Australia's Housing: From Boom to Stabilisation?

Australia's Housing: From Boom to Stabilisation?

Australia's housing market has been a rollercoaster of emotions for investors. As we move forward, a combination of economic factors and expert insights paints a promising picture for the future.

We've had a wild ride in recent years as prices slumped during the pandemic then quickly skyrocketed before losing ground again. Currently, as prices stabilise or show modest growth, some analysts foresee promising developments.i

A combination of positive indicators for housing could help to fuel further price rises.

With a widespread view that the Reserve Bank’s interest rate increases are beginning to work to ease spending, some believe we may see the first rate cuts as early as next March. Coupled with rising migration and a decline in new home constructions, we might witness a surge in residential property values. CBA Chief Economist Stephen Halmarick is forecasting a 7 per cent rise in house prices this year and another 5 per cent in 2024 claiming that, by this time next year, prices will return to “all-time record highs”.

Driving Factors Behind the Housing Price Surge

The sustained levels of high demand clashing with historically low levels of for-sale listings are also pushing prices up, according to the Property Investment Professionals of Australia (PIPA).ii

Meanwhile, several investors grapple with the challenges posed by escalating interest rates, with the conclusion of fixed-rate mortgages often playing a role. The number of short-term property resales made at a loss has jumped, according to property analysts CoreLogic, from 2.7 per cent a year ago to 9.7 per cent in the June quarter this year.iii The median loss was $30,000, for houses sold within two years, compared to a median profit of $75,000.

PIPA’s annual survey to gauge property investor sentiment found just over 12 per cent of investors sold at least one investment property in the past year.iv Less than a quarter of those houses sold went to other investors, continuing a trend that has been happening for several years.

Nearly 50% of sellers expressed concerns over potential hikes in government taxes, duties, and levies.

Where are rents headed?

Will rents continue to rise or stabilise? Experts’ views are mixed about the short-term outlook for the rental market.

The Rental Market: Current Trends and Predictions

The Reserve Bank says the continuing shortage of rental housing is likely to support ongoing increases in rents.v

The rents paid by new tenants provide a good indication of price movements in rental housing. Actual rents paid by new tenants increased by 14 per cent over the year to February 2023. Since the onset of the pandemic in 2020, rents paid by new tenants have increased by 24 per cent.vi

The Reserve Bank says rents for apartments with new tenants have been more volatile than for houses and townhouses over the past couple of years.

Rents for apartments with new tenants fell sharply during the pandemic and remained below pre-pandemic levels until early 2022 but rose 24 per cent over the year to February 2023, whereas the overall index increased by 14 per cent. By contrast, rent for houses and townhouses with new tenants increased by around 10 per cent over the year to February 2023.

But CoreLogic predicts a slowing in rental price growth next year, saying rents rose for the 35th month in a row in July but monthly growth has eased over the past four months. It says the expected drop in interest rates next year combined with softer income growth and stretched rental affordability will contribute to a slowing in rents.

First homebuyers falling

The recent boom in property prices, the positive outlook and the many assistance programs available from federal and state governments have not been helping those looking to get into the market.

A recent study highlighted a significant decline in first homebuyers over the past three decades. vii Published by the Australian Housing and Urban Research Institute, the study says the drop in first homebuyers is down to delayed partnering, higher rates of educational attainment and associated debt, the precarious nature of employment and worsening housing affordability.

The study says various government policy decisions have had little effect on the numbers of first homebuyers.

Build-to-rent growth

Australia’s growing build-to-rent (BTR) market is getting a boost from governments eager to increase housing stock. Various state governments have introduced a raft of incentives for build-to-rent projects, mostly in the form of tax concessions.

BTR projects, common in Europe and North American, see landlords build a large-scale residential development intending to hold it for the long-term while renting the apartments for longer-than-usual terms, often as long as three years with rent increases locked in. Rents are often slightly higher than market averages in return for better communal amenities such as roof gardens and gyms.

Institutional investors, such as super funds, are also getting onboard with the projects, favouring the steady income stream.

