NSW Government comes to save the property market

Markets have been rocky in recent weeks and news of continued spot rate hikes has not been good news for the real estate sector either.

The RBA Governor can give no certainty about the size or speed of the increases.

Excerpt from a recent speech:

As we return to 2-3% inflation, Australians should prepare for further interest rate hikes.

The level of interest rates is still very low for an economy with low unemployment and high inflation.

However, I would like to emphasize that we are not on a predefined path.

The speed at which we raise interest rates and how far we need to go will be guided by incoming data and the Board’s assessment of the outlook for inflation and the labor market.

What is one thing you can be sure of?

Policymakers will do all they can to cushion any negative effect on real estate values.

Especially in the most affected areas.

Sydney values ​​are down 1.5% from their highs, and without intervention the future doesn’t look too bright for the country’s most expensive property market.

Two initiatives will help reverse the trend.

First, the state is preparing to phase out stamp duties and introduce a property tax.

First-time home buyers will be able to choose to pay an annual property tax rather than an upfront stamp duty payment.

To be clear, this is for properties under $1.5 million. The annual property tax is set at $400 plus 0.3% of the land value of the property.

However, the increase in sales at the bottom of the market is producing a wave in all segments. This puts more money in the pockets of sellers to move to a price market.

If a buyer opts, the property tax would then be locked in on the property.

In other words, future owners would have to pay property tax if a precedent had.

The end goal is that reforms such as this can be extended so that stamp duty can be abolished altogether. (As it happens in the ACT.)

Let’s not quibble about it; switching from stamp duty to property tax is more economical for several reasons which you can read in detail here.

It removes a barrier in the market for first-time home buyers struggling to save a down payment, let alone stamp duty.

The result is a more fluid market. Allowing more into the real estate market with lower upfront costs.

But if the property tax is not set at a high enough rate, the increase in purchasing power will only further inflate the market in the transition.

If you’re having trouble understanding this, think of property tax as a landlord’s corporation fee on an apartment building.

The higher the fees, the less a buyer is willing to pay for the apartment as they budget for the annual charge.

Property tax works the same way.

The higher it is, the lower the price of the land, since buyers have to pay an additional annual payment.

And likewise — the lower the property tax — the higher the price!

As it stands, today’s first-time buyers will potentially have $50,000 in stamp duty savings that can now be used to drive up prices.

In other words, sellers are the big winners of this announcement.

They will experience a surge on the demand side in a slowing market.

Add to that NSW’s recent announcement of a shared equity scheme for low-income workers. And the horizon looks a little brighter for Sydney landowners!

The plan follows the federal example.

The NSW Government offers to pay part of the purchase price of a property in return for an equivalent ownership share of the property.

Up to 40% of the price of new housing and 30% for existing houses.

The buyer only needs a minimum deposit of 2% of the purchase price, and no mortgage insurance from the lender is required either.

We’ll have to wait and see what effect this will have on prices as the year progresses.

But I suspect that by 2023 things will be a bit better for the Sydney property market.

These types of reforms are typical of what we would expect in the later years of the 18-year housing cycle. (You can read more about this here.)

Take the federal grant for first home owners. It was originally introduced in the 2000s to promote a similar wave of investment in the property sector.

It entitled owners to $7,000 to cover the cost of a property. And it wasn’t long before various states and territories followed suit with similar initiatives to encourage buyers to enter the market at the lower end.

By the time we got to 2007, loan rates were around 9-10%.

But that didn’t deter buyers; the banks have found a way to keep business rolling.

Some borrowers were able to access 105% mortgages, low documentation loans and kitty loans were promoted as a way to get a foot on the ladder.

As the Royal Banking Commission proved in 2018, mortgage fraud was rampant throughout the period.

Expect to see the same in the coming years as we head towards a global peak in 2026.

Best wishes,

Signature of Catherine Cashmore

Catherine Cashmore,
Editor, The Daily Reckoning Australia

Penny D. Jackson