An indirect impact to home owners and buyers
The Australian Federal Budget 2019 was handed down Tuesday 2 April, at 7.30pm, in which Treasurer Josh Frydenberg promised a $7.1 billion budget surplus by the next financial year.
Excitement, caution, and skepticism aside… a key question remains for the property industry: to what extent does the Federal Budget 2019 address and/or impact property players (i.e. owner occupiers, first home buyers, and investors) and the property industry as whole?
In the Federal Budget 2017 we saw the establishment of: a National Housing Finance and Investment Corporation Scheme, policies to increase housing supply and investment into quality and affordable housing, the First Home Super Savers Scheme, concessions for people over 65 who are downsizing their home, and policies to cap foreign ownership in new developments (of at least 50 dwellings) at 50%. These are policies that directly impacted property players and the industry.
The Federal Budget 2019 follows the footsteps of the Federal Budget 2018, in the sense that there are no direct items targeted to property players in contrast to Federal Budget 2017. Rather, the 2019/20 Federal Budget promises to provide a fiscal stimulus through infrastructure spending and higher disposable income to 10 million low to middle-income earners.
This will impact property players and the industry indirectly, mainly through measures such as:
- $158 billion tax relief to increase Australia’s disposable income, for those earning between $18,200 – $126,000 per year. The tax cut will impact those earning $48,000 to $90,000 per year the most, resulting in an extra $1,080 (single-income) or $2,160 (double-income) on a yearly basis. This should alleviate living costs and have the potential for either further savings towards a house deposit, or increased payments on the current home mortgage loan.
- Reduction of the tax-rate from 32.5% to 30.0% from 1 July 2025, covering anyone earning between $45,000 -$200,000 per year. If this policy is implemented 94.0% of all taxpayers will pay no more than 30 cents in the dollar in tax.
- $100 billion in infrastructure projects over the next 10 years. There will be a focus on easing up congestion in capital cities and infrastructure creation in regional areas. This includes $15 billion on new road and rail projects, and $2 billion on fast rail connection between Geelong and Melbourne, as well as 5 other cases for fast rail proposals: Sydney to Wollongong, Sydney to Parkes, Melbourne to Albury to Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast. This will potentially push out property buyers to outer-ring metro and regional areas, as they take advantage of: a) lower property prices (compared to capital cities), b) increasing connectivity to business and employment hubs, c) increased livability through improved infrastructure and d) increased local employment opportunities as businesses move to and/or open branches in outer-ring metro and regional areas.
- Benefits to small and medium businesses, including: a tax rate cut from 27.5% to 26.0% by 2019 and to 25.0% by 2021, and instant asset write-off for purchases under $30,000 can be used by businesses with an annual turnover of under $50million. A lower cost to doing business may result in businesses expanding quicker and/or employing more people. Higher employment suggests more people having a disposable income, increasing the potential number of home buyers and/or investors.
- From 1 July 2020, those aged 66 and 67 can make extra payments into their superannuation, even if they are not working. Those under the age of 67 will be allowed to make up to 3 years’ worth of voluntary contributions in 1 year. Seniors with a partner can contribute to their super for longer, to the age of 74 (70 years previously). Residential aged care is a growing industry in Australia, thus having retirees who can afford more suggests: a market for premium aged care products, and potentially higher absorption rates of current aged care developments in construction.
- $525 million skills package, to create 88,000 new apprenticeships as well as double incentive payments to employers in industries experiencing skills shortages. An increase in employment levels will always have an indirect impact on the property industry, as it suggests more people with disposable income and the potential to save for a house deposit or to choose to rent in their desired home and/or location.
The Morrison Government and Parliament seems to have a double-edged sword approach to the property market. The Federal Budget 2019 papers highlighted the large contribution made by the property industry to non-mining business investment, which grew by 9.7% in 2017-2018, compared to average annual growth of 1.5% over the previous decade. The absence of direct property related policies in the Federal Budget 2019 can only suggest that, in combination with measures introduced in the Federal Budget 2017, they are entrusting the free-market to “correct itself” (as per previous property cycles) and create a property market that is more “balanced” and fairer for all.
Yet, at the same time, Treasurer Josh Frydenberg stated that new dwelling investment will only grow 0.5% this year, before dropping by 7.0% in 2019-20, and a further 4.0% in 2020-21 as existing projects are completed. The Treasurer acknowledged that the Australian housing sector is worth approximately $7 trillion and that it is an uncertain time in the property cycle, whereby a cooling residential housing market will have a notable impact on economic growth. In fact, Mr. Frydenberg stated that a 10.0% drop in housing prices reduces real Gross Domestic Product (GDP) by approximately 0.5%.
The Treasurer also stated that a 1.0% drop in dwelling investment and household consumption will result in a 0.25% decrease in the Australian GDP. Mum and Dad property investors can breathe a sigh of relief as the Federal Budget 2019 highlighted the dangers of changes to negative gearing and capital gains tax. The economy can keep on moving and income spent on goods and services, as opposed to worrying over decreasing equity and the potential of a disrupted rental market (i.e. higher rents).
There are some nice surprises in the Federal Budget 2019 in the form of spending on farmers, mental health and disability, renewable energy and electricity bills, migration policies, and Australians’ safety. However, overall there are no real surprises. Tax cuts, infrastructure spending, investment into alternative types of employment, and building up metro/regional areas has always been the core to all Federal Budgets in history.
It will be interesting to see how this budget is received by Australians and whether it plays its role as an election budget. It is important to remember that this budget will only come into reality if the Morrison Government is re-elected. To that sense, it will be extremely interesting to see to what extent this budget is held up (if the Morrison Government is elected), OR, to what extent the budget will be changed (if the Morrison Government is not re-elected).
Source: PRDnationwide Research