Homeowners and the Budget

May 16th, 2014
Australian homeowners fared well in this year’s budget, with the housing sector not suffering direct hits like other parts of the economy. While Joe Hockey's cost cutting measures will be fel t far and wide, the family home will not be included in pension means testing as feared and negative gearing stays intact for now. First-home buyers did suffer a blow, however, with the scrapping of the First Home Savers Account (FHSA).

Real estate is rarely a major player in budget policy, with governments usually managing the property sector indirectly through macro positioning. There were fears this year would be different, however, as the magnitude of austerity measures became known. Despite the possibility of saving billions through direct changes to housing policy, however, the government decided to look elsewhere. The CGT tax-free status for owner-occupier homes remains untouched, with the family home excluded from age pension means testing and negative gearing also unchanged.

The Commission of Audit recently made a proposal to include the family home in the assets test from 2027-28, with some analysts fearing a much earlier adoption. According to BRW property rich-lister Kevin Young in a statement to news.com.au, the possibility of this change is already having an effect on the ground. “Some buyers still aren’t convinced this type of means testing won't be introduced down the track. A couple I know are so frightened by it, they recently bought a home in Bali rather than Australia.” said Young.

The $6 billion a year in lost tax revenue from negative gearing could have been a major target for Joe Hockey as he searched for tax leaks. While the age of negative gearing is coming to an end according to many commentators, things remain unchanged for the time being. Financial commentator David Koch recently made a statement to this effect, saying “Given negative gearing doesn’t appear to be stimulating much in the way of new housing investment- the original intention - and we’re approaching the peak of a property boom, the timing of a change in future concessions is probably right.”

Despite homeowners getting off the hook, first-home buyers - who can afford it least - did suffer a major blow. The FHSA initiative set up by the Rudd government in 2008 to assist first home buyers has been scrapped, with co-contributions to the accounts ending on July 1 and tax and social security concessions withdrawn from July 2015. Under the scheme, savers paid concessional tax rates of 15 percent on interest earned and the government made a 17 percent co-contribution on the first $6000 contributed each year. According to Mr Hockey, the accounts are being abolished due to low popularity.

While the real estate sector was largely left alone, perhaps the biggest effect of the budget on the housing market will be felt indirectly. As cost cutting flows through to the overall economy, there will be less need for the government to boost housing activity. What this means for homeowners is simple, with the central bank unlikely to tighten its macro policy and the government expecting interest rates to remain low in the medium to long term.