Budget week is all about huff and puff

Well it’s that time of the year when Australian taxpayers prepare themselves to get their annual slap across the face with a couple of moist lettuce leaves.

Yes – the 2014/15 federal budget is now less than one day away and just like the budgets before this one the warnings, threats and pugnacious leaks usually amount to next to nothing. The reason why? Politicians have an addiction to being re-elected which is contingent on strong polling performances despite our economy growing slightly below trend.

Historically real estate has been a minor player come budget time with the government of the day preferring to address the industry from more of a macro positioning given that is by far an easier option when compared to a micro-economic analysis. For all intents and purposes if the real estate/housing demographic were that essential, then it would be fair to say there would actually be a designated Housing Minister which is not the case with the Abbott led government.

Although it should be noted that governments take out a lot more through property tax than is given back – real estate is a cash cow of choice for all three levels of government – including through stamp duty, land tax, capital gains tax, rates and infrastructure charges. It would be reasonable to suggest that one of the compelling reasons as to why the GST has been left out until the next election is because the state governments reneged on their 2000 tax obligations when the GST was introduced. If and when the GST is discussed the states and territories will have to make some significant tax adjustments given the decision will be made by referendum.

Negative gearing will escape greater scrutiny in this year’s budget despite the government having to fund $5 billion each year and growing tax concessions.

Given the ongoing debates attributed to housing affordability it will only be a matter of time before we see a tapering in the annual tax concessions which would also lend significant weight to investors contemplating a move away from traditional bricks and mortar – any such decision would be staggered over a 15 to 20 year period.

Source: OECD

As with every budget the Real Estate Institute of Australia (REIA) had their say into negative gearing and pointed out that Australian Taxation Office (ATO) data shows fewer than 80% of total individual taxpayers that are claiming a tax deduction from property earn less than $80,000 per annum.

The OECD eloquently summed up Australia’s economic position this week when it released their economic outlook for May:

“Output is projected to increase by 2 ½% in 2014 and by nearly 3% in 2015, with a general pick – up in demand offsetting declining investment in the resources sector.

"Some economic slack will remain and the unemployment rate will not begin to edge down until the second half of 2015. As a result there will be little inflation pressure, although rapid growth in house prices and mortgage lending requires continued attention.

"Given near – term uncertainties in the re – balancing of the economy away from investment in the natural resources sector, heavy front loading of fiscal consolidation should be avoided.

"Against the backdrop of the projected recovery, monetary stimulus should start to be withdrawn in the first half of 2015.”

It will be fascinating to see how much of this the federal government adopts with next week’s budget.

Source: Australian Property Monitors

With regard to the OECD’s concerns regarding house prices and mortgage lending it should be noted that the house prices showing the greatest gains are in the lower price ranges and not the top-end markets.

From the above graph I would suggest that the vast majority of Sydney suburbs would be showing their yearly price increases of between 5.00 and 10.00% – which is not a concern. We will only see property stress once the RBA starts moving up the cash rate.