When it comes to housing affordability, this week's federal budget could've been better and it could've been worse, writes Victor Kumar.
While there was some negative gearing tinkering that seems a little trivial to me, there were some elements that were sorely needed.
First, let me say that I am a big fan of the announcement that postcode restricted lending will soon become a reality.
The Australian Prudential Regulatory Authority (APRA), from 1 July 2017, will have greater powers over big and small lenders, which will make lending tighter.
Significantly the change will give APRA the ability to turn on or turn off lending taps by postcode.
We know that the property market at the moment is hot in Melbourne and Sydney, but not in all suburbs or areas.
Correspondingly, in Perth, the market there is not travelling so well, but it has still been impacted by the new tougher credit regime.
So, this measure has given APRA the ability to reduce the loan-to-value ratios (LVRs) by postcode if particular areas are too hot, but it can increase them in areas that are cooler.
It's a more surgical approach if you ask me and it's the most thought-out strategy in the federal government's so-called housing affordability package.
The rest are less so.
First home buyer savings
The ability for first home buyers to salary sacrifice into their super fund may seem like a good way to help them save a deposit.
However, those additional savings will still be taxed, and the inherent problem is that those who can save, are saving, but those who can't, still won’t be able to regardless of what measure you put in front of them.
That's because they don't have any spare money to start off with.
I believe a better approach may have been to borrow, say, $100,000 in equity from Mum and Dad but make that sum tax-deductible to them.
Plus, that $100,000 has to be paid back within five years either through cash or from increased equity in the property that their son or daughter bought with the funds.
The reality is that most young people need a $100,000 deposit but the super savings scheme only has the potential to provide $30,000.
Therefore, it's not really going to change much and is really just a sugar coating on a bitter pill.
Foreign investor crackdown
I agree that limiting sales in new developments to 50 per cent foreign investors is a good thing and such a measure does quell the market.
However, the penalty associated with leaving foreign-owned properties vacant is not high enough and most foreign investors will happily cop it because it's small change to them.
A harsher measure should have been considered to stop these properties sitting empty. For example, a penalty of $50,000 would make most foreign investors sit up and take notice!
With many of these housing affordability measures, however, there will be further negative impacts in the off-the-plan sector, which is already in trouble.
Postcode restrictions may apply to borrowers, you've got overseas investors who might not qualify anymore because of the new lending regime, and valuations might not stack up – so we'll start to see more off-the-plan market woe.
Negative gearing tinkering
Changes to negative gearing were also announced in the federal budget.
The changes to depreciation deductions will likely have an impact on investors who are heavily reliant on them to make their numbers work.
However, we need more information about how this change is going to work because they're still very sketchy at this stage.
This measure will probably stop some of the speculation on new properties in the market and will blow away some of the spruikers in this space – which is a not bad thing!
At the same time, I don't think it will really pause the market either.
In fact, the entire housing affordability package seems to have been designed to not stall the market because that would certainly negatively impact our economy.
Some of the measures are a good idea, if you ask me, but others are not well thought-out and resemble tokenism rather than good policy.
About the Blogger
Nearly 15 years ago Victor and his wife came to Australia from Fiji with just $4,500 in their pockets. They worked hard as radiographers but realised this was not the way to prosperity. Victor embarked on a process of building wealth through property. He has amassed a substantial property portfolio, and is still actively buying and renovating property. His recommendations are based on what works in today’s market, not what used to be effective a year or more ago.
Victor’s experience, finance background, and financial planning qualifications mean he is well equipped to negotiate with banks – helping them find ways to say “Yes”. He has also invested significant time and money in learning from other property investment experts and knows how to make a portfolio work.
Of course, Victor has made a few mistakes along the way but these have made him wiser – and he’ll let you learn from his mistakes so you don’t need to make them. His goal is to help you achieve your financial goals by sharing his extensive knowledge about financial structures and investment property.
Victor is now sought after as a keynote speaker at several property investment seminars and is acknowledged by his peers as an expert in the industry.