We thought we would give you our quick synopsis of Tuesday night’s Federal Budget, inasmuch as it relates to us as Property Investors.
Starting generally, the budget appears to have kept the ratings agencies happy and our AAA Credit Rating intact (for now), with measures forecast to move the budget back to surplus by 2020/21.
However, I question the major assumption that wage growth will somehow revert to 3.75% p.a. from its current level of around 2% p.a in the forward estimate’s timeframe. Remember, 3.75% p.a. wages growth was last seen at the height of the mining boom. Politically, the move to increase taxes by raising the Medicare levy from 2.0% to 2.5% to fund the National Disability Insurance Scheme is clever, as it would take a brave person to complain about properly funding the most vulnerable in our community.
It is also politically clever to scrape out another $6 billion or so by effectively raising a new tax only on the biggest 5 banks (CBA, Westpac, NAB, ANZ, and Macquarie), as well as increasing regulatory oversight over them. This will also somewhat neutralise Labor’s blockage of the proposed cuts in corporate tax cuts that are designed to make Australia more globally competitive.
Some $75 billion in infrastructure projects were also pledged and borrowing at low interest rates now to spend on productive infrastructure projects is something we have been calling for now for years.
Let’s look more specifically now to how this Federal Budget will potentially affect our hip pockets as property investors.
Perhaps this budget is most noticeable for what is not there.
That is, there is no significant changes to Negative Gearing (apart from a clamp down on claiming of travel expenses and some depreciation deductions) or the Capital Gains Tax exemptions (apart from the CGT exemption actually rising to 60% for some low-cost housing providers).
Prior to the budget, housing affordability was the thing that most commentators were looking to see policy changes address. In fact, The Property Council stated when it comes to the critical economic and social issue of housing affordability, there are five tests by which the Federal Budget will be assessed:
- Does it encourage the construction of new dwellings – at affordable prices – to match our population growth?
- Does it reduce the costs of buying housing and make it easier for people to move house?
- Does it help close the deposit gap?
- Does it open up innovative means to deliver affordable housing?
- Does the proposal make the problem worse?
Without going into too much detail in this blog, this budget does not really address all of these questions adequately.
For example, about the only policies that I can see that will go close to encouraging new supply are in the area of social or low-cost housing. Treasurer Scott Morrison announced that a “bond aggregator“, to be managed by the new National Housing Finance and Investment Corporation (NHIFC), will effectively act to combine the borrowing needs of not-for-profit community housing providers. This will make it easier for those providers to borrow at lower interest rates and on longer terms than conventional finance.
The NHFIC will also issue Government-backed bonds for social housing. The goal is to attract large institutional players like superfunds to invest in community housing — a model that is already well developed in the United Kingdom. Mr Morrison also announced $1 billion over five years for the National Housing Infrastructure Facility to assist with costs like cleaning up land, paying for transportation links, and loans to local governments, to help finance community housing projects.
In addition, there is a much needed $375 million boost to crisis accommodation for the homeless (over three years, and only starting in July 2018), especially vulnerable young Australians and victims of domestic violence…but this is no where near enough to solve this issue.
There are no real direct measures to reduce the costs of buying a house (e.g. changing the way in which property is taxed), but the Federal Budget has announced what has been dubbed the “First Home Super Savers Scheme”, and an incentive for older Australians to downsize.
From 1 July 2017, savers will be able to salary sacrifice extra contributions into their superannuation account above the compulsory contribution, up to a maximum of $30,000 per person in total and $15,000 in a single year. Couples can put in a total of $60,000.
They will then be able to withdraw that cash from 1 July, 2018 onwards, along with any associated earnings.
“Under this plan, most first home savers will be able accelerate their savings by at least 30%” Treasurer Scott Morrison said in his budget speech.
Let’s look at how this works with the Government’s own example of a lady called “Michelle”:
Michelle earns $60,000 a year, and salary sacrifices $10,000 of her pre-tax income into her superannuation account, boosting her balance by $8,500 after contributions tax. After three years, she can withdraw $27,380 (plus earnings on those contributions), paying tax of $1620, leaving her with $25,760 for her deposit. That works out to about $6,240 more than if she had saved in a standard deposit account.
But really how far will an extra $6,240 deposit take you in markets like Sydney or Melbourne? And is the complexity and compliance going to make it as unpopular as a similar scheme introduced previously by Kevin Rudd? Also, historically, schemes that have increased people’s ability to spend more on a house, in the absence of major supply changes, have largely led to the effect of stimulating house prices, not improving affordability.
And in a move designed to free up homes in established areas, home owners aged 65 and over selling a home they have lived in for 10 or more years will be able to make a non-concessional contribution of up to $300,000 into their superannuation from the proceeds of the sale. Both members of a couple are allowed to take advantage of this measure for the same home, meaning up to $600,000 per couple.
This new incentive is in addition to concessions already permitted, and will be exempt from the age test, work test, and $1.6 million balance test. On the surface this appears to be a good policy, however I would have liked to have seen this taken a step further with either stamp duty exemptions or concessions as well for those older Australians wishing to downsize. This would potentially boost the supply of established family homes, which is what the majority of home buyers are looking for.
And in another property-related policy, a Foreign Vacant Tax similar to those announced recently at a state level in Victoria was announced by the Federal Treasurer. Effectively, a fee will be charged to any foreign owner who leaves their property vacant for more than 6 months in a year. Is this federal tax also in addition to state-based levies, or will it replace the State Based Vacancy Tax? Who will police this and how, as well as it how it’ll be rolled out, we’ll want to see more detail on.
So in summary, this budget is far better, fairer, and more optimistic than the 2014 Hockey/Abbott budget. It is also politically smarter, firstly by putting to bed the billions of dollars of the so-called “zombie-measures” from the failed 2014 Budget, and secondly by being dubbed a “Labor Lite” Budget that will go at least some way to nullifying many of Labor’s ideological differences from the current Liberal government, while also appeasing many in the Senate.
From our perspectives as property investors, it is likely that this budget will have minimal impact on our housing markets. We can only see housing affordability being addressed indirectly, through:
- a smallish increase in funding more social/low-cost housing
- some potential mild slow down on property investment (assuming that the Big 5 banks pass on the 0.06% new tax to consumers, we could see mortgage rates rise by around 0.03%…and assuming investors do not simply move their lending to those lenders unaffected by the new tax)
- increased supply potentially due to the $300,000 per person super concession for those aged 65 or older who have lived in their homes for more than 10 years and actually want to downsize
Obviously, the devil is in the details, and there will always be unique opportunities that come out of any policy changes, but as far as we’re concerned, it’s game on…at least for now! If you want to learn more about how we will be moving forward with our investment strategies in 2017 and beyond, join us for our upcoming LIVE & INTERACTIVE online workshop entitledSix Steps to a Six Figure Passive Income. Simply click here to reserve your seat now.