How the Federal Budget will impact the Australian property market – who it targets and benefits and why! (Ep.147)

In this week’s episode, Dave, Cate and Pete take you through:

1. How does this budget compare with previous budgets?
   With the federal election looming, no one was expecting to see huge dollars being thrown around in this years’ budget, particularly with the large amounts spent on emergency pandemic measures in the last two years. The trio discuss some key points that were missing, namely: housing affordability, the ongoing rental crisis and returning Australia to surplus.
2. First Home Guarantee, (formerly known as the First Home Deposit Scheme). Also known as the ‘New Home Guarantee’, the First Home Guarantee allows first home buyers to build or purchase a newly built home with a deposit as low as 5%, without having to pay Lenders Mortgage Insurance (LMI), as the government will guarantee the remaining 15% deposit required to avoid LMI. The scheme has been extended from the 10,000 places promised to 35,000 places per annum. The trio discuss the price caps which apply and eligibility requirements.  They also ponder the alternatives for first home buyers who are sensitive to the concept of lenders mortgage insurance.
3. Family Home Guarantee. Like the First Home Guarantee, this scheme allows single parents with dependents to purchase a property with an even lower deposit without paying LMI. However, there are some key differences which make it a great initiative. Single parents need only a 2% deposit, (not 5%) and they are also able to purchase established as well as new properties under the scheme. Places in the scheme have been doubled from 2,500 to 5,000 guarantees per year. The trio discuss the benefits of this initiative for single parents who have little cash on hand, which is common when going through a divorce or separation as well as competing with other households that have double incomes.
4. Regional Home Guarantee. This guarantee is a new initiative introduced, with 10,000 guarantees on offer over the next 3 years. Similar to the First Home Guarantee, the required deposit is as low as 5% and the guarantee is offered for newly built homes only. A key difference is that this scheme is offered to permanent residents, as well as Australian citizens, which the other guarantees are not. Reading between the lines, it seems that the government is attempting to encourage migrants to move to the regions. However, the trio question whether this level of pressure is appropriate for regions already struggling with stock shortages and whether the hardest hit regions will benefit. Another question posed is whether the scheme could be better targeted to the smaller regional towns, with a population of 5,000 or less that have struggled with migration, although the cost of construction and availability of tradespersons is a key question to ask, also.
5. First Home Super Saver Scheme. The existing scheme which allowed first home owners to make voluntary contributions to their Superannuation of $30,000 for the purpose of saving a deposit for their first property has now been increased to $50,000. This is a great initiative, as the voluntary contributions will be taxed at 15% rather than the marginal tax rate. However, those looking to take advantage of the scheme can only withdraw the funds to purchase a property, which means that if they don’t purchase, the funds will be inaccessible.   
6. Crystal balling interest rates. The forecast for inflation is that it will be under control within the next 12 months. What that means for the fate of interest rates, is that we can expect rates to rise within the next 12 months, but likely not beyond that. The trio discuss their thoughts and predictions on the future of inflation and interest rates. For those listeners concerned about future rate increases, remember that lenders use a bench mark assessment rate to stress test your loan, so there is a buffer there to absorb the impact of rising rates.   
7. How long has it taken property prices to double. Pete shares his research on national property prices and how long it has taken them to double. Tune in to find out! 

Resources

• Property Cycle Management – Why now is the best time to buy if it suits your personal economy and you have a long-term property plan! (Ep.12)
• Off the plan purchases – Everything you need to know. Part 2: The financial return drivers (Ep.59)
• Setting yourself up to purchase with confidence and why getting your pre-approval in place is more critical than ever (Ep.78)
• Property Booms and Price Drops in Australia from 2003 to 2021 (Ep.111)
• How to increase your borrowing power – Learn how investors, first home buyers and upgraders increase capacity (Ep.116)
• How will your mortgages serve you in the long run?
• Five mortgage strategies that can grow your wealth
• How our mortgage strategy helps us to hold properties
• How to succeed with Property and Create your Ideal Lifestyle
• Mortgage Strategy 101 – YouTube video series.

Show notes

How does this budget compare?

