While the Federal Government's 2014-2015 Budget is fairly aggressive, with Treasurer Joe Hockey slashing welfare benefits and increasing taxes on high income earners in a bid to reduce the nation's deficit, homeowners and the housing sector have emerged relatively unscathed.
In the days and weeks leading up to 13 May, there were fears that negative gearing could be repealed or altered and that family homes would come under scrutiny. Fortunately for the time being, property has been kept out of the firing line.
Interest rate hike likely to be delayed until 2015
To offset the money being removed from the economy by the government, it is likely the Reserve Bank will leave rates on hold for the foreseeable future – giving Australians plenty of time to adjust to other changes being implemented by the Budget.
The cash rate is expected to continue hovering around the historically low level of 2.5% for at least the short to medium term, making now a good time for potential property buyers to leap onto the property ladder.
Surge in construction will help to deliver an improvement in affordability
Over the last year, rising dwelling prices have shown the housing market is responding strongly to low interest rates. On the back of a surge in building approvals, the Budget has also unsurprisingly predicted an impending surge in construction. An increase in the supply of residential properties is needed to satisfy the high levels of pent-up demand and improve housing affordability.
First-home buyers no longer to receive taxpayer support
First home buyers are now at record low levels with many eager to enter the market to take advantage of the current low interest rates. The Budget has announced discontinuance of first-home saver accounts – a scheme that provided those saving for a deposit with tax breaks and co-contributions from the government. Any accounts opened after Tuesday 13 May 2014 will no longer be entitled to these benefits.
While abolishment of the scheme could be perceived as a blow for Australians saving for their first property, these accounts failed to achieve any significant traction and will not be greatly missed by the housing industry.
Mr Hockey said the low popularity of the accounts, first announced in 2008, demonstrated they had failed to make a sufficient impact on housing affordability, and he was right, with only 46,000 accounts of a target of 750,000 accounts opened during the period of the scheme.
Many users were deterred by the specific conditions associated with the accounts. For example, money had to be saved for at least four years and if the account holders had a change of heart, their savings were defaulted to their superannuation account.
Nevertheless, first-home buyer grants will continue to be handed out in conjunction with State governments, and remain unaffected by the Budget. While we hold little hope in the short term, we would like the FHOG reinstated on established housing and appropriately indexed to the annual movement in the median dwelling prices. Contrary to populist opinion, if this can be retained and not meddled with to interrupt the normal cycle of first home buyers entering the market, it will not have any inflationary effect on house prices.
Tax perks for investors
Despite being an area floated for reform, negative gearing has been left intact – which is positive news for investors.
With population growth at 1.8%, housing in short supply and the construction industry accounting for around 9% of the Australian workforce (the third largest sector behind healthcare and retail), the motivations behind the initial introduction of negative gearing remain unchanged, and it would be remiss of the government to alter its stance now.
Family homes escape pension asset test
The Federal Budget dismissed a key recommendation from the Commission for Audit to include the family home in the asset test for the aged pension.
The CGT (Capital Gains) tax-free status for owner-occupier homes has also thankfully remained untouched.
Potential impact of delayed retirement on housing sector
The proposed increase of the pension access age to 70 in 2035 has the potential to result in unexpected consequences for the housing market. For example, delayed retirement could impact the demand for downsize opportunities. Many Australians may be forced to consider selling sooner to fund the gap between their retirement and ability to collect the pension.
It's still too early to tell how consumer reaction to the Budget will impact buyer and seller activity in the immediate future. Auction attendance and clearance rates will come into sharp focus over the coming months to demonstrate stronger indications of consumer confidence. However, with interest rates set to remain low throughout 2014, the housing sector remains positive for both current mortgage holders and those looking to enter the property market.