Research News, Thought Leadership • 27 Oct 2022 | CoreLogic
Eliza Owen unpacks the direct and indirect implications of this budget for the housing market.
Restrained spending has characterised the Albanese Government’s first federal budget. With Treasury forecasting annual headline inflation to hit 7.75% in the December quarter, key considerations for fiscal policy range include increasing productivity and moderating spending to minimise inflationary pressures.
Various measures seek to increase labour force capacity, including upskilling workers through subsidised tertiary education, boosting skilled migration and increasing childcare subsidies.
Cost saving measures included a spending audit, identifying more than $20 billion in budget cuts, while the vast majority of tax revenue windfalls will be used to reduce the budget deficit. However, the result is still a budget deficit, with high expenditure across the NDIS in particular running at $35.8 billion over 2022-23.
Another striking figure in an otherwise modest budget was a target for one million new homes to be built by 2030. Below we unpack the direct and indirect implications of this budget for the housing market.
‘Restrained expenditure’ and monetary policy
The housing market has reacted strongly to the rate tightening cycle, with the national CoreLogic Home Value Index down around -6% since its peak in May, year-to-date sales volumes running around -11% lower than in 2021, and the value of new monthly housing finance secured through August down -13.9% since April. From a housing growth perspective, the Federal Budget would ideally reign in expenditure to compliment monetary policy, and reduce the need for further rate hikes.
However, other sectors seem relatively resilient to rate increases, with persistently high consumer spending and further expectations for wage increases meaning there could be more to come in the way of strong cash rate rises.
Economists generally report expenditure in this budget does not stoke inflation further, but that further restraint in spending will be needed so as not to put more pressure on the RBA to keep lifting rates down the line. An obvious target would be increased efficiency and productivity within NDIS operations, which is attracting more spend than aged care, Medicare and state hospitals.
Alongside persistent inflation and the potential for further rate rises, the Budget papers outlined a forecast increase in the unemployment rate to 4.5% in 2023-24. While this is a notable shift from current tight labour market conditions, this would still put the unemployment rate below the decade average of 5.5%, and should continue to support relatively strong mortgage serviceability.
The National Housing Accord
The budget outlined a National Housing Accord, which is an agreement signed between governments, investors and the construction sector, aimed at addressing the supply and affordability of housing. There are several direct impacts of the housing accord which are worth noting.
One million new homes is an ambitious target when considering economic context, and will keep construction activity elevated.
The budget references a target within the accord to build one million new homes from 2024 over five years, with the bulk of this coming from the private sector.
One of the main critiques of a target for one million new homes in a five-year period is the target is not ambitious, given recent completions match this anyway. ABS dwelling completions data suggests 974,732 homes were constructed in the five years to June 2022, and an average of 1,010,723 have been completed on a five-year basis since 2017.
However, the past five years have been conducive to high levels of construction (notwithstanding immense bottlenecks for the construction industry in past two years) and there’s no guarantee activity levels will remain at the same level for the next five years.
The completion of one million homes between 2017-2022 has been achieved amid falling and record-low interest rates, strong price incentives for developers, the HomeBuilder grant, and an investment-led, off-the-plan apartment building boom in the mid-to-late 2010s.
The chart below of historic ABS completions on a rolling five-year period shows the decade to 2015 saw average five-year completions at 772,000. As interest rates rise, home prices fall and supply-side constraints persist, the delivery of a million homes is not guaranteed and may be more ambitious than what was achieved in the past five years. Data below shows completions have already started falling off since the recent building boom and new dwelling approvals have generally been trending lower since interest rates increased. It suggests there will be a gradual depletion of the residential construction pipeline and further falls in completions down the line.
Perhaps one of the more worrying unknowns in the accord is just how much of these million homes will be dedicated to affordable housing. At the moment it seems at least 5% will be allocated to affordable housing. This includes 10,000 affordable homes supported by the Federal Government over five years, 10,000 from state and territory governments, as well as the 30,000 new social and affordable homes, which were announced in the lead up to the May federal election.
While there is reference throughout the budget of incentives for the private sector to deliver affordable housing, there will be some finer detail required about how this can be incentivised and enforced.
The Housing Accord is laying the foundations for institutional ownership.
The accord encourages ‘institutional investment’ in housing, including from superannuation funds. Traditionally, institutionally-funded housing has not been a large part of Australian housing stock. Australian tax settings in particular are far more conducive to individual, ‘mum and dad’ investors participating in the housing market than large managed funds.
Part of the reason is institutional investors seek solid rental returns and despite rising rents in our populous cities of Sydney and Melbourne, gross yields remain relatively low at 2.9% and 3.1% respectively. This makes long-term rental investments less viable.
To combat this, the accord outlines funding that will incentivise institutions to invest in social and affordable housing by ‘covering the gap between market rents and subsidised rents’.
Institutional ownership of land and property could be an awkward fit for Australia, a country which has historically placed emphasis on outright home ownership for wealth creation and a comfortable retirement. While there is not a lot of detail just yet about how institutional investors will fit into the Australian housing market, it seems the Albanese Government is laying the foundations for a new kind of property ownership in Australia.
Existing plans to boost home ownership and affordable housing
In addition to the new initiatives outlined in the Housing Accord, the federal budget reaffirms a raft of existing policies to boost affordable housing and overall supply. These include:
- A ‘Help to Buy’ scheme, allowing up to 40,000 eligible Australians to own a home through the government taking an equity stake in the property;
- The Regional First Home Buyer Guarantee, supporting 10,000 low-deposit home loans for Australians living in the regions for at least 12 months;
- A $10 billion housing Australia Future Fund, to boost social and community housing;
- An expansion to the exemption of home sale proceeds from pension asset testing from 12 months to 24 months, to encourage downsizing; and,
- The Defence Home Ownership Assistance Scheme, with $46.2 million added to the scheme to help defence force members buy their own home.
These existing policies are likely to have mixed effectiveness in boosting housing supply (for example, CoreLogic has previously written about the limitation of incentivising downsizing for older Australians). But ultimately, it is a step in the right direction for easing price pressures in housing longer term. A worthwhile addition to the policy mix might lie in adjusting rent assistance for low income households (as recommended by the productivity commission), to help with housing stability while new housing is built.
Part of the spending restraint in this budget means that supply-side housing solutions won’t kick off in 2024. In the near term however, there is not much this budget offers to alleviate high rental housing costs. Instead, we are likely to see a more demand-driven shift in the rental market, with the potential for share houses to re-form, or migration away from excessively tight rental markets.