• Interesting budget – no huge surprises. After the amount of money spent getting us through the pandemic, it was an enormous ledger, I didn’t’ expect to see huge dollars being thrown about.  
• Housing affordability and rental crisis didn’t crack a mention.  
• 4 years ago, they were talking about returning us to surplus, not a mention about that now. Accepted there was a huge deficit. The shortcoming was also not standing up to some of the things they didn’t do, vaccine mess. There were not many headline things that will rattle the property world. Tax reform, nothing nearly as substantial as past budget 
• Reasonable budget heading into an election. They will normally splash cash around prior to an election. They didn’t do this which is good given the inflationary pressures. A few areas focused on, Home Guarantee more than doubled.
• Made up of  
  • First (or New) home guarantee – 35,000 places per year (up from $10,000) 
  • Family home guarantee – 5,000 places per year (up from $2,500) 
  • Regional home guarantee – 10,000 places per year 
  • = 50,000 places total per year 

First (or New) Home Guarantee up to 35,000 guarantees each year, up from the current 10,000, from 1 July 2022

• Also known as “New Home Guarantee” 
• Details of scheme
  • Build or purchase a newly built home with a deposit as low as 5% 
  • Government will guarantee up to 15% 
  • No LMI paid as lending at 80% 
  • Owner occupiers, not investment 
  • Loans under the New Home Guarantee require scheduled repayments of the principal and interest of the loan for the full period of the agreement, which will need to be for a term of 30 years or less, (with limited exceptions for interest only loans, which mainly relate to construction lending). 
• Eligible properties 
  • newly-constructed dwellings 
  • off-the-plan dwellings 
  • house and land packages 
  • land and a separate contract to build a new home
• Eligible people 
  • Australian citizens who are at least 18 years of age. Permanent residents are not eligible
  • Income – previous financial year
  • Single applicants with a taxable income of up to $125,000 per annum
  • couples with a taxable income of up to $200,000 per annum
  • Applicants must be first home buyers who have not previously owned, or had an interest in, a property in Australia, either separately or jointly with someone else (includes residential strata and company title properties).
• Borrowers can use the guarantee in conjunction with other government programs like the First Home Super Saver Scheme, HomeBuilder grant or state and territory First Home Owner Grants and stamp duty concessions. 

Family Home Guarantee – 5,000 guarantees each year from 1 July 2022 to 30 June 2025 

• When the scheme was announced last year, the scheme was to give 10,000 places over four financial years (to June 2025) to single parents = 2,500 places per year. 
• Now it has been doubled to 5,000 places per year until 30 June 2025 
• Details of the scheme 
  • Single parents with dependents 
  • Purchase a home (cannot be investment) 
  • New or existing 
  • Deposit minimum of 2% 
  • Government will guarantee maximum 18% 
  • No LMI paid as lending at 80% 
• Eligibility 
  • Be a single parent with at least one dependent.  
    • You will need to demonstrate that as a single parent you are legally responsible for the day-to-day care, welfare and development of your child and that they are in your care.  
    • Depending on your situation and terms of any shared custody arrangement, both single mother and father of a child may be able to separately access the Family Home Guarantee as individuals. 
  • Australian citizen, at least 18 years of age 
  • With an annual taxable income of $125,000 or less for the previous financial year (Child support payments are not included as income for the purpose of the income cap) 
    • You need to provide NOA from previous financial year 
  • As a single parent, you must be the sole applicant listed on the loan and certificate of title. 
  • You must live in the property you intend to purchase. 
  • Although this does not need to be your first home to be eligible for this scheme, you will not be eligible if you do currently own a home, including commercial property, investment property, owning land or a company title interest in land in Australia. 
• Why target this co-hort?
  • It’s very hard to have cash on hand for a deposit if you are going through a divorce or separation.  
  • We would have loved to see more of this.  
  • One of the reasons why property prices have grown so much is because we have two members of the household working full time – increases borrowing capacity.  
  • If you’re a single parent, it is proportionately harder (for younger people too purchasing their first property) because they are competing with dual incomes.  
  • An interesting distinction for this scheme is that it can be used to purchase existing properties – under-utilised properties closer to the city.  
  • To purchase a house, you need to purchase way out, where the city meets the country. Thereby you are further entrenching social disadvantage. If you allow single parents to move into existing houses, they’ll be moving into areas closer to the city.
  • Only need a deposit of 2% – the other guarantees are 5%. 

