Debate over house prices 'invokes terror' in politicians

One economist says house prices falling will ease inflation. (ABC News: Steve Keen)

Politicians have hesitated to weigh in on whether it would be good or bad if prices fell.

One economist says house prices falling will ease inflation but would upset many voters.

The government has passed its budget tax reforms through the House of Representatives, but will need the support of the Greens to pass them in the Senate.

Politicians do not want to say whether house prices should rise or fall as the market softens, despite agreement housing should be more affordable for younger people.

The government's proposed changes to negative gearing and capital gains tax have contributed to a slowdown at auctions as people wait to see how it will affect them.

Treasurer Jim Chalmers has repeatedly stated the tax reforms are not aimed at "a particular price outcome" but instead give Australians trying to enter the market a "fair crack", with house prices growing, but more slowly.

Home values flatlined in May, a culmination of interest rate hikes, high inflation and property tax proposals weighing on demand, with Sydney and Melbourne prices dropping 0.9 per cent and 0.8 per cent, respectively.

Jim Chalmers says tax reforms give Australians trying to enter the market a "fair crack". (ABC News: Matt Roberts)

But the question of whether it is good or bad for house prices to rise or fall has vexed politicians across the political spectrum, who are conscious of the need to appeal to both first home buyers and Australians already in the market.

Economists and political analysts suggest that while politicians speak of increasing housing affordability and improving intergenerational equity, they are cognisant that housing is the highest source of wealth creation, with two-thirds of Australians owning their homes.

Independent economist Saul Eslake said, despite politicians' "crocodile tears" for the difficulty faced by aspiring homebuyers, the reality was that more voters sat on the side of home owners.

Dr Jill Sheppard, an associate professor of politics at the Australian National University, says few issues divide voters more starkly than property.

"Nothing like property seems to invoke this terror of disadvantaging half of the electorate in one fell swoop," she told ABC News.

The housing minister says the federal budget will have only a "mild" impact on house prices, and if predictions bear out that house prices may drop by 10 per cent, that won't be due to the government's tax changes.

The government has been tripped up before on the prickly issue of house prices.