In the months leading up to the 2017 Federal Budget, there was no hotter topic than housing affordability.
Journalists, commentators and those in the know had debated the issue with such frenzy, that a nation of first home buyers waited with anticipation on the outcome.
So when the budget was handed down on May 9, how did first home buyers fare? Was it a magic fix to the housing affordability crisis plaguing the country? We break it down for you in simple terms.
Salary sacrifice + tax breaks
The first announcement you need to know about is the First Home Super Saver Scheme.
The First Home Super Saver Scheme will allow first home buyers to make extra contributions up to $15,000 a year, to a maximum of $30,000, into their superannuation fund.
The major advantage of the scheme is the tax concessions when you deposit and withdraw your money. Take the following example of ‘Bel’ – she earns $60,000 per year and decides to salary sacrifice $10,000 a year into the saver scheme.
From July 1 2017, Bel can instruct her employer to deposit money from her pre-tax income into her super account. This money will be taxed at just 15 per cent, instead of Bel’s marginal tax rate of 32 per cent. Therefore, after tax she has deposited $8500.
In 2018 and 2019, Bel contributes $10,000 each year. After three years she is ready to purchase her home and will withdraw the money she deposited, plus the earnings achieved.
When withdrawing, the money is taxed at 30 percentage points below Bel’s marginal rate. In Bel’s case she will pay around 2 per cent tax equating to $1620. This leaves her with $25,760 for her deposit, $6240 more than if Bel had saved her money in a standard deposit account.
To work out how the scheme would work for you, click here
If you are currently deliberating whether you should invest your money through the First Buyers Saver Scheme, here are some points to consider.
While the scheme is good for forced savings and comes with generous tax concessions, are you in a financial position to deposit money into an account that can’t be accessed until you are ready to buy a home?
It’s important to be aware that if your plans change and your home ownership dream doesn’t occur, your money is locked away until you reach retirement age.
The cap of $30,000 means that on top of the money locked in the scheme you will need further savings to meet the upfront costs required to buy a home, even in a steady market like Adelaide.
In Adelaide if you buy an established home worth $430,000 through a mainstream lender with a 5% deposit, the total upfront costs required is $59,865.26. Or with HomeStart with its 3% deposit, the upfront costs are $38,881
Regulating foreign investors + incentives to downsize
While the First Buyers Saver Scheme priortises measures to provide access to finance, the next two announcements address supply side constraints.
Under the proposed budget measure to regulate foreign investors, developers will only be able to sell half of a development to foreign buyers, with remaining properties to be sold to Australians.
The Government has also proposed providing incentives for older Australians to downsize, freeing up more supply for younger home buyers to purchase.
From 1 July, 2018 Australians aged over 65 who sell a home they’ve lived in for a decade or more can deposit $300,000 from the sale proceeds into their superannuation.
So how do these measures help first home buyers? Both are aimed at providing suitable and available housing stock for first home buyers to purchase. Will they have an impact? Only time will tell, but it’s no magic fix, and it may take years to see the affects.
Limiting negative gearing
Negative gearing was heavily debated in the lead-up to the Budget, but what does it actually mean?
When investors purchase an investment property, they can negatively gear that property. This means the costs of owning a property (interest on the loan, agent fees, and maintenance) exceeds the income (rent) it produces.
Negative gearing offers immediate tax benefits to investors, coupled with the longer term prospect of an increase in the home’s value.
In the months leading up to the budget there was talk the Government would look at capping the size of negative gearing deductions, or the number of properties investors can negatively gear.
However, the announcement in the budget saw a watered down version of what was spoken about in the lead up. Investors can no longer claim travel to and from their investment, or equipment for repairs and upkeep. These changes are likely to have little to no impact in reducing the demand for property from investors.
And that means - you guessed it - no assistance for first home buyers.
The final word
While it was promising that the Federal Government prioritised measures for first home buyers in the Budget, our take is that unfortunately, the measures don’t go far enough.
The supposed jewel for first home buyers is the Super Saver Scheme. However, it’s questionable if many first home buyers will use it as it only leaves you potentially $2000 a year better off than a standard deposit account, and locks your money in superannuation if you don’t use it for a house.
Fortunately, South Australian home buyers have access to HomeStart Finance, which offers loan products to reduce the upfront costs of buying a home. With products such as low deposit loans or shared equity to increase borrowing power, first home owners can get into their own home sooner.