Small businesses and young families were clear winners in Treasurer Hockey’s second budget, which was handed last Tuesday.
No policy announcement was specific to Australia’s house and unit markets, however the proposed fiscal policy has implications for economic growth and employment, which in turn will influence dwelling demand.
Some of the proposed fiscal measures may even have a direct influence on housing markets.
Something other than Sydney Housing Expected to Boom
As noted in my latest statement on the RBA cash rate cut, fiscal policy was needed to ensure the historically low cash rate was not just taken advantage of by property investors, as this risked further inflation of the Sydney and Melbourne property markets.
Investors could not be blamed for seeking the highest possible returns on their money, so fiscal policy was needed to divert funds elsewhere.
Therefore it was promising to see the immediate tax deduction of assets up to $20,000 available for small businesses.
The incentive to buy capital goods is likely to stimulate consumer confidence, which has was last measured at 96.2 in April, down from 100.7 in February, as well as stimulate retail activity, manufacturing of capital goods and employment as small businesses demand assets.
Essentially, this policy will promote the flow of capital into goods and services, rather than dwelling assets which are appealing for high return.
Other benefits for small businesses included tax concessions.
There was a 1.5 percent tax cut proposed for small business, and a 5 per cent tax cut of up to $1,000 a year for unincorporated businesses.
Employee Share Schemes also saw proposed reform for employees, under which employees offered shares in start-up companies will not have to pay tax on them until the shares are sold.
Fringe Benefits Tax on portable electronic goods will be abolished, incentivising employers to supply their workers with capital goods that may improve their efficiency.
While these measures are financial incentives for small businesses, there are a couple of underlying economic factors which will ultimately undermine the capacity for growth.
The first is education.
While the Government has committed to increasing funding to schools in line with CPI, this is a reduction of planned spending by the former Labor government.
In addition, Education Minister Christopher Pyne has proposed funding cuts to leading universities and programmes that support research in Australia.
The benefit of providing tax breaks to small businesses is unsustainable if our business people do not receive as quality an education as those they are competing with in the global economy.
The future entrepreneurs of this country will be able to operate much more efficiently if they have access to cutting edge, rigorous research in a variety of fields such as technology, energy, business strategy and finance.
Secondly, the government may be underestimating its deficit of $35 billion over the 2015-16 financial year.
There are currently two million small businesses in Australia.
However, it is worth asking whether these fiscal policies could result in a larger number of small businesses being created for the sake of obtaining tax loopholes.
This would increase the amount of concessions provided by the government and reduce tax revenue.
In an effort to increase tax revenue for the coming financial year, the government outlined its anti-avoidance policy for multinationals operating in Australia.
This was a politically safe move which embraces an egalitarian, nationalistic sentiment in Australia, which would prevent big multinationals from ‘ripping us off’, and placing a larger tax burden on smaller, national businesses.
If multinationals are found to be cheating on their tax obligations from businesses or sales conducted in Australia, they will be made to repay tax, as well as interest and additional penalties.
While it seems fair that big businesses should pay tax like everyone else, there is unintended consequences of policies such as these.
The trouble with financially punishing large businesses is that we need their business. In fact, some economists have theorised that the optimal tax rate for large multinationals is actually zero per cent.
This way, large businesses are fully incentivised to set up operations and employ people in tax friendly environments.
It will be interesting to see how this treatment of multinationals will affect business and employment in Australia, particularly in Western Australia where approximately four out of five mines are effectively owned by foreign interests, according to 2011 ABS data.
Perhaps one subdued allusion to foreign investment in dwellings in Hockey’s speech was to “[make] changes to… Australia’s foreign investment framework by introducing a new fee regime, better enforcement and stricter penalties”.
Such policies have been outlined previously, after it was found that the foreign investment review board had not enforced existing legislation since 2007 due to a lack of resources.
Current legislation of foreign investment around Australian property is about creating new housing, and ideally creating jobs, increasing dwelling supply and mitigating property price increases. Prohibitions on purchasing existing homes include:
- Non-residents not being able to buy an established home.
- Temporary residents (with a visa over 12 months) can buy one established home to live in while they are in Australia, but must sell the home when the visa expires.
If the federal government invests in enforcing these laws, there is potential for a large amount of dwelling stock to come onto the market, thereby reducing prices of houses and units.
Potential in the Northern Territory
Australia’s south-eastern housing markets have had a lot of attention lately, but last night’s budget acknowledged the economic potential of northern Australia. The government announced $5 billion in concessional loans to northern Queensland, northern Western Australia and the Northern Territory to develop pipelines, ports and electricity and water infrastructure.
The Northern Territory is arguably coming into a cyclical upswing in its house and unit markets, as can be seen in the trend data below.
Graph 1: Northern Territory Dwelling Growth Trends
The announcement of stimulus to northern infrastructure projects and tax deductions for farmers to invest in infrastructure could be an added boost to the Northern Territory house and unit markets.
The Northern Territory still faces high levels of youth unemployment, but the participation rate has increased rapidly from 72.2 per cent in October 2014, to 76.4 per cent in April 2015 due to the employment opportunities created by the Icthys Project.
Further infrastructure investment, coupled with programs aimed at helping youths and the long term unemployed transition into work, could see higher incomes, population growth and dwelling demand in the Northern Territory.
More Bad News for Queensland
Historically, the east coast housing markets of Brisbane and Melbourne have followed the Sydney growth cycle, booming shortly after the Sydney market reaches its peak.
Despite speculation that growth in the Sydney market would spill north to Brisbane, devastating weather conditions and the deterioration of commodity prices mean that the greater Brisbane region has seen subdued growth so far in 2015.
Our latest data shows that the median house value in Brisbane contracted by 1.33 per cent for the March quarter.
Units did not do much better, with growth of zero per cent in the same period.
Queensland Treasurer Curtis Pitt described the Federal Budget as a “let down for Queensland”.
The State Government was chasing funding for a cross river rail, the second stage of the Gold Coast light rail and the Sunshine Coast rail duplication.
However, the Federal Government has announced its infrastructure loans are conditional, and Queensland will not receive full federal support unless it agrees to sell its assets.
Unless the State Government can negotiate further infrastructure funding, Queensland may see subdued economic and employment growth.
This is further reinforced by the abolishment of the tax free threshold for those on a working holiday in Australia.
The reform could reduce tourism, which has provided a crutch for the Queensland economy following the tapering off of the mining boom.
Any fiscal policy impacting tourism is also important for those with holiday rentals to consider, as rental returns could go down and vacancy periods have the potential to go up.
In the coming months, we will provide updates on house and unit markets across Australia, as fiscal policy is negotiated in the Senate and implemented.
For now, it seems that state and territory dwelling markets will see varied effects based on support to small businesses, the location of infrastructure projects and stricter foreign investment monitoring.
 Small businesses are organisations conducting business activity that have a turnover of less than $2 million dollars per year.
 An index score above 100 indicates that optimists on economic performance outweigh pessimists.
 Source: ‘Report on Foreign Investment in Residential Real Estate’, Federal Government, November 2014.