Summary and headline response
With so much debate about housing affordability it was always going to be the case that the 2017 budget included key policies aimed at improving the affordability of housing and addressing some of the systemic issues that have pushed housing prices out of reach for many Australians.
At face value, the budget measures present a good attempt at improving housing supply while softening some of the incentives stoking housing demand.
From a housing perspective, key elements of the budget can be divided into polices that influence supply or demand.
From a supply perspective, the government has announced
- Incentives for downsizers – proceeds from the sale of the family home can be contributed to superannuation, capped at $300k
- The National Affordable Housing Agreement which currently exists between the states and federal government will be maintained, but the rules of how the $1.3 billion is used will be tightened to ensure states deliver adequate new public housing supply and reform the urban planning framework.
- Federally owned land that is available for development will become more transparent via an online register. Additionally, surplus land holdings will be offered up for residential development with a high profile parcel of land in Melbourne’s Maribyrnong offered as the first example.
- A new City Deal has been announced for Western Sydney that will help to support strong population growth via a coordinated funding approach with state and local governments.
- The budget has outlined a national $70 billion spend on transport infrastructure through to 2021 (a $50b increase from the last budget). Investment in better transport has the dual benefit of creating jobs and improving productivity as well as linking regions with affordable housing to employment nodes and social precincts.
- Funding for community housing has seen a substantial boost with the establishment of the National Housing Finance and Investment Corporation – a bond aggregator designed to source funds for lending to community housing organisations at lower interest rates on longer terms.
From a demand perspective there have been several policy announcements aimed at reducing housing demand from key areas:
- First home buyers have been given a leg up to assist with saving for a deposit via a new First home super savers scheme whereby they can salary sacrifice their income directly into the same account as their superannuation capped at $15k per annum and a total of $30k total.
- Investment demand will see some further dampening via changes to what expenses can be claimed. Investors can no longer include travel associated with their investment property and they can’t claim depreciation on ‘plant and equipment’ such as the dishwasher, oven and hot water system. Outside of these changes, negative gearing the capital gains tax concession remains untouched.
- Foreign buyer demand could be dampened as well, with the budget announcing a new $5000 levy on foreign owned properties that left vacant for at least six months over a year as well as ensuring foreign buyers are exempt from any capital gains tax concessions. Additionally, developers can’t sell more than half of a development to foreign buyers.
The main components in detail:
FIRST HOME BUYERS
- First home super savers scheme will help prospective first time buyers to save for a deposit, utilising a salary sacrifice arrangement directly into their super fund which will attract the same tax concessions as superannuation donations (15% tax rate). Savers can add an additional $15,000 per year or $30,000 in total.
- There was some risk that a demand side policy aimed at first home buyers could further fuel price growth by adding to demand, however this scheme is likely to improve demand gradually and incentive a savings strategy which is a positive outcome for first home buyers and the housing market.
- Question marks remain around how much it will help potential first home buyers in markets like Sydney and Melbourne where the market is moving swiftly but it should assist first home buyers elsewhere.
INCENTIVEs for DOWNSIZERS
- Home owners aged 65+ can now make non-concessional contributions up to $300,000 into superannuation from the sale of their principal place of residence which has been owned for at least ten years. These contributions will be outside of the existing caps.
- This budget policy is aimed at freeing up established housing supply into the market and encouraging long term home owners who are seeking to downsize, while also having the dual effect of allowing retirees to free up equity held in their home.
- The policy should add a further incentive for downsizers, however it’s also important that these long term home owners have an appropriate downsizing option to move to. Downsizers will often prefer to stay within their local neighbourhood.
- Another barrier is that by cashing in their equity, some downsizers may no longer be eligible for a pension, which is means tested (the PPR is excluded from the assets test).
- The other major barrier is stamp duty payments which will continue to add a disincentive to downsizing.
TWEAKS TO NEGATIVE GEARING POLICY
- Investors can no longer claim travel expenses as part of their investment expenses.
- Additionally, investors can only claim deductions related to plant and equipment expenses that they have incurred directly rather than claiming expenses incurred by previous owners.
- Removing travel to an investment property as a claimable expense will impact those investors with properties in regional areas or in locations that are distant from where the investor lives. Regional areas may be disadvantaged by this new policy, however the impact on investment demand is likely to be minimal. This is likely a response to a perception that some investors are claiming travel expenses that may be more related to personal usage rather than legitimate expenses related to their investment.
- The changes to plant and equipment deductions could be more material, as it effects an investor’s ability to depreciate things such as appliances & utilities (oven/dishwasher/hot water system etc) if these items were purchased by the previous owner. There could be the potential that this policy encourages investors to renovate established homes rather than purchase recently built product where they won’t be able to realise the depreciation benefits of recently installed appliances. The 2014-15 taxation statistics show that $3.013 billion in capital works deductions were claimed. We also know that investors overwhelmingly prefer to buy established rather than new stock so this could have a significant impact on the attractiveness of second-hand investment properties and may contribute to an overall slowing in investor demand. From a rental market perspective it may provide better outcomes with owners more prepared to invest in upgrading their properties for the depreciation benefits.
- Foreign owners who keep their property vacant for at least six months a year will face a levy of at least $5,000 per annum.
- Developers will be restricted in the proportion of stock that can be sold to foreign buyers. Going forward, projects can’t have more than 50% of stock sold to foreign buyers.
- Capital gains tax rules will be strengthened to ensure the risk of foreign buyers avoiding capital gains tax is reduced. Foreign or temporary residents will no longer be able to claim the main residence capital gains tax exemption.
