How will the 2017 Federal Budget Impact Property Investors?

Investor demand was massive in 2014, and for good reason…

Interest rates were low and falling, the AUS$ was finally trending down, and house prices were climbing after a very rare downturn in 2011-2012. The market was heating up, and wise heads feared that we’d all get burned.

In December 2014, APRA wrote to lenders warning lenders to restrict the growth in investor loans to 10% in 2015. Finance became more expensive and difficult to attain for investors, and a variety of measures were gradually introduced to curb foreign investment as well (e.g. increased stamp duty, ineligible foreign income, ATO crackdowns).

Is Investor activity returning to the highs of 2014-2015?

The below graph shows that Investor Lending wained through the back half of 2015 and the front half of 2016. Overall buyer demand remained pretty flat during this period (while Melbourne house prices grew by about 10%). Investor demand has rebounded since Spring last year, with total Investor Lending growing by well over 10% for each of the last 6 months. Investor Loans have accounted for about 40% of all Housing Lending in recent months; this proportion is relatively high, but 4-5% below the heights seen in when APRA alarm bells rang.

 

There was a lot of talk early this year about potential changes to capital gains, negative gearing, and the use of superannuation for purchases. Yet, as the federal budget approached, more emphasis was placed on housing affordability (as distinct from investor activity).

The result is legislation that could lead to a bit more supply of quality housing, and to marginally lower levels of investment from overseas and from high income earners.

Lack of housing supply in established Melbourne suburbs has been a big issue in recent times, and a couple initiatives from the 2017 budget should help a bit… Super changes that allow up to $300,000 in non-concessional contributions will see more elderly sell, and many of these houses will in turn be developed. And, some foreigner investors will choose to sell due to the removal of the Capital Gains Tax exemption associated with main residence.

Investor activity has been particularly strong in the apartment sector. The budget determined that foreign ownership of new developments will be capped at 50%, meaning that off-the-plan sales to overseas buyers will taper off. This, eventually, may lead to more developments designed to meeting the needs of domestic homebuyers. And, new measures that restrict investment property tax deductions and expenses will reduce incentives for wealthy investors who invest in real estate primarily for  tax purposes.

The fundamentals that make Melbourne real estate attractive to domestic and overseas investors haven’t changed…

Interest rates are still at record lows; the AUS$ is stable and close to historical average; interstate and international immigration is strong; and, unemployment is low and new jobs are being created at a good rate.

We’re in our 5th year of consecutive Median $ House Price Growth. Good times never last forever, but renewed investor activity is a good sign, particularly when so much has been done by government and banks to restrict it.

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