Federal Budget 2017 – What It Means For Property Developers
The Federal Budget measures brought down on the 9th May, show a government that’s finally starting to act to address Housing Affordability, by introducing measures to cool the market and also address supply.
It seems it’s not a moment too soon. Hot on the heels of our Blog on 4 May 2017 the Governor of the Reserve Bank made some commentary in the press on 5 May 2017 (Daily Telegraph)
The Governor expressed concerns for young peoples’ ability to be able to enter the Sydney property market. This is based on the recent (rapid) growth in median house prices in Sydney and Melbourne in particular and the growing affordability gap between prices and incomes. He intimated that the RBA cash rate might have been lowered from the existing 1.5% to stimulate the economy however this move was resisted due to the hot property markets. He also pointed out (in the same theme as our Blog) that the main issue is supply.
“You don’t address housing affordability by adding to demand,’’ he said.
“You address it by adding to the supply of dwellings and well-located land.”
“Policies that increase demand are just capitalised into the prices.’’
“Lower interest rates at the moment would risk increasing the imbalances in the system.”
The measures that have been introduced in the Federal Budget may only have a nominal impact on the balance of supply and demand, however the measures are acknowledging the issue and are constructive in their approach.
- Salary sacrificing into super (over and above the minimum statutory requirement) can now be accumulated by first home buyers and used as a deposit on a dwelling. This maintains the sanctity of statutory superannuation however enables FHB’s to tax effectively save for the deposit.
- The Federal Government will provide concessional loans to the States to increase the supply of new housing. The current National Affordable Housing Agreement (NAHA) will be replaced with a new National Housing and Homelessness Agreement (NHHA). The new agreement will have concrete requirements for states and territories to deliver on housing supply targets and reform their planning systems. In addition, the Government will establish a National Housing Infrastructure Facility based on the program set up in the UK to work with states and territories to fund deals with local governments to remove infrastructure impediments to developing new homes and apartments on selected sites. The scheme is described by the Treasurer as “micro” City Deals.
The Federal Government will also focus on releasing surplus land wherever available by establishing a register of such land. It will work with the States and developers to create new housing estates.
- The Federal Government will establish a new Real Estate Investment Trust regime that will enable institutional investors to own real estate assets subject to 80% of the income being sourced from “Affordable Housing”. The housing must offer rental arrangements at a discount to normal market parameters. This will encourage the development of more Affordable Housing.
- Negative Gearing will be maintained (thank goodness) however certain expenses will now be unable to be deducted, namely expenses incurred in travel to inspect the property. Bill Shorten has indicated that he would totally remove negative gearing which would be a disastrous policy measure for the property industry.
- Retiree downsizing will be encouraged to bring more stock onto the market. This is through offering up to $300,000 in concessional superannuation contributions out of the sale proceeds ($600,000 for couples). This is over and above the existing concessional threshold policy.
- Foreign home buyers are a key focus. Foreign ownership of new developments is to be restricted and additional charges applied to purchasers. They will now incur a fee for having a property that sits empty for 6 months or more in a year taking effect from May 9. The move is designed to ease tightening rental markets. Only half a development will now be able to sold to foreign investors and those investors will also be ineligible for capital gains tax exemptions. The CGT withholding tax rate for foreign tax residents is being lifted from 10 – 12.5%nd the CGT withholding threshold for foreign tax residents is being dropped from $2million to $750,000.
The Impact For Property Developers:
For the most part the Budget will have a neutral effect on the property construction sector. Over time there could be more supply of land which, coupled with flattening gross realisations might create a softening of residual land values. However, the demand for property in Sydney and Melbourne will continue and on balance there is likely to be more demand than supply for the foreseeable future.
There may be more activity in the development of affordable housing stock as local councils, state and federal governments align to facilitate planning around that. The inclusion of Affordable Housing as a Managed Investment Scheme / REIT will also facilitate growth in the sector of the market.
Only time will tell if these measures actually have a noticeable effect on housing affordability.
Stephen Turner B Ec. is a Senior Credit Executive with DFP.
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