Forget about the mortgage cliff, here comes the cash mountain

Times have been tough lately for many Australian households - particularly those with a mortgage, as the Reserve Bank of Australia has progressively jacked up interest rates.

But warnings there would be a flood of loan defaults, particularly as about one million homeowners rolled off low fixed-term rates over the last 18 months onto much higher variable rates - the so-called “fixed-rate cliff” - have been shown to be overblown.

“Many were expected to bail, unable to pay thousands in extra repayments every month, with a flurry of emergency sales predicted to help drive (home) prices down last year,” says The Australian’s Property reporter Mackenzie Scott.

Instead, home prices actually rose 8.1% in 2023, according to CoreLogic’s national HVI measure, buoyed by strong population growth, low supply and an almost complete absence of distressed sales.

In 2024, most property analysts, banks, and economists are tipping more subdued growth.

Many of those forecasts are based on predicted movements in interest rates - with the RBA expected to start cutting the cash rate in the second half of the year. 

Stage 3 tax cuts

However, there’s another factor that could be a key ingredient in keeping significant upward pressure on home prices in 2024.

Releasing the mid-year economic and fiscal outlook (MYEFO) in early December, Federal Treasurer Jim Chalmers and Finance Minister Katy Gallagher made clear they’re proceeding with introducing the legislated Stage 3 tax cuts from July this year. 

In the face of a concerted campaign by the Greens and the social service sector to scrap them, Dr Chalmers made clear the government’s rationale to proceed with the controversial reform is actually one of equity.

The priority is tackling “bracket creep”, where workers who get a pay rise or earn more, find themselves falling into higher tax brackets, whittling away gains in take-home pay.

“Returning bracket creep is a worthwhile aspiration for a government,” the Treasurer said.

The MYEFO papers show a $30 billion surge in income tax revenue since last May, a key factor in helping push the budget into surplus.

The National Accounts data for the September quarter of 2023 provided more proof.

It showed that Australian household savings declined due to a strong 6.3% rise in “income payable”.

"Income taxes drove the rise, in the absence of the Low and Middle Income Tax Offset (LMITO) which ceased over 2022-23," the ABS stated in the notes accompanying the figures.

What that means is that at a time of higher prices for consumer goods and services due to high inflation and much higher mortgage repayments, Australians were also sending more and more of their income to the taxman.

And yet, indebted households still managed to meet their mortgage obligations.

The cash mountain

So what will be the effect of more cash in wage-earners’ pay packets from the 1st of July when the Stage 3 tax cuts kick in?

“It will increase business revenues, create more jobs, boost the income of tenants, improve household borrowing power, increase first home buyer activity and support more owner-occupier upgrades,” says Simon Pressley, Head of Research at buyer’s agency Propertyology.

“For property investors, that extra annual income will offset some of the annual shortfall between rental income and investment expenses.”

This useful graph from the Tax Institute shows just how much extra wage earners will have in their pockets:

As you can see, high-income earners are the main beneficiaries of the tax cuts.

However, analysis by Domain shows that the Stage 3 cuts will enable even households on more modest incomes, to be able to substantially increase their home loan borrowing capacity. 

"Largely the take home is that everyone will be better off in terms of improving their borrowing power, “ according to Dr Nicola Powell, Domain's Chief of Research and Economics.

"An increase in borrowing capacity opens up slightly more suburbs in which you can afford to purchase as it opens up different price points," she told Nine.com.au. 

While the Stage 3 tax cuts may give potential buyers scope to purchase a more expensive home in a more sought-after suburb, they’re likely to face stiff competition from other cashed-up buyers.

“We find it hard to see a situation whereby prices start falling,” PropTrack’s Director of Economic Research, Cameron Kusher says.

“It’s wealthier households broadly transacting stock,” he told The Australian.

That analysis is supported by John McGrath, head of the McGrath Real Estate Agents group.

He predicts there will be plenty of buyers - many of them Millennials backed by the so-called “Bank of Mum and Dad” - chasing premium properties this year.

 “They’re buying with cash; there is an enormous amount of wealth, and I have no doubt that part of the market will stay in demand,” he told the Financial Review.

Late last year, investment bank Jarden surveyed 282 mortgage brokers and found that about 15% of all borrowers were purchasing properties with family assistance.

Two-thirds of those received a cash loan or gift with an average value of $70,000.

If potential home buyers thought they might be able to snag a property bargain in 2024 because of a lack of rival buyers, they may be in for a rude shock.

Forget about the mortgage cliff, here come the buyers with mountains of cash.