The Real Estate Developer’s Federal Budget 2012 Overview

08/05/2012 11:41 pm

This is an overview of the 2012 federal budget for real estate developers and investors. In a nutshell this wasn't a real estate friendly budget. The Housing Industry Association expressed disappointment that the federal budget missed the opportunity to reinvigorate new home building activity and alleviate the nation's housing affordability issues. As promised the budget seeks to take 2011-12 $44 billion deficit and turn it into a $1.5 billion surplus in 2012-15 as result of more than $32 billion of cuts.

Looking at the big picture, this years Budget continues a process that has effectively produced a marked tightening of the fiscal stance. Practically the Budget was neutral on new measures, as most of the work was outlined in the mid year review.

NAB predicts that fiscal policy is now set to detract at least 1% from growth in 2012-13 at a time of further evidence of a weakening demand and soft exports. Looking at this in light of the implications for monetary policy loosening, it is clear that the Government is banking on the fact the RBA are more likely to cut rates than increase them.

The Budget contained:

  • Targeted assistance to lower income groups (via increased benefits to Tax Benefit Part A recipients ($1.8b)
  • New support initiatives ($1b) and the Schoolkids bonus ($2b)
  • Introduction of a National Disability Insurance Scheme from 2013 ($2b)
  • Dental health initiatives ($505m – with $345m to reduce dental waiting lists)
  • A welcome initiative to allow tax losses to be carried forward for small business (up to $1m in 2012-13)
  • Money for an upgrade of the Pacific Highway ($2.7b)

Offsetting savings included:

  • Not proceeding with a 1% cut in company tax ($4.8b)
  • Reduced superannuation tax concessions for high income earners ($1b)
  • Reductions in the benefits (duration) for living away from home ($1b)
  • Delays in defence ($5.4b), deferred development assistance ($2.9b) and (disappointingly) the deduction of interest payments has been dropped ($1b)

The Government expects the unemployment rate to rise to around 5.5% in 2013. The Government has taken the view that the underlying inflation will remain within the RBA's 2-3% target band over the period. Due to soft labour market conditions and the significant degree of fiscal tightening in the budget stance, monetary policy will need to become more accommodating over the next few months with a cash rate forecast from NAB of 3.25% by September 2012.

REAL ESTATE & HOUSING

There were no major announcements on the real estate front despite ongoing weakness in the home building sector and perennial supply side obstacles.

KEY NEW INITIATIVES:

  • Government continuing with funding for a range of social housing and housing affordability projects, including the $4.5 billion National Rental Affordability Scheme, the Housing Affordability Fund and The Building Better Regional cities program. Total spending on housing affordability and homelessness measures will be $3.6b in the 2012-13 year.
  • Government will not proceed with the Tax Breaks for Green Buildings program at a saving of $405.2m over 4 years.
  • Government will increase the managed investment trust final withholding tax rate from 7.5% to 15% with effect from 1 July 2012.

IMPACTS:

  • Missed opportunity to spur new home building activity and improve housing affordability pressures.
  • Property development sector negatively impacted by scrapping of Tax breaks for Green Buildings.
  • Increase tax on foreign investment in property trusts may send negative signal to international investors.

REAL ESTATE OUTLOOK

NAB’s Australian Residential Property survey, the property index rose in the March quarter, as the pace of house price decline moderates and rents continue growing. WA overtook NSW as the strongest state and Victoria remains the weakest.

The survey is tracking for house prices to fall slightly over the next 12 months with modest price growth in the next 2 years. WA  is expected to outperform the market average, Queensland will improve and Victoria will fall behind in price growth. NAB’s outlook also expects house prices to remain flat or fall slightly in 2012 with a modest recovery in prices in 2013. National rents are forecast to increase to 2.9% over the next year and 4.3% over next 2 years. Rental returns are expected to be strongest in WA and NSW.

First home buyers and resident investors have been recently less active in the market for new property, but overseas buyer activity has increased. Demand for new property is still strongest for inner city houses  and low rise apartments/townhouses. Tight credit conditions and housing affordability are cited as the most “significant” constraints on new housing development. A lack of development sites and construction costs are becoming problematic, especially in WA.

Overall demand for existing property has improved with houses still the most preferred type of property, especially in the inner city. Low and high rise middle ring apartments/townhouses are seen as the least preferred option for existing property buyers. Capital growth expectations remain strongest for existing property in the below $500,000 price range, and the outlook for premium property remains poor. Access to credit is still viewed as the biggest impediment to purchasing existing property. Employment security the next biggest concern, with Victoria most pessimistic state. For more information on this years Budget and the market outlook visit NAB's Money Basics site