Treasure Joe Hockey handed down his second federal budget this week and while there are many initiatives for small businesses and families, the budget virtually ignored our housing markets.
This is interesting considering housing affordability (or the lack of it), as well as the so-called property boom and what’s likely to happen to property prices are issues facing everyday Australians as house prices skyrocket in a number of our capital cities.
However, while the budget offered nothing directly for property owners, the proposed fiscal policy has implications for economic growth and employment, which will in turn influence consumer confidence and housing demand.
In fact the budget acknowledges property is probably going to be one of the few industries that will prop up the economy for a while.
So let’s look at how the budget could affect the various sectors of our property market.
The economic context
Ask any real estate agent and they’ll tell you the overall economy has a big influence on the health of the property markets.
The fact is the Australian economy is forecast to keep stumbling along with high unemployment in the coming year, which will dampen consumer confidence.
The good news is by adopting what might be seen as a fairer approach to repairing the budget this year, the proposed measures should stand a greater chance of getting through the Senate, slowly benefiting the economy and eventually having a positive impact on consumer and business confidence.
As such we may have seen the low point for interest rates. While there could still be one more rate drop the likelihood of a rate hike looks a long way off.
First home buyers
The vast majority of Australian property seekers think the government should help them buy their first home, yet there was no good news on this front and things are only likely to get worse since some of the new measures in the budget, as well as the recent rate cut, are likely to provide more stimulus for the real estate sector.
First home buyer numbers fell to 14.7% in March, from 15.1% in February, and the average loan size is up $5,200 to $326,300, according to the Australian Bureau of Statistics.
Let’s face it, the current low mortgage interest rates are having an adverse effect on first time buyers trying to break into the property market, especially in Sydney and Melbourne. They are facing a double whammy of rising prices, in general driven by investors who are often competing for properties in the same price bracket and deposits that are barely increasing in value because of low bank deposit rates.
So instead many potential first-time buyers are choosing to rent in the lifestyle areas they would like to live but can’t afford to purchase in, while buying an investment property in an area they can afford.
But don’t get me wrong, I don’t think the federal government should be giving more money to first home buyers. It has been shown in the past all this does is further push up property prices when the money really becomes a “second home owners grant” as they pay more for existing properties.
This was a family-friendly budget with Treasurer Joe Hockey using the catch-phrase of “helping Australians to have a go” with the aim of restoring consumer confidence.
Over the last few years consumer confidence has been helped by the wealth effect of rising home prices. That’s because each Monday morning many existing home owners, particularly in the inner and middle ring suburbs of Sydney and Melbourne, read the auction clearance results and the fact that the value of their home, their castle, keeps rising.
This has led to many established homeowners upgrading to a bigger home because today’s low interest rates mean their new mortgage repayments remain much the same as they paid for their cheaper home a few years ago.
Even in regions where home prices have not gone up much, families figure the value of the home they’re upgrading to hasn’t increased much either, so in this lower interest rate environment they’re getting better bang for their bucks moving to a larger home and paying much the same in mortgage payments.
The budget brought a big sigh of relief for Australia’s 1.9 million property investors – there have been no changes to capital gains tax, negative gearing, depreciation, taxes on superannuation or the use of self-managed super funds for property investment.
And unless lending restrictions sanctioned by the Australian Prudential Regulation Authority come into play, it is likely the investor market will remain strong this year.
This was confirmed with this week’s release of the latest housing finance data by the Australian Bureau of Statistics for March 2015, which showed despite the recently released guidelines for sound lending practices released by APRA and repeated warnings from the Reserve Bank of Australia, lending for investment purposes continues to surge.
Investments loans were up 6.4% in March, making up 41% of the total lending figure, and were up 21% compared to a year ago.
However, there was one sector in the property industry that received a blow in the budget and that’s the National Rental Affordability Scheme (NRAS), which will be frozen pending a review.
In my opinion this is a good move as the scheme was lining the pockets of property developers and their marketers while mum and dad investors lined up to buy overpriced property, usually in secondary locations, simply to get some money from the government.
Foreign property buyers
There’s little doubt Asian capital is driving sectors of the Australian property markets, with Credit Suisse reporting Chinese buyers bought $8.7 billion in Australian residential property in 2013-14, or about 15% of new homes, and that number is growing fast.
Credit Suisse expects $60 billion in purchases by Chinese buyers over the next six years, more than double the $28 billion over the last six.
Currently most of these purchases are concentrated in Sydney and Melbourne where towers of new CBD apartments are being bought by Chinese investors.
But the introduction of a new application fee on all foreign real estate investment proposals, which the government expects to raise $735 million over four years, is likely to do little to the rate of foreign investment. Nor is the proposed Victorian tax changes as foreign investors are already paying a premium for their properties and don’t seem to care.
It’s more important for them to move their money to a country with a sound economic and banking system and a safe political environment.
The bottom line
Reading between the lines of this budget, the lesson for Australians is the importance of taking their financial future in their own hands.
With the pension age being pushed out and serious holes in the future funding of social benefits, it is important for all Australians to accumulate appreciating assets, such as residential real estate and shares, during their working life as they can’t count on the government to look after them in their retirement years.
This means more will turn to direct property investment and the property cycle will move on as our improving economy, growing consumer confidence, increasing household wealth and a low interest rate environment will keep our capital city property values rising.
However, our property markets will remain fragmented because while all the states will experience the same low interest rate environment, their individual property markets will be influenced by local consumer confidence, supply and demand factors and importantly the local economy creating job prospects.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.