The Federal Budget has introduced policies we believe will add further upward pressure to house prices. However, we are unsure if counter measures to increase housing stock and reduce price pressures will be effective. No matter the outcome, we don’t see it impacting the outlook for interest rates.
The government will provide additional assistance to First Home Buyers (FHBs):
- Firstly, the government will introduce a New Home Guarantee Scheme, taking elements of HomeBuilder and the First Home Deposit Guarantee Scheme. The New Home Guarantee Scheme will allow first home buyers to build a new home with a 5 per cent deposit, with the government guaranteeing the rest.
- Secondly, the government has introduced the First Home Guarantee scheme for single parents, which allows a single parent to purchase a dwelling with 2 per cent deposit. The scheme is designed to support 10,000 single parents over four years.
- And finally, the government will expand its First Home Super Saver Scheme, by raising the cap that allows people to make voluntary contributions to superannuation and use that as their deposit. The cap will be raised from $30,000 to $50,000.
Ultimately, we believe these schemes will boost demand for housing further, leading to higher price gains than otherwise, and conversely, leading to a deterioration of affordability as income growth is unlikely to keep abreast with house price gains. Most recent affordability metrics have shown a sharp deterioration.
Housing affordability deteriorates
Source: Citi research, HIA as of June 2020
Retirees unlikely to add much to supply
The reduction in the minimum age of the downsizer superannuation contribution from 65 to 60 will allow those near retirement to make a post-tax contribution to their superannuation of $300,000.
This will apply from 1 July 2022, and it’s designed to encourage a greater housing supply by freeing up larger homes. However, its impact on housing supply remains uncertain.
Without structural reforms—such as removal of stamp duty—if house prices continue to rise rapidly it will make the policy less effective as older workers would also face affordability issues buying other homes, despite being able to make a contribution to super.
Support still there for households but no new cash handouts
In the budget last year, the government bought forward the Stage 2 tax cuts to fiscal year (FY) 2021 and also included the low middle income tax offset (LMITO) for FY21.
Earlier this year, the government also agreed to the permanent increase in JobSeeker by $50 a fortnight. This is estimated to cost up to $9.5bn over four years. These measures imply that there is still more government support for household incomes when compared to pre-Covid levels.
However, unlike direct stimulus handouts that were announced following the onset of the pandemic, there is less direct support to households in the form of cash payments in this budget.
We believe that an improved labour market, ongoing Stage 2 tax cuts and LMITO returns later this year will continue to buttress the household balance sheet in 2021.
Expectations of weaker population growth for longer
Possibly reflecting an expectation that international borders will take longer to open, the government has reduced the assumption on population growth. To just 0.1 per cent and 0.2 per cent in FY21 and FY22 respectively.
This feeds into our forecast that 2022 will experience lower growth in property prices, falling from 10 per cent this year to 3 per cent next year.
Our inflation outlook and wage growth remain unchanged
We continue to expect the Reserve bank of Australia to remain focused on the labour market as an indicator of spare capacity, and for this to continue to show the economy remains a few years away from generating wage and inflation pressures that signal an end to highly accommodative monetary policy and put pressure on interest rates to rise.
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