Bruce Wan, Global Real Estate Strategist, Macquarie Capital
Wednesday 04 May 2016
What does the Budget mean for Australian real estate markets?
Bruce Wan, Global Real Estate Strategist, Macquarie Capital
Analysing the likely effects of budgetary changes on the market outlook
With the Commonwealth election likely to take place on 2 July 2016, this Budget was always going to be framed as a pre-election sales pitch to voters, intended to reinforce the Government’s economic management credentials and sweetened with a number of policy measures targeted at key constituents. From a real estate market perspective, however, what were the most important policy measures?
Certainly, the most important and sensitive fiscal policy levers for residential housing were left unchanged in the Budget.
- Standing arrangements on negative gearing (tax deductibility of investment property losses) and capital gains (50% discount on capital gains tax for individuals) remain in place. Potential changes under discussion were ruled out early in the Budget process.
- In sharp contrast, the Labor Opposition has proposed key reforms from 1 July 2017, restricting negative gearing to new housing and winding back capital gains tax discount to 25% for individuals.
- Overall, the tax treatment of housing investment were consciously excluded from any policy reforms this Budget. Undoubtedly, this issue is now shaping up as a key election battleground in July.
The major changes in this Budget related to modest cuts to income and company taxes, intended to support economic growth broadly, rather than property markets specifically.
- Personal income tax cuts ($4 billion over four years) by increasing the 32.5% marginal tax threshold from $80,000 to $87,000 from 1 July 2016. As a result, 500,000 taxpayers will move to a lower marginal tax rate, unwinding some degree of bracket creep.
- Ten Year Enterprise Plan ($3 billion over four years) by increasing the turnover threshold from $2 million to $10 million, broadening access to lower corporate tax rates, accelerated depreciation and depreciation pooling provisions. Company tax rates reduced to 25% over a ten year period.
- Superannuation Reform Package includes a series of measures like the introduction of a $1.6 million superannuation transfer balance cap ($2 billion over four years), reducing the tax-free benefits of retirement phase accounts for high wealth individuals.
From a real estate market perspective, newly-announced infrastructure funding initiatives will potentially provide some value uplift for adjacent commercial and residential real estate over time. Other measures will release potential urban re-development sites.
- Asset Recycling Initiatives ($3.3 billion) still under negotiation with four state and territory governments, which will unlock $23 billion of transport infrastructure works, including the Sydney and Melbourne Metro projects
- Western Sydney Infrastructure Plan ($2.9 billion over ten years) earmarked to improve transport infrastructure across Western Sydney, including the development of the Badgerys Creek airport.
- Reallocation from Melbourne East-West Link ($1.5 billion) to essential infrastructure around Victoria, including the Monash Freeway ($500 million), M80 Ring Road upgrade ($350 million) and Murray Basin freight line upgrade ($220 million).
- Forrestfield-Airport Link (additional $490 million in 2015-16) provides funding for key road connections in the East Perth region, a key local industrial and logistics transport hub.
- Perth Freight Link ($261 million) set aside for the Stage 2 tunnel phase of the transport link, providing key road connections from the port of Fremantle.
- Ipswich Motorway ($200 million) allocated on a matching basis with the Queensland Government to ease significant road traffic congestion along the critical Western growth corridor of Brisbane.
- Consolidation of Onshore Immigration Detention Network ($68 million over five years) will drive further closures in detention facilities. This will potentially involve the sale of Commonwealth owned land in Maribyrnong (Melbourne) and Villawood (Sydney).
Elsewhere, several housing market measures were included as part of a series of affordable housing payments to the states, while key rental schemes will enhance income certainty in public and social housing.
- National Affordable Housing ($5.5 billion over four years) provides reforms to integrate homeless and employment services, improve the operating efficiency of public housing and increase supply through planning reforms.
- National Partnership for Homelessness ($115 million in 2016-17) provides funding for frontline homelessness services, with a focus on women and children affected by domestic violence and homeless youth.
- Remote Australia Strategy ($108 million over four years) provides funding to improve public housing in remote communities by investing in housing works including upgrades, new houses and related infrastructure.
- Remote Indigenous Housing ($774 million over two years) provides for Indigenous public housing reforms to address overcrowding, homelessness, poor conditions and severe shortages.
- Compulsory Rent Deduction Scheme (to be negotiated) provides for the automatic deduction of rents from income support payments to public/social housing providers, thereby increasing the certainty and reliability of these rental income streams.
Certainly, these budgetary changes are coming at a critical juncture in the Australian housing market cycle.
- Housing market was in a broad moderation. By mid-2016, most housing markets in Australia are seeing more moderate, more sustainable pricing growth. Some markets like Perth remain in correction given the ongoing mining downturn. This broad cyclical phase will likely remain in place until we see more apparent monetary policy or regulatory tightening in housing markets.
- Interest rate cut will revive demand and sentiment. The Reserve Bank of Australia’s cut in cash rate to 1.75% - the lowest in modern history – will provide a near-term uplift to buyer sentiment and a rally for housing prices. The associated depreciation in the Australian dollar will marginally improve relative pricing for offshore buyers as well.
In the context of these budgetary and interest rate changes, what else will affect the outlook for Australian housing markets ahead?
- Election outcome in July will deeply affect homebuyers. As key housing market tax treatments (like negative gearing and capital gains concessions) come into play during an election, we will see contested notions about the impact of these changes on housing markets. Certainly there will be some direct impacts from a pull-back in tax concessions, but there will also be some indirect impacts (as we have seen during the introduction of the GST) as homebuyers markedly change their purchasing and investment behaviour to avoid relatively modest tax changes.
- Infrastructure roll-out will create value uplift. The sizeable $50 billion of infrastructure developments across Australia will create tangible asset value uplift in affected real estate markets. In the larger cities of Sydney and Melbourne, new Metro and light rail projects will provide concentrated boost to asset values in specific urban locations.
- Public and social housing will need to feature more prominently. Meanwhile, housing affordability will continue to be overstretched for key segments of the community, adding to social housing demand during a period of modest household income growth. There remains a deep challenge to find adequate supply of affordable and social housing across the country, particularly in relatively expensive capital city locations.