The budget’s secret bonus for property investors

Did you pick the hidden surprise in last week’s horror budget?

In my view there was some good news for property investors buried amongst all the spending cuts and tax hikes, and I’m not talking about the fact that negative gearing was left untouched.

I guess if you’re like most Australians you’re probably thinking, “How will last week’s budget affect my pocket?”

Of course there are also the big picture questions of how the budget will affect the economy and whether the treatment of people at the bottom, middle and top is fair? But if you’re like many homeowners or property investors you’re probably wondering:“What does all this do to property values?”

Well, as I see it, the good news for those who own property is that the government is relying on continuing low interest rates and more consumer spending to help grow the economy.

You see, since the global financial crisis, despite an unprecedented resources boom our government debt has nearly tripled, growing faster than debt in Europe where many countries endured a full blown economic disaster. This means if Joe Hockey wants to rein in and pay down this debt without increasing taxes the government is going to have to limit its spending.

But there’s another issue…

Our economy has been growing at below its medium-term trend rate of about 3% a year, which is the rate that keeps unemployment steady. And the economic forecasts from the RBA suggest our economy will remain sluggish.

However, the problem is that with a mining-led slump in business investment and public sector spending being capped by constraints in state and federal budgets, unemployment rates are slowly edging higher.

At the same time our relatively expensive Australian dollar is stifling tourism, manufacturing and non-mining exports.

So what can our government do to boost the economy?

There is little option for the government other than relying on low interest rates and asset prices rising further for GDP growth over the next few years.

Fact is: the government is hoping for a construction-led economic boost and more consumer spending. The budget papers explain:

“…further gains in household wealth are expected to support a further modest decline in [household] savings ratio, allowing consumption to grow faster than income.”

As you can see from the graph below, since 2008 (the GFC) we’re back to saving again, with the average household stashing aside around 10% of their disposable income.

At the same time our household wealth has grown thanks to higher house and equity prices at a time when we’ve been curbing our liabilities.

What this means is property values will keep rising…

Low interest rates, strong population growth and new household formation creating pent-up demand, increasing household wealth and greater consumer spending means the outlook is good for our capital city property markets.

Especially since all this is happening on a backdrop of relative affordability of housing because, despite rising property values, our historically low interest rates and rising wages is making housing as affordable as it has ever been over the last decade.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy.