Australian Property Pulse - Newsletter #6

Welcome to this week's edition of Australian Property Pulse

In this edition, we delve into the hot topic currently dominating discussions: negative gearing. The government is contemplating changes to these rules, a move that has historically proven to be risky and could potentially jeopardize their position. Meanwhile, the increasing income required to purchase a home in Australia continues to pose challenges for younger buyers aspiring to enter the housing market.

As the cost of living puts pressure on Australian households, many mortgage holders are opting for interest-only repayments to better manage their cash flow. Additionally, we explore how quickly property prices are expected to double in your capital city—be sure to check out our comprehensive list. Finally, we highlight the significant shortfall in housing supply, with Australia facing a deficit of approximately 300,000 homes needed to meet government targets.

Stay informed with the latest insights and analyses to navigate this evolving property landscape.

The recent RMIT policy discussion paper proposes significant reforms to Australia's negative gearing and capital gains tax concessions, aiming to improve tenant living conditions and provide better value for the federal government's $10 billion investment in tax concessions and Commonwealth Rent Assistance.

One of the key recommendations is to link landlords' access to these benefits with property conditions and long-term tenancy agreements. Under the proposal, landlords would need to offer five-year leases, limit rent increases to 10% per lease, and ensure properties meet a seven-star NatHERS energy rating. Additionally, landlords would be required to allow pets and give tenants the flexibility to break leases without notice. Compliance would be self-reported on tax returns, with enforcement overseen by the Australian Tax Office.

The proposal introduces a tiered system for tax concessions. In the most common tier, available to all tenants, landlords would receive a 75% negative gearing tax discount and a 10% capital gains tax discount. For rent assistance recipients, landlords could access the full negative gearing benefit and a 20% capital gains tax discount. The final tier, targeting tenants typically in public or community housing, would offer a full negative gearing discount and a 30% capital gains tax discount.

The paper's release coincides with political tensions, as the Greens have joined forces with the Coalition to delay the government’s Help to Buy Scheme. The Greens have conditioned their support on phasing out negative gearing, removing capital gains tax concessions for investors, and freezing rents. These tax concessions have been a focal point in past elections, with Labor abandoning its reform plans after losses in 2016 and 2019.

Affording a home in Sydney or Melbourne is becoming increasingly difficult as property prices soar, pushing the Australian Dream further out of reach. In Sydney, couples in seven regions need to earn well over $100,000 each just to afford the median house price, according to Canstar's modelling. This assumes an average variable interest rate of 6.28% over 30 years and a 20% deposit. Single buyers in Sydney face even slimmer options, with the only affordable units being in the south-west or outer south-west of the city, where an income close to the national average of $100,017 would be needed to purchase a median-priced unit, according to the latest ABS data.

In Melbourne, the situation is slightly more accessible for couples looking to buy units. A household income of around $60,000 each is enough to purchase in many areas. However, single-income buyers would still find it difficult to enter the market, with a six-figure income required to afford a unit in most parts of the city.

These rising income requirements highlight the increasing challenge for both single and dual-income households to move up the property ladder. Housing affordability is becoming a significant barrier, particularly in the nation's major cities, underscoring the need for careful financial planning and strategic decision-making. In this challenging market, working with a property advisor or mortgage specialist can be essential to navigate the complexities and find the best solutions for your circumstances.

As rising interest rates and inflation place greater financial pressure on homeowners, many are turning to interest-only repayments to manage their budgets. Recent data from CoreLogic reveals that interest-only loans now make up 20.3% of home loans, marking the highest level since 2019. This trend reflects the increasing challenges faced by borrowers, who are looking for temporary relief from the strain of principal and interest repayments.

While this option offers short-term respite, it also comes with heightened risks. Homeowners are betting on the hope that property values will continue to rise or that they’ll be able to repay the loan when they sell. However, with property price growth slowing and a third of suburbs already experiencing declines, this strategy is far from guaranteed.

Additionally, the rise in interest-only loans is also driven by investors, who are often drawn to these products for the higher tax deductions they offer. The surge in this loan type is sparking concerns about a potential mortgage cliff in the coming years, as more homeowners may struggle to transition back to full repayments.

In an increasingly uncertain housing market, it’s essential for borrowers to weigh the short-term benefits of interest-only loans against the long-term risks they may present.

The dynamics of the Australian property market reveal a fascinating contrast in how quickly property values can grow. Recent data indicates that, while the median house price across the country has doubled over the past decade, certain high-demand suburbs have outpaced this trend significantly.

For instance, prestigious areas like Bellevue Hill and Vaucluse in Sydney, along with Avalon Beach and Fairlight on the northern beaches, have seen even faster appreciation in property values. In Brisbane, suburbs such as Seven Hills, East Brisbane, and Clayfield, once considered affordable, have now pushed towards the $2 million mark after doubling their prices in just four to five years.

On the other hand, the situation is quite different for some areas where property prices have stagnated. In suburbs like Bruce in the ACT, units have taken 31 years to double in value, while apartments in the Melbourne and Brisbane CBDs have taken 28 years. Similar patterns can be observed in the CBDs of Townsville, Cairns, and Perth, where price growth has taken over 25 years.

This slower appreciation can be attributed to a higher proportion of smaller apartments in these areas, coupled with less supply pressure compared to more tightly held suburbs where demand drives prices upward more rapidly.

Understanding these trends is crucial for investors and homebuyers alike. By identifying areas with potential for growth, such as the booming suburbs benefiting from lifestyle changes, we can make informed decisions that align with our financial goals.

New data from Urbis sheds light on the evolving apartment market across Australia’s major cities, highlighting challenges in meeting the government’s housing targets.

In Brisbane, the weighted average sale price surpassed $2 million for the first time, driven by luxury apartment sales. Meanwhile, Sydney saw its average price drop below $1 million for the first time since 2020, as more affordable options entered the market.

Owner-occupiers continue to dominate apartment sales, particularly in Sydney, Melbourne, and inner Brisbane, where they accounted for 70% to 80% of transactions. In contrast, owner-occupier activity was slower in Perth and on the Gold Coast, where they represented 48% of sales. Perth’s high investor interest, however, was linked to a specific project rather than a broader trend.

Despite rising demand for affordable apartments, new builds are struggling to meet government targets. This month, the Master Builders Association further reduced its pipeline forecast, predicting just over one million homes will be built over the next five years—falling well short of the government’s target of 1.2 million homes.

With the national average sale price per square metre for newly launched projects holding steady at $14,000, the shortfall in new builds remains a pressing issue for the market and policymakers.

If you're interested in securing your first home, expanding your investment portfolio, or exploring property investment through your Self-Managed Super Fund, please don't hesitate to contact Steven at 0414 759 733.