At 7:30 pm on Tuesday 9th May Treasurer Scott Morrison released the Federal Budget. With growing concerns of housing affordability and Sydney’s median house price around 13x the average annual wage, what changes have been enforced to affect first home buyers and investors?
The federal government has tried to address housing affordability by making the housing market more accessible for low to mid income earners to save for a deposit. One way has been through the implementation of the first home ‘Super Saver Scheme’ whereby first home buyers will be able to set aside voluntary pre-tax contributions (salary sacrifice) to their superannuation account as savings for their home deposit. The maximum contributions that can be set aside for a deposit is limited to $15,000 per annum, and capped at $30,000 per person in total.
Individually, they can contribute up to $30,000 across two years, making a combined total of $60,000. This is taxed at a lower rate of just 15% as opposed to the marginal rate of 34.5% (Medicare Levy inclusive). What it means is that if a couple made a combined total contribution of $60,000 and paid income tax at 34.5% on this final amount they would be left with $39,300 after paying $20,700 in tax.
However, this scheme now means that if this hypothetical couple ‘salary sacrificed’ and withdrew the same $60,000 from superannuation and cashed it out under the new proposal, tax payable would only be $12,060. Therefore, a total saving of $8,640 would occur, which is an approximately 5% discount on a $170k deposit. Although, this withdrawal tax concession encourages greater saving for first home buyers… it is arguably not enough.
The 2017-18 budget will be $28.7b in deficit, which is an expected improvement on the $37b actual deficit in 2016. The government has an objective of hitting surplus by 2021 with targets set on property investors, major banks and Medicare levy contributors.
NAB, CBA, ANZ, Westpac and Macquarie Bank will all face increased tax on loan facilities such as corporate bonds, commercial paper, tier 2 capital and certification of deposit. With no real certainty of the ‘ripple effect’ this will have on banks to try to balance costs, one thing is for sure, however, is that this will ultimately be passed onto taxpayers. There are 3 possibilities as to how this will be introduced:
In response to historically low mortgage rates with the cash rate stabilised at 1.5% this has inevitably increased the demand for housing placing an upward pressure on prices as well as debt to income levels. These repercussions have already begun to emerge with Westpac and its subsidiaries raising fixed – rate interest only loans by 20 basis points in terms of investment property, self-managed super fund and non-residential loans.
However, there has been cuts in principal and interest loans by up to 30 basis points. This is a growing trend amongst similar major creditors such as CBA aiming to discourage new interest-only borrowers but encouraging existing interest-only borrowers to switch to principal and interest. The underlying reason behind these rapid changes in loan terms and conditions is a result of growing concerns from APRA of interest-only loans which now account for 64% of all investor lending as well as deferring principal payment. If national household debt to GDP was to continue to climb past 123% placing us within the top 3 globally, this greater creditor risk could lead to mortgage concerns if a downward correction in house prices were to occur in response to potential tightening of monetary policy or increased unemployment.
The federal government has implemented depreciation regulation for property investors with investors no longer able to claim depreciation on fixtures and fittings installed prior to purchasing the property, only the items installed after the property purchase.
In response to the alarming concern of over 80,000 properties across Sydney being recorded vacant owned predominantly by foreign investors causing an artificial downward pressure on vacancy rates, the federal government has implemented penalties whereby properties that are not occupied or made available on the rental market for at least 6 months a year will be charged an annual levy. Furthermore, from July 9 2017 foreign and temporary tax residents will face a capital gains tax rate increase from 10% to 12.5%.
To encourage those 65 or over to downsize from their existing family dwellings to help solve concerns over lack of supply, individuals aged 65+ who have lived in their family home for more than 10 years can divert the profit from the sale of their home into superannuation at a 0% tax rate. Each member can transfer up to $300,000 tax-free into their super account. This federal budget incentive is forecasted to be successful with up to 50,000 pre-existing properties being made available per annum. To accommodate this reform, the budget package will ensure the rezoning of land in urban centres to include additional ‘over 55’s’ retirement villages, enabling this demographic to downsize whilst remain within their local community. Furthermore, the government has also received advice that back these reforms from the Productivity Commission with their survey analysis concluding that over 15% of older Australians want to move to homes that are cheaper and easier to maintain.
Housing affordability is often placed into the ‘doom and gloom’ basket for a lot of first home buyers, with saving for a deposit and getting loan approval more difficult due to a lack of housing supply and increased prices through investor interest-only loans, negative gearing and foreign investment. Furthermore, median house price to average income ratio was 12.2 and 9.5 in Sydney and Melbourne in 2016 respectively. However, this often leads to misleading data when comparing the median-based measures of housing in the same location as it does not consider interest rate differences overtime. For example, in 1990 a buyer purchased an average house in Sydney for $195,000 with an interest rate of 17% with monthly repayments of $2,790 for a 30-year loan term. However, in 1990 the average full-time annual gross income was $30,000, thus buyer’s mortgage repayments represented around 112% of average gross earnings. Conversely, in 2017 an average house purchased for around $1,000,000 with an average interest rate of 4% and monthly repayments of $4,784 is 70% of their average gross earnings of $81,947, a staggering 42% lower than 1990.