia\/wp-json\/wp\/v2\/tags?post=24123"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}