EOFY opportunities for investment property owners
Interest rates in the driving seat for residential property markets
Interest rates, moderation of the real estate markets and the Federal Election will all impact Australian property prices as it moves into the 2016-17 financial year.
Australia’s property investment market will be affected by probable movement in interest rates and the hangover of both the Federal Election and changes coming out of the most recent Federal Budget.
Interest rates have been one of the biggest influences on the market recently, and this will continue to be the case for the foreseeable future.
The Reserve Bank of Australia (RBA) eased interest rates in May, cutting the official cash rate to a record low of 1.75%. The cut was the RBA’s reaction to inflation falling below its target of 2-3%⁶, and with it the risk of deflation.
With wages growth falling to a record low of 2.1%, a high Australian dollar against the US, and constrained economic growth, economists are forecasting a possible additional two rate cuts by the end of 2016, taking the cash rate to 1.25%.
The cut in the cash rate may cause a short-term rally in housing prices in some markets, but this isn’t expected to overcome the calmer market conditions most Australian capital cities are experiencing. Apart from Perth and Darwin, which is in market correction due to the mining downturn, most residential property markets are expected to continue moderate growth until monetary policy is changed.
The Federal Election, held on July 2, was effectively timed to coincide with the new financial year. With no clear result yet, it’s still unclear what the impact will be on the market over the short to medium term, with negative gearing a hot political and election topic.
If it takes power, Labor will remove negative gearing from July 2017, except for the purchase of new homes. The Coalition has not made changes to its negative gearing policy.Negative gearing is a benefit for investors and a key driver for their buying decisions. The outcome of the Election may have a big impact on the property market, especially in the short term if Labor wins and investors make a run for older properties before the July 2017 deadline.
The Federal Election may cause short-term change in the property investment environment, but interest rates and broader moderation of real estate markets may be more significant.
The Federal Budget may also have some lingering effects – new rules include a $1.6 million limit on the amount that can be transferred from a super accumulation account into an earnings account (where earnings are tax-free), and there is some concern this could impact borrowing by Self-Managed Super Funds (SMSF).
A new lifetime limit on non-concessional contributions of $500,000 also took effect with the Budget, backdated to 2007.
However, the impact of these policies will likely affect only a small percentage of the market, with economists suggesting only about 4% of investors will be caught up in these changes.
So with cooling property markets, especially Sydney and Melbourne, and additional interest rate cuts likely by the end of the year, investors are likely weighing up their next moves for the short term.