In most boom phases interest rate rises jump on the back of prices and start weighing them down. But not this time. It begs the question, what’s holding prices back now?
So now that all the media heat has died down, I thought I’d post my two cents on what I reckon the budget will mean for house prices.
I don’t think a lot of people have picked up on it, but there’s a sleeper in the budget that could have a big effect on prices and drive them higher.
But that’s not through any deliberate action on the government’s part – or even any policy aimed at housing in general. Rising prices will be a by-product of other policy changes.
It reminds me of Steven Bradbury, who won gold at the winter Olympics by virtue of being so far behind everyone else, that when there were a stumble that took out the leaders, he coasted through to victory.
Pulling off a victory you efforts didn’t deserve is to pull a Steven Bradbury. In this way, the budget Bradburies house prices.
But first up let’s look at budget policy that actually targeted the housing market. There were only two of these and I don’t expect they’ll have a big impact.
The first is the expected announcement that First home-buyer savings accounts would be eliminated.
These were the accounts that the Rudd government introduced to assist first home buyers in saving for a deposit. With the governments co-contribution and tax limit of 15%, we might have expected more people to go for it.
At first, take up was slow but as at the end of 2013 there were 46,000 accounts opened. That might sound like a lot, but when you spread that out over 10-20 years of first home buying, it’s not hugely significant.
In a way it was one of these long-term policies that gave you a nice press announcement in the middle of a crisis, but had little immediate impact. And with first home buyers still making up a shrinking slice of the property pie, the removal of the accounts will have a negligible impact on prices, now and over the medium term.
The other property policy in the budget, also well flagged in advance, was the elimination of the National Rental Affordability Schemes.
This was another Rudd initiative, and was aimed at improving rental affordability for low to middle income earners – our beloved nurses and firemen. The scheme worked by offering rebate incentives to property investors on approved new properties. Renters effectively received a 20% reduction off the market rent.
The scheme never really took off though. It was designed with the institutional market (banks, fund managers) in mind, but they never really got behind it, and banks were put off by the high LVRs many properties had. In the end, they mostly went to private investors. And like any policy, there were some dodgy operators abusing the system.
At the end of the day, only 15,000 properties were built under the scheme over several years. When you remember that we build about 80,000 homes every year in Australia, and some of those properties would have been built anyway, scrapping the scheme is likely to have little impact.
Though, as I’ve written many times, Australia struggles to bring enough housing supply to the market, and so to the extent that this reduces supply at the margin, that could further imbalance demand and supply and push prices up.
But I don’t expect it to be huge.
So all up, not much action from changes to housing policy in this budget.
I actually think the biggest impact we’ll see on prices might come through the high income levy. The levy (the tax that shall not be named) means that the effective top tax rate is 49.5%.
I can already hear the sounds of accountants scratching their bald little heads trying to figure out a way around it.
But we know that when people, particularly high-income earners want to reduce their tax burden, they turn to property and negative gearing. There’s no reason to expect this will change, and at this stage in the property cycle, with strong momentum behind prices and bright outlook, negatively-geared properties are going to be an attractive option.
So what we’re talking about is taking the richest people in Australia, and giving them an extra strong incentive to leverage into investment property. The market is already tight, and competition between investors is strong, so sending a new round of cashed up investors into the market could have a material impact on prices.
There’s not likely to be a huge number of them, but they’ll have deep pockets. And it’s the size of the spend that counts when we’re talking about demand.
I’m sure this wasn’t the government’s intention, but they’ve accidently introduced a measure that could put (another!) rocket booster under prices.
The tempering factor in all of this though is confidence. The budget gave consumers a massive scare, and consumer confidence has tanked.
Budgets almost always do this though, and we generally see a bounce back in June. However, if we don’t get this, and consumers remain cautious, this could put some pause into the economy, and that would eventually drag on house prices.
On the way there though, there would probably be a temptation for the RBA to cut rates further, especially since the budget itself isn’t giving much stimulus to the economy, and is generally working the other way.
And so that scenario would see rates staying lower for longer. This means the impact on prices would be mixed, and a bit harder to read over the medium term.
So the net effect is likely to be a firm positive for prices. Let’s give the budget a grade of a ‘B’ maybe a ‘B-’.
But I’m not sure they deserved it.