News & Media

February 2017 Newsletter

FOREIGN INVESTOR SURCHARGE NOW IN PLAY

The new year auction season is about to kick off, with many watching the next round of Super Saturdays with keen interest.

In particular, many are wondering what the impact will be of the new land tax for foreign investors, which came into effect at midnight on December 31. The measure will force foreign owners of residential real estate to pay a land tax surcharge of 0.75 per cent.

Under the changes, a foreign-owned property with a million-dollar land package would incur a foreign investor surcharge of $7500, which is on top of the standard 1.6% currently levied on NSW residential land.

Foreign buyers are not able to access the land tax-free threshold nor is there an exemption for the principal place of residence. These buyers were required to lodge an initial NSW land tax return by January 31.

There have been mounting concerns about the level of foreign investments and investors’ ability to pay off their real estate purchases since the stamp duty surcharge was introduced and local banks stopped lending to foreign buyers.

In 2016, the big four banks clamped down on foreign lending. The NSW government then joined Victoria in introducing surcharges and taxes for offshore buyers. Victoria has long had a 0.5% land tax surcharge for foreign buyers and on January 1 this year, that surcharge rose to 1.5%.

It has been said that the stamp duty charges act as the bigger deterrent to foreign property purchases.

In NSW, the stamp duty surcharge is 4% in addition to any transfer duty on residential property. In Victoria, that surcharge rose to 7% in July 2016, up from 3%, while Queensland implemented a 3% surcharge from October 1, known as the Additional Foreign Acquirer Duty.

So with the 2017 season upon us, many are eagerly waiting to see whether the new taxes are going to make a difference. Fears the new stamp duty charges and land taxes imposed on foreign buyers on the Eastern Seaboard would reduce demand and dampen price growth, didn’t really eventuate. Prices continued to rise in Sydney, Melbourne, Brisbane, Canberra and Hobart.

Louis Christopher from SQM Research said in a Financial Review article last month that many forecasters overplayed the role of foreign investors in driving up house prices and understated the broader economic factors such as low interest rates, population growth and the imbalance between demand and supply.

WHAT LIES AHEAD FOR INTEREST RATES?

The Reserve Bank of Australia Board meets for the first time this year on Tuesday 7 February and while most economists believe the official cash rate will remain on hold at 1.5%, there are murmurings that there may be a rate hike some time this year.

But while some economists are predicting a rate rise this year, others believe the official cash rate will remain steady. ANZ and Westpac recently predicted the central bank will keep the rate at its record low for the entirety of 2017. Conversely, NAB believes the RBA will cut rates twice more in a bid to prevent unemployment rising in 2018 as housing construction slows, while the US Federal Reserve will continue to hike.

It’s obvious the RBA is maintaining a watching brief on household debt and the housing market. In its minutes from the December Board meeting, the RBA offered a more positive view of the overall economy suggesting there was less of an easing bias, but it was clear it is keeping an eye on consumer spending, unemployment, wage growth, housing prices and other factors.

And what about the Trump factor? The International Monetary Fund is betting that a blowout in the US budget deficit under his presidency will drive global growth and drive interest rates up more rapidly. Economists believe US authorities will increase interest rates between two and four times in 2017.

For Australia, the IMF’s forecast is for further gains in commodity prices in 2017 and a boost to world trade growth.

In an interview with The Australian, ANZ senior rates strategist Martin Whetton said US growth was already improving and either this would continue or the Trump administration would “turbocharge” it. The upshot is that in either case, interest rates would rise further.

So while it appears there may only be a small chance of the RBA hiking rates by the end of the year, financial markets no longer think there will be cuts, as was the resounding viewpoint prior to the US presidential election.

Don’t bite off more than you can chew

The RBA has cut the official cash rate 12 times since 2011, from 4.75% to the current low of 1.5%. There hasn’t been a shift in the cash rate since November 2010, so if there is a hike the impact on borrowers could be significant.

Recent research from Digital Finance Analytics shows that one in five Australians are in such a precarious position that they could lose their homes if interest rates rise by even 0.5%. The survey of 26,000 Australian households examined much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, plus other financial commitments.

It shows that around 20% would find themselves in mortgage difficulty if interest rates rose by 0.5% or less. An additional 4% would be troubled by a rise between 0.5% and 1%. Almost half of homeowners (42%) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5% to the long term average of 7%.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote. The major banks have already begun increasing home loan interest rates, despite the fact the cash rate has remained steady.

According to the research, young, growing families and young, affluent households were deemed the most vulnerable to a small rate rise. The report found that affluent homeowners in well-to-do suburbs, such as Bondi, are among those most at risk of mortgage stress.

Martin North, principal of Digital Finance Analytics, said another thing he has discovered in his default analysis is that those who have received help from the “Bank of Mum and Dad” to buy their first property are nearly twice as likely to end up in difficulty. “It potentially opens them to more risk later because they haven’t had the discipline of saving,” he said.

Using the assumption that rates will increase over the next 12 to 18 months, North believes mortgages are going to rise by at least half of a percent, which could prove burdensome for some borrowers.

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