Regional Home Guarantee – 10,000 guarantees each year from 1 October 2022 to 30 June 2025 

The Regional Home Guarantee is part of an expansion of the above New Home Guarantee 

• Details of the scheme 
  • Rural or regional area
  • Build or purchase a newly built home with a deposit as low as 5% 
  • Government will guarantee up to 15% 
  • No LMI paid as lending at 80% 
• Eligibility 
  • Either first home buyer OR have not owned property within the last 5 years 
  • Australian citizens or permanent residents – encouraging migrants to settle in rural areas by opening the scheme to permanent residents, unlike the other schemes which are restricted to Australian citizens.  
• It also allows permanent residents to take advantage of this scheme (the others do not, they are only open to Australian citizens), reading between the lines it seems the government is trying to encourage migrants to move to the regions.  
• Don’t think the regions needed this, there is such stock shortages providing pressure on prices. 
• Would could be useful, is further narrowing to the regions that have been struggling. Areas that have lost their local football teams, netball teams, schools closed down, churches.  
• Pete gives an example of a regional council in SA which advertises the shortages that they have to encourage newcomers. We don’t have any plumbers in this area, if a plumber came there would be pelnty of work for them. If we can get more people to live out there, that would be good.  
• How can we underpin continued migration to regions? In the years prior to covid, migration to regions had taken a hit. Particularly the satelite towns around bigger regional centres with less than 5,000 population, they are the ones that struggle and miss these things, it could be more targeted to these towns.  

First Home Super Saver Scheme

• From 1 July 2022, the maximum amount of voluntary contributions that can be released under the FHSSS will be increased from $30,000 to $50,000 per person enabling first home owners to achieve their dreams of home ownership sooner. 
• Under the FHSSS, first home buyers, who have made voluntary super contributions of up to $15,000 per financial year into their super 
• Taxed at 15% in super rather than your normal tax rate.  
• You will be better of if you put your savings into Super – you can only pull it out to buy a property. You can’t then go back and tap into the money once you’ve put it in there. Makes sense to put extra savings, $15,000 a year to go to the first home, than you otherwise would have. 
• can withdraw these amounts (plus associated earnings/less tax) from their super fund to help with a deposit on their first home. 
• Combine with your own savings 
• If you’re a first home buyer, you may be eligible to withdraw voluntary super contributions you’ve made (plus earnings) to put towards a home deposit. 
• The First Home Super Saver Scheme (FHSSS) helps Australians boost their savings for a first home by allowing them to build a deposit inside superannuation, giving them a tax cut.  
• For most people, the FHSSS can boost the savings they can put towards a deposit by at least 30 per cent compared with saving through a standard deposit account. 

Forecast for Interest Rates

• The Government has predicted that inflation will come back down and be under control within 12 months. I don’t know if they can be all that certain. On this basis, we would expect rates to rise within the next 12 months, but not much beyond that. The Government’s crystal ball is no better than ours. They had a subtle mention there about inflationary pressure not being as great as they initially thought – supply chains starting to resolve themselves. Expecting significant rate rises is not on my horizon, we would be really surprised if there are consecutive rate rises. 
• For the people who are concerned, when you got your mortgage in the last year, banks do use a benchmark assessment rate, so there is some fat in there. You could tighten your discretionary spending. 
• Fixed rates are going up, pricing in the money markets is increasing for long-term money. It doesn’t mean that the variable will actually go that high.  

Gold Nuggets

Cate Bakos – The Property Buyer’s Golden nugget: In relation to election talk, it’s great for people to be aware of what’s in the agenda and the speeches, you can go to treasury site and download the speech. You can see the shades of grey as well, where they haven’t shared the budget or the details. It’s really important when making decisions at the polling booth to know what’s on the agenda, there will be more detail as we get closer to election day. 

David Johnston – The Property Planner’s Golden nugget:  Despite the big picture and the budget, we come back to: the most important economy to make your decisions on is your own personal economy. Don’t get too caught up in what will happen, rates are low, if it’s the right time for you to buy, history suggests that buying today is better than buying tomorrow. So make decisions when you can if it suits your economy and if you’re in it for the long-term, things will take care of themselves.

Market Updates

1. Auctioneers call the shots. Cate shares her experience attending an online auction where bids whittled down to one dollar increments. After a tense game of property ping pong where 256 one dollar bids were made, the auctioneer called an end to the pain and declared that only bids of $500 or more would be accepted. This serves as a good reminder that the auctioneer has the capacity to change the rules mid-auction and refuse bids as well.   
2. Smoke signals rising from China Evergrande developments. Property development firms in China are experiencing a major delay in auditing, with an increase of 75% in delayed results. Five Chinese auditors have resigned in the last three months, and combined with the delayed results, there are the concerns of what the audits may disclose. This could have an impact on broader money markets, flowing into Australia and around the world. The number of property sales in China has dropped drastically, as well as a raised threat of hidden debts. Chinese companies are due to report their December year-end results in April. Watch this space…