What will FHB Stamp Duty cuts mean for Melbourne’s property market?

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What will FHB Stamp Duty cuts mean for Melbourne’s property market?

First Home Buyers

As of 1st July 2017, the Victorian Government will abolish stamp duty for First Home Buyers (FHB) in response to Melbourne’s affordability issue that has once again captured media attention. The policy will be applicable on new and established residential properties if the purchase price is below $600,000, and a sliding scale up to $750,000. It’s no secret that FHB’s have been priced out of the Melbourne property market with a median house price of approximately $826,000; driven through strong demand from foreign investment, population growth and an undersupply of good quality housing stock.

As a result, Melbourne’s suburbs with a median house price below $600,000 are in excess of 15km to the north and west, and 30km to the south and east of the CBD. The policies intention is to provide financial relief for FHB’s but once prices exceed $600,000, buyers will be pushed to neighbouring suburbs to still achieve the full policy benefit. Housing prices in the inner and middle rings will remain unaffected as the majority of these suburbs exceed the policies price threshold. Focus will be on the more affordable outer-ring housing sector of Melbourne in excess of 15km from the CBD. In addition, city fringe apartment stock within 5km of the CBD may receive increased buyer attention, particularly established units in smaller boutique blocks that appeal to owner-occupiers.

When the First Home Owners Grant was introduced in 2000, history shows us that FHB activity as a percentage of Victoria’s population grew from 0.64% in 2000 to 0.71% in 2001. Similarly, in 2008 doubling the First Home Owners Grant increased activity from 0.60% in 2008 to 0.88% in 2009. Shortly after both grants were introduced FHB activity dropped from 0.71% in 2001 to 0.57% in 2002 and from 0.88% in 2009 to 0.53% in 2010. The rapid influx of FHB’s caused the market to grow so rapidly it became unaffordable within a 12-month period, even with the financial grant. This suggests that following the stamp duty abolishment, history could repeat itself and FHB’s may once again be priced out of the local market.

On the other hand, government incentives increase ability and encourage participation in the property market. Choosing a good quality property with the premise it will appreciate over time is a fundamental driver of property acquisition. The capital growth gained by a quality asset will assist in upgrading to a larger family home or reinvesting the equity. An inferior or undersized asset will limit the capacity of moving onto another investment, which reinforces the importance of keeping the asset quality high. In the long term, resale value and liquidity are just as important as the initial purchase price.

A majority of recently built inner-ring apartments are targeted towards investors; with a below average quality, tighter floor plans and profit orientated. The Victorian Government newly introduced a design overhaul to improve the lifestyle and amenity of apartment living. These new standards will incorporate the external design and common areas with an increase to minimum requirements for natural light, energy efficiency, functional spaces and general liveability. Therefore, developers could consider designs targeted towards owner-occupiers with larger floor plans and a higher quality of finish. It would provide an affordable option for those who are comfortable sacrificing the land component associated with a home in favour of the CBD’s locational benefits.

Over the last 7 years, property prices in Melbourne have