The economists also questioned whether Labor would be able to pass the capital gains tax measures.

"We are also somewhat sceptical of the ability of the ALP to pass changes to the capital gains tax arrangements through the Senate given the likely make-up of the cross-bench – which in our view is the most impactful aspect of the reform package (as opposed to the changes to 'negative gearing')," they said.

The sanguine analysis, which plays down "several popular narratives of the slowdown", makes the argument that Australia's housing market is in an orderly decline and that the flow-on effects for the wider economy will be limited.

Publication of the note came as official figures on Tuesday showed that price declines of houses in Sydney and Melbourne sped up in the three months to September, pulling the national quarterly rate of decline to 1.7 per cent, its fastest rate in seven years.

"Our central case – which we think the RBA shares – remains an orderly decline in both prices and construction activity in aggregate, with manageable spillovers to consumption," the economists said.

"That said, slower processing of loan applications could temporarily amplify the cooling in the housing market in the near term, and we do view a material lowering of Australia's immigration intake as a tail risk to the medium-term outlook."

The ABS numbers showed that Sydney house prices dropped 4.9 per cent in the September quarter from a year earlier and Melbourne house prices fell 2.1 per cent - in line with the annual declines reported earlier by data provider CoreLogic.


Tuesday's figures also showed that Sydney's pace of decline in attached housing - apartments, townhouses and semi-detached dwellings - was largely stable. Sydney attached dwellings shed 3.3 per cent in September from a year earlier - in line with June's 3.4 per cent decline - and their 1.3 per cent quarter-on-quarter decline was unchanged from June.

The picture was worse for Melbourne attached homes, with the quarterly pace of decline jumping to 1.1 per cent from 0.2 per cent in June.

"While we agree that investor expectations are correcting in Melbourne and Sydney, we don't think valuations were excessively stretched to begin with (given low debt servicing costs) and view a sharp retracement as unlikely," the Goldman Sachs economists said.

"In real terms, Australian dwelling prices have performed in line with other small open advanced economies over the past decade."

In addition to Labor's tax proposals, the note also tackles popular notions around a credit crunch, a speculative "bubble" and excessive overbuilding, saying they were exaggerated.

"In our view, while there is a kernel of truth to many of the popular narratives, a close inspection of the data suggest most are overly negative," they said.


"That said, we acknowledge the housing market presents a clear downside risk to our fairly upbeat 2019 outlook – including our expectation that the RBA will raise rates in late 2019."

Tighter credit rules that began with lending policies driven by banking regulator APRA had focused on investors - most active in Sydney and Melbourne housing markets - and did not constitute a "credit crunch" that typically happened when banks became unable to lend.

"The value of finance approvals to investors in NSW and Victoria continues to fall sharply, but is little changed elsewhere; while the number of finance approvals to owner-occupiers remain fairly elevated in NSW and VIC (albeit a bit weaker) and mixed in other regions," the economists said.

"In our view, this remains broadly consistent with our earlier view that the primary driver of softer loan approvals over 2018 has been lower demand from investors – driven by a normalisation in expectations for capital gains in Sydney and Melbourne."

Tighter scrutiny of mortgage applicants' expenses was slowing approval times and had had a "relatively modest impact to date" on average loan sizes, but the effect was likely to be temporary, they said.

"This slower processing period may well take a few months to wash through and cause some temporary distortions in the interim," they said.

"On balance, however, the evidence that supply-side credit tightening is significantly worsening is not compelling to us."


There was unlikely to be widespread stress as interest-only loans converted to principal-and-interest mortgages requiring higher repayments, they said.

"Given a lack of timely and publicly available information on indicators of lending standards and mortgage stress, we are fairly agnostic on of these views. However, on lending standards, we do note that Australia did not experience a large increase home ownership rates as seen in the US 'housing boom' – which many attribute to a loosening in lending standards. And while there are anecdotal reports of rising mortgage stress, RBA data suggest mortgage arrears remain low."

The greatest risk to housing demand and housing construction, would come from severe immigration cuts, they said.

"In our view, the much more material risk to both the underlying supply/demand balance and the level of construction activity would be a significant reduction in population growth," they said.

Labor's proposed negative gearing and capital gains tax reforms will only have a small effect on individual investments, Goldmans says.

"We note Prime Minister Scott Morrison recently proposed to reduce Australia's annual permanent migration quota by up to 30,000 per annum (or about 15 per cent) and redirect new migrants away from Sydney and Melbourne.

"While formal changes are yet to be made – and the impact on population growth of this proposal would likely be negligible given (i) actual permanent migration is already below the current cap, and (ii) the measures don't address the large amount of temporary migration – the increasing political focus raises the possibility of a more substantial policy shift in the future."

Goldman Sachs is predicting an 'orderly decline' in housing prices. Louie Douvis