The markets have been thrashed in recent weeks and news about continuing hikes in the cash rate isn’t giving much joy to the property sector either.
The governor of the RBA can’t give any certainty to how far or fast the increases will be.
From a recent speech:
‘As we chart our way back to 2 to 3 per cent inflation, Australians should be prepared for more interest rate increases.
‘The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.
‘I want to emphasise though that we are not on a pre-set path.
‘How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.’
What’s one thing you can be certain of though?
Policymakers will do everything they can to buffer any negative effect on real estate values.
Especially in areas affected the most.
Sydney values are down 1.5% from their highs, and without intervention, the future doesn’t look too bright for the country’s most expensive real estate market.
Two initiatives will help turn the tide.
First, the state is setting up to phase out stamp duty and introduce a land tax.
First home buyers will be able to opt into paying an annual land tax rather than an upfront stamp duty payment.
To be clear, this is for properties less than $1.5 million. The annual land tax is to be set at $400 plus 0.3% of the property’s land value.
However, boosting sales at the lower end of the market produces a wave across all segments. It puts more money in vendor’s pockets to upgrade into a pricer market.
If a buyer opts in, the land tax charge would then be locked onto the property.
In other words, future owners would have to pay the land tax if a previous one had.
The eventual goal is that reforms such as this can be expanded so that stamp duty can be phased out altogether. (As is occurring in the ACT.)
Let’s not quibble about it; switching from stamp duty to land tax is more economically sound for several reasons that you can read about in detail here.
It removes a barrier into the market for first home buyers who struggle to save a deposit, let alone stamp duty.
The outcome is a more fluid market. Allowing more into the property market with lower upfront costs.
But if the land tax is not set at a high enough rate, the increase in purchasing power will only inflate the market further in the transition.
If you’re struggling to get your head around it, think of land tax like an owner’s corporation fee on an apartment block.
The higher the fee, the less a buyer is willing to pay for the apartment as they budget for the annual charge.
Land tax works similarly.
The higher it’s set, the lower the land price as buyers account for an additional annual payment.
And similarly — the lower the land tax is set — the higher the price!
As it is, today’s first home buyers will have potentially $50,000 in stamp duty savings that can now be used to bid up prices.
In other words, sellers are the big winners of this announcement.
They’ll experience a demand-side fillip in a softening market.
Add to this the recent NSW announcement of a shared equity scheme for lower income workers. And the horizon looks a little brighter for Sydney’s landowners!
The scheme follows the federal lead.
The NSW government is offering to stump up a proportion of the purchase price of a property in exchange for an equivalent ownership share of the property.
Up to 40% of the price of a new dwelling and 30% for existing homes.
The purchaser only needs a minimum deposit of 2% of the purchase price, and no lenders mortgage insurance is required either.
We’ll have to wait and see what effect it will have on prices as the year progresses.
But I suspect by 2023, things will look a little better for Sydney’s property market.
These types of reforms are typical of what we would expect in the final few years of the 18-year property cycle. (You can find out more about that here.)
Take the federal First Homeowner Grant. It was initially introduced in the 2000s to promote a similar wave of investment into the property sector.
It entitled homeowners to $7,000 towards the cost of a property. And it wasn’t long before various states and territories followed suit with similar initiatives to encourage buyers into the market at the lower end.
By the time we got to 2007, lending rates were around 9–10%.
But that didn’t deter buyers; banks found a way to keep business rolling.
Some borrowers were able to access 105% mortgages, low doc loans and kitty loans were promoted as a way to get a foot on the ladder.
As the Banking Royal Commission proved in 2018, mortgage fraud was rife throughout the period.
Expect to see more of the same in the years ahead as we head to an overall peak in 2026.
Best wishes,
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Catherine Cashmore,
Editor, The Daily Reckoning Australia