Though dominated by major developers and international entities, Australia's BTR market is also attracting smaller private investors. On the plus side, BTR offers regular income, often better returns and the chance to minimise expenses, not to mention the government tax concessions.

On the downside, there is the possibility the BTR concept might not take off in Australia and that vacancy rates may be higher as a result. There is also a downside to the promise of regular income – locked in rental increases may not keep pace with rapid market changes.

Rental Vacancy Rates*
Seasonally adjusted

* Data is monthly for Sydney and Melbourne and quarterly for all other serires
Sources: REIA; REINSW; REIV

i https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/total-value-dwellings/latest-release
ii, iv https://www.pipa.asn.au/wp-content/uploads/PIPA_Investor-Survey-Report_2023_Final.pdf
iii https://www.corelogic.com.au/news-research/news/2023/short-term-loss-making-resales-on-the-rise
v, vi https://www.rba.gov.au/publications/bulletin/2023/jun/new-insights-into-the-rental-market.html
vii https://www.ahuri.edu.au/sites/default/files/documents/2023-09/Executive-Summary-FR408-Financing-first-home-ownership-opportunities-and-challenges.pdf

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Help getting onto the property ladder for first time buyers

Help getting onto the property ladder for first time buyers

Buying your first home is always a big step, but with property prices rising faster than pay packets, taking that first step seems more challenging than ever. This month we take a look at the best options for getting a foot on the first rung of the ladder.

National house prices rose 20 per cent in the year to September, the fastest growth since 1989. Higher prices have also fanned out from capital cities to the regions, as city folk discover the country lifestyle and cheaper housing during the pandemic.i

While this is great news for homeowners and investors, it’s putting home ownership further out of reach for many hopeful first home buyers. The combination of rapid price growth and weak wages growth have pushed up the cost of an average first home deposit from 70 per cent of income to more than 80 per cent.ii

And in another blow to first home buyers, the Australian Prudential Regulation Authority (APRA) has told lenders to assess whether new borrowers can afford their loan at an interest rate at least 3 percentage points higher than the current rate on their home loan. Previously, banks used a 2.5 per cent buffer.iii

So what strategies are available to help younger Australians get a foot on the property ladder?

Government supports

In recent years, the federal government has launched three schemes to close the deposit gap for first home buyers.

The First Home Loan Deposit Scheme (FHLDS) and the New Home Guarantee (NHG) allow eligible first home buyers to purchase a home with a deposit of as little as 5 per cent. While the Family Home Guarantee helps eligible single parents buy a home with an even lower deposit of at least two per cent.

Another way for first home buyers to build a deposit is to contribute voluntary savings to your super account and withdraw up to $30,000 plus investment earnings when you are ready to buy. The First Home Super Saver scheme takes advantage of the low tax super environment and investment returns that have consistently outpaced bank savings accounts.

Rentvesting

If you can’t afford to buy your dream home in a suburb or location you like, “rentvesting” may be worth exploring.

Rentvesting is where you buy property in a location you can afford with good rental yields and capital growth prospects and lease it out, while renting in an area you prefer. Or live with your parents for minimal rent and pay off the mortgage on your rental property even faster.

You can also claim a tax deduction for allowable expenses, depreciation, and interest on the loan for your investment property. The downside is you will be liable for capital gains tax when you sell.

Alternatively, under the six-year rule if you buy and live in the property for at least six months before you rent it out, you will be exempt from capital gains tax on the growth of your investment for up to six years.

Bank of Mum and Dad

It’s not just younger Australians who worry about housing affordability. Their parents often worry just as much. So much so that recent research found the Bank of Mum and Dad is the nation’s ninth biggest mortgage lender.

According to research by Digital Finance Analytics (DFA), 60 per cent of first home buyers are getting help from their parents.iv Parents typically do this by giving their children cash towards the deposit or by going guarantor for the loan.

DFA found the average parental contribution was $92,000, indicating parents may be choosing to help with the deposit. Not only are banks reluctant to lend to first time buyers with less than a 20 per cent deposit, but any less means borrowers must pay lenders mortgage insurance.

