With the coalition having released their first budget it is now possible to assess any impact on the property sector. While real estate has historically been a very minor feature in previous federal budgets it was speculated early that Joe Hockey would look to the housing sector with the view to stem tax leaks and cut federal spending where feasible. As with many other sectors there will be budget cuts to help improve the Government’s bottom line, however, most investors will be pleased to note that negative gearing will remain unchanged for now.

The biggest change will come with the coalition abandoning the fifth instalment of the National Rental Affordability Scheme (known more commonly as NRAS). The cessation of this scheme, which involves federal assistance to developers/owners who offer affordable housing to the public, will ultimately help the government save $235 million over the next three years. However it is also likely this decision will sit poorly for many people – not the least of which, the Housing Industry of Australia (HIA) and The Urban Development Institute of Australia (UDIA) – who are particularly disappointed with the changes. Applicants who applied for the fifth round of approvals (which closed in August 2013) will now be abandoned entirely. Conversely, those projects already formally approved will still receive government concessions. To date, NRAS has delivered 14,575 dwellings with another 23,884 in the pipeline. Both the HIA and UDIA speculate many pipeline projects will now be abandoned. As a natural consequence, this will further evaporate existing housing stock for middle and low-income earners with the true impact being measurable only in the long-term.

The other main loser will be first home buyers. The government has abolished the First Home Savers Account scheme. The government initiative, introduced in 2008, provided people saving for a deposit with tax breaks and co-contributions from the government. Under the scheme, savers paid concessional tax rates of 15% on interest earned in the accounts and the government made a 17% co-contribution on the first $6000 contributed each year. It is estimated this will boost the governments bottom line by $143 million and, like with the savings from NRAS will “be redirected by the Government to repair the budget and fund policy priorities”.

The good news for property investors is that negative gearing will remain unchanged. With the government losing approximately $6 billion annually through negative gearing many viewed it as being in the governments sights for potential review. While some consider it as a tax perk that does little to boost supply it is an existing policy that, if changed, would drastically change the sentiment of many property owning voters. Thus, it comes as little surprise the coalition left this tax concession in place.

Good news is also at hand for pensioners and homeowners. While the eligible pension age has been raised to 70, the family home will be exempt from the means test in order to receive the Age Pension. Homeowners have also breathed a collective sigh of relief with the CGT free status of the family home remaining untouched.

In summary, like the rest of the budget, it is anticipated these announcements will be met with mixed reactions. Developers and investors in NRAS will undoubtedly be disappointed and there will be an increasing level of strain placed on social housing (however it is hoped this will see some people move towards the private sector). The number of first home buyers is expected to dwindle further, especially as investors still have access to negative gearing benefits and home owners will be largely unaffected. With austerity measures likely to help keep a lid on the very low interest rate private development and purchasing is expected to remain moderate to strong.
This report was prepared by Joe Kotevich, Head of Research, IPS.

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