- This $5,000 vacancy levy is aimed at ensuring foreign investors are actually contributing to housing supply and not simply offshoring their capital with no intention to occupy or lease the dwelling. The additional levy isn’t likely to act as a major disincentive to foreign investment, however the policy could be difficult to monitor and enforce.
- The second part of foreign investment policy is more significant and will impact on those developers who sell a large proportion of their stock via roadshows through Asia and other regions or who rely on foreign marketing networks to sell their stock. Attracting domestic demand to some high-rise unit projects that have been designed specifically for foreign buyers may not have market appeal domestically. New unit approvals have already fallen dramatically and these changes may compress new approvals further as developers struggle to achieve the required number of presales to commence construction.
- Tightening the taxation rules on foreign owned property is a logical move, ensuring foreign owners pay the full rate of capital gain tax without the concession that would normally apply to Australian residents who have held their property for at least 12 months.
SOCIAL / COMMUNITY HOUSING
- A new bond aggregator model will be set up via a newly established National Housing Finance and Investment Corporation with the objective being to provide finance for the community housing sector at lower interest rates over long lending terms.
- This policy is likely to be based on existing frameworks in the UK and Switzerland. The aim here is to source funding for community housing from the bond market rather than through more expensive lending arrangements via the banking sector. Funds would be lent to community housing providers at lower interest rates and over longer terms in an effort to support more housing options under affordable rental or purchase arrangements.
- This initiative is likely to be welcomed by community housing providers and should go a long way towards improving the amount of social housing being developed.
RE-JIGGING THE NATIONAL AFFORDABLE HOUSING AGREEMENT
- Currently, states are funded with $1.3 billion each year which is to be used by them to support affordable housing initiatives. Under the new budget policy, the funding will remain the same, however the rules will be tightened to ensure states meet agreed housing supply targets and work towards reforming town planning.
- This is one of the most legitimate ways the federal government can establish an affordable housing framework in conjunction with the states. The funding is substantial, but in the past there is the perception the funds have not been well spent with little visible benefits to public housing additions and improved housing affordability.
- The new policy, may promote proper usage of the federal funding and ensure town planning reforms improve strategic land usage and land release. Firm targets around the amount of new supply and town planning reform will need to be set in transparent and achievable terms for this policy to be successful.
FACILITATING LAND RELEASE
- An online Commonwealth Land Registry will be created which provides details on government owned sites that can be made available for residential development.
- Releasing suitable surplus Commonwealth land starting with 127 hectares of Defence land in Maribyrnong (Melbourne), which could support up to 6,000 new homes
- A new ‘City Deal’ for Western Sydney aimed at improving the town planning regime across 9 council areas of Western Sydney.
- Providing more transparency around federal government land holdings that are available, and in fact, promoted as developable for residential housing will be a welcome improvement in urban planning. It shows the federal government is serious about offloading surplus land and ensuring it used for the highest and best use.
- The announcement of the Maribyrnong land release is significant, considering its proximity to Melbourne’s CBD and potential for a significant uplift in housing supply in a strategic location.
- ‘City Deals’ have previously been signed in Townsville and Launceston with an aim to provide a long term commitment between the three levels of government to deliver strategic outcomes (new infrastructure, more jobs and facilitate growth) for the residents of the area. The City Deal funding announced for Western Sydney should provide a long term strategy for managing the high rate of projected population growth across this region of Sydney.
- The budget has outlined a national $70 billion spend on transport infrastructure through to 2021 (a $50b increase from the last budget).
- Significant spends include:
- $5.3b to build the first stage of the Western Sydney ‘Badgerys Creek’ Airport.
- $8.4b to build the Inland Rail project.
- $75 billion for road and rail funding over 10 years
- $10 billion for a National Rail Program aimed at improving urban and regional rail over a 10 year period.
- $1 billion for infrastructure spending for Victoria, including $500m for regional rail, $30m for airport rail link planning and a further $20.2 million for Murray Basin rail.
- $844m for Queensland Bruce Highway upgrades.
- $700m for WA’s Metronet rail project
- $2.9b for the Western Sydney Infrastructure Plan
- Additionally, $1b a National Housing Infrastructure Facility over 5 years to support local governments through a range of options to finance critical infrastructure.
- Overall, spending on infrastructure is stimulatory to the economy, having the dual effect of creating jobs and improving productivity.
- Many areas where housing and land is more affordable are poorly connected by efficient transport linkages, and the higher budgeted spend on transport infrastructure will go a long way towards linking these areas with more efficient transport and making these outer fringe areas more desirable to home buyers.
In addition to the budget policy announcement around housing and housing affordability, there have also been important announcements around the banking sector.
- New legislation will expand APRA’s remit to include non ADI’s. This is likely to be an effort to get some risk minimisation and regulation around the non-banking / shadow banking sector which has become more active since APRA stepped up their regulatory changes aimed at slowing investment demand. These changes could make it harder for investors, foreign buyers and businesses, who are being turned away from the major banks, to fund their property purchases.
- Another change related to APRA was an expanded to remit to include geographic restrictions on lending where APRA considers it appropriate. While we need more clarity around this provision, it seems that this new provision for APRA is setting the framework for targeting policies specific to geographic areas, similar to RBNZ announcements in New Zealand that imposed strict LVR limits for investment loans on Auckland properties.
- Additionally the budget announces a 6 basis point levy on funding of banks with at least $100m in liabilities (Big 4 plus Macquarie) which is budgeted to raise $1.5 billion per year over the next four years for the federal gov. Labor has already announced they would support this policy. The likelihood is that this additional cost could push mortgage rates slightly higher as banks look to recoup the costs.
Published in CoreLogic Research Blog by Tim Lawless, 10th May 2017