Tax Cuts Supercharge Borrowing Power, Property Markets will React

One of the big drivers of housing demand is access to finance. 

The more money people can get, the higher house prices go.  

That’s essentially why house prices are influenced to go up when rates go down, and vice versa. 

And over the last 15 – 20 years, schemes such as offsets, longer loans and deregulation have all increased the amount home buyers can borrow. 

The latest of these are the Stage 3

Income Tax Cuts

These tax cuts were introduced by the previous government to lower taxes paid by middle and higher-income earners. 

And the final stage takes effect from July 2024, which is only a few months away. 

It was part of a package to help stimulate the economy by putting more money into the hands of everyday Australians to spend. 

And tackle the issue of bracket creep, which has effectively raised taxes over the years. 

In case you’re not over the details, these are the new tax rates once they come into effect. 

What does this mean in terms of actual dollars?

Here’s a snapshot of the impact of the tax cuts as they rolled through. 

As you can see, they’re quite dramatic if you’re a high earner, but not so much if you earn less. 

For example, if you’re on $200,000 a year, you’ll be almost $750 a month better off once the stage 3 tax cuts come into effect. 

Controversy is brewing

Now, these tax cuts aren’t without their fair share of controversy. 

Tax cuts never are. 

After all, it’s not like the government isn’t dealing with a range of issues at the moment. And some extra funding could go a long way. 

Poor infrastructure, homelessness, the soaring costs of the National Disability Insurance Scheme, disadvantage in remote communities, and climate change. 

There are plenty of ways to use the tax revenue other than giving it back. 

Besides, giving people more spending power risks overheating the economy. 

More spending means more inflation. 

And then it’s back to rate hikes we go. 

(The left hand gives it and the right hand takes it back.)

So you can see why there’s so much opposition. 

Recent polling revealed support for repealing the tax cuts, which now sits at 48%.

And support for keeping them at just 22%. 

However, the show must go on and no amount of complaints is going to stop them. 

The tax cuts will definitely be coming into effect on time. 

What does this mean for the real estate market?

What this means for real estate is a sudden increase in many people’s borrowing capacity. 

In other words, buyers with more money will be fighting for the same houses … against other buyers who also have more money. 

The auctioneer may as well start the bidding $50,000 higher. 

And unfortunately, those at the lower end of the pay scale won’t have any relief whatsoever, pricing them even further out of the market. 

To put this into context, for someone on $200,000 a year, this is worth an extra $110,000 to your borrowing.

That’s a rough figure, of course, because it depends on so many factors. 

However, in a high-earning household with 2 high wages, it’s going to be champagne and camembert on July 1. 

And since supply is so low already, it’s mostly the higher end of the market doing most of the buying. 

But make no mistake about this. 

While it might appear to be isolated to a battle for houses in the top end of town, it’s actually going to be a major contributor overall to the mega boom. 

Not all borrowers are going to spend every last dollar the bank lends them. 

Plenty are going to target more affordable houses and not stretch themselves to the limit. 

And this means cashed-up buyers sending house prices in the ‘more affordable’ bracket soaring as they swoop in. 

It also means more investors using their newly found borrowing limit to chase higher returns on offers from real estate. 

So, while the conversation on house prices has focussed on migration and low supply, the impact of the stage 3 tax cuts can’t be understated.