Going guarantor

Parents without cash to spare sometimes agree to guarantee their child’s loan by using the equity in their own home as security. This can have the advantage of helping children get into the market sooner, but there are risks.

If the borrower can’t make repayments the guarantor is responsible for the debt, putting their home at risk. To limit this risk, you can choose to guarantee a portion of the loan, so you are only liable for that portion if the borrower defaults. You can also arrange to be released from the loan once the borrower builds up the same portion of equity in their home.

Saving for a first home is a challenge in the current market, but there are strategies to help make your dream a reality. So get in touch if you would like to discuss your options.

i https://www.corelogic.com.au/sites/default/files/2021-09/211001_CoreLogic_HomeValueIndex_Oct21_FINAL.pdf

ii https://theconversation.com/as-home-prices-soar-beyond-reach-we-have-a-government-inquiry-almost-designed-not-to-tell-us-why-168959

iii https://www.apra.gov.au/strengthening-residential-mortgage-lending-assessments

iv https://www.savings.com.au/home-loans/we-need-to-talk-about-the-rise-of-the-bank-of-mum-and-dad

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Granny flats- tax tips and traps

Granny flats: tax tips and traps

Granny flats- tax tips and traps

Granny flats: tax tips and traps

The idea of adding a granny flat to your property sounds like a great idea. A property to rent out to generate some welcome extra income, or a home for adult children or mum and dad in their later years.

But there are important tax and personal considerations to consider before taking the plunge and digging up the backyard. Although the Federal Budget proposed significant reform in this area (which we cover later in this article), important tax questions remain.

Tax and granny flats: what you need to know

A granny flat is usually a self-contained secondary dwelling with a separate entrance, bathroom, kitchen and living space.

Unlike an investment property, granny flats do not have a separate title and are built within the boundary of your existing property or attached to your home. A granny flat cannot be sold separately unless you subdivide the existing property title.

Before you rush off to start building, you need to carefully consider the tax implications and get professional advice, or you could find yourself facing significant tax bills.

For example, if you rent out your granny flat at commercial rates to a third party like a student, the rent will be assessable income and you will pay income tax on it at your marginal tax rate. You are, however, entitled to claim the normal deductions for depreciation against income from an investment property.i

Subdividing the property could also create a GST obligation, as the flat may be deemed a new residential property.

Granny flats and capital gains

Under current legislation, the main tax issue when adding a granny flat is that it can create a capital gains tax (CGT) headache when it comes time to sell your home. CGT is payable on the difference in value between the time you bought the property and the time you sell.

Normally, your main residence is exempt from CGT, but adding a granny flat can affect this. If you charge rent to a student living in your granny flat for example, you will lose some of your main residence exemption from CGT as the property is partly being used for income-producing purposes.

When a family member lives in a granny flat and does not pay commercial rent, generally the main residence exemption still applies as the arrangement is deemed private or domestic.

CGT and cash contributions

Things get more complicated if a relative provides a cash sum to help pay for the cost of building a granny flat in return for a right of occupancy for life or life interest.

Under current tax laws, a cash sum paid by one party to build a granny flat is a CGT event. This means if your parent makes a financial contribution towards you building a flat to live in on your property, you will have a partial CGT liability to pay when you eventually sell your home.

To make things worse, the normal 50 per cent discount on CGT for the disposal of an asset held for over 12 months may not be available.

Potential for elder abuse

In many cases, concern about paying CGT means families fail to put formal agreements in place when a relative contributes to the cost of a granny flat. This leaves the family member with no protection if the relationship breaks down and creates the potential for financial abuse.

The family member can also lose out financially if they need to move into an aged care facility, or if the homeowner needs to sell.

It’s also worth noting that an interest in a granny flat can affect social security entitlements and aged care fees.

Proposed Federal Budget exemption

To solve some of these issues, the October 2020 Federal Budget included a proposed CGT exemption for granny flats where a formal written agreement is in place. The new measure will be limited to arrangements covering family relationships and disabled children – not commercial rentals.

Eligibility conditions for the new CGT exemption will depend on the legislation eventually being passed by Parliament. If passed, a start date is expected as early as 1 July 2021.

If you are considering building a granny flat on your property, contact us today to discuss the potential tax implications.

https://www.ato.gov.au/General/property/your-home/renting-out-part-or-all-of-your-home/

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Airbnb Tax Management Australia

Airbnb Hosts - Here’s What You Must Know About Australian Property Tax

As specialist property accountants we look after a lot of clients with Airbnb rental incomes.

Most earn a side income from letting out parts of their own homes. Others have found Airbnb a more profitable way to let out ordinary self-contained rental properties.Read more


You can claim borrowing expenses greater than $100 over a five year period or over the life of the loan whichever is the least. You can claim all of the following borrowing costs

• stamp duty charged on mortgage (note this is not the stamp duty on purchase of the property)
• loan establishment fees
• title search fees charged by the lender
• costs for preparing and filing the mortgage documents
• mortgage broker fees
• valuation fees for loan approval
• lender’s mortgage insurance

It is important in the first year that you don’t claim the full amount amortised over the five year period but you will need to apportion the first years borrowing costs over the number of days between the date you took out the loan and the end of that particular financial year. Another common mistake is either not claiming the borrowing costs at all or claiming them all in the first year the loan is taken out.

If a loan has been taken out and has a mix of private and investment/business components (something we recommend you really try to avoid and work together with your accountant and mortgage broker to prevent getting into this sticky situation) then the borrowing expenses also need apportioned.

Property Inheritance and Taxes

The passing away of someone you love is a tragic event but not taking into account the tax considerations on sale of any property you receive from an inheritance as part of that estate can cause further grief.

Main Residence

If the property was used as the main residence of the deceased then any capital gain or loss on a dwelling acquired by an individual as a beneficiary of deceased estate or by the trustee of a deceased estate will be fully exempt if

  1. the dwelling was the deceased’s main residence just before they died or it was the deceased’s pre-CGT property; and
  2. the dwelling was disposed of within two years of the deceased’s death, or it was, from the time of death until the disposal, the main residence of
  • the spouse of the deceased
  • an individual who had the right to occupy the dwelling under the will of the deceased ; or
  • a beneficiary

3. then need to consider a number of events with your adviser.

Careful planning needs to be undertaken to ensure that this event is planned for.

For all other property, other than your main residence or other dwelling e.g. an investment property, you will need to determine whether the property is a pre-CGT asset (purchased prior to 20 Sept 1985) or a post-CGT asset (purchased after 20 Sept 1985).

Pre CGT Assets of the Deceased

If the property you inherit was acquired by the deceased prior to 20 September 1985 you will be deemed to have acquired the property for its market value on the day the deceased died.  It will then be a post CGT asset for you.  You will need to hold the property for more than 12 months from the date the deceased died in order to obtain the 50% general CGT discount.

Remember though the special rules in Section 118-195 ITAA 1997.  If the property was acquired by the deceased prior to Sept 1985 and you dispose of that property within 2 years of the deceased date of death there will be no CGT on the sale of that property.  Many accountants do not read the table in Section 118-195 properly and think it is to be read like most tables.  However s118-195 makes it very clear only one condition in Column 3 and one condition in Column 2 is required.  It is a matrix not a table.  We have seen this to be a common mistake made by many accountants.

Post CGT Assets of the Deceased

If the property you inherit, other than your main residence (discussed above) or other dwelling e.g. an investment property which are subject to special rules (worth discussing with your adviser), was acquired by the deceased on or after 20 September 1985 you will be deemed to have acquired the property for the cost base and the reduced cost base that applied to the deceased.  You will need to hold the property for more than 12 months from the date the deceased acquired the property to obtain the 50% general CGT discount.

They say that two things in life are certain.  Death and taxes.  Unfortunately the two are often intertwined.  House of Wealth are able to assist with the preparation of a deceased clients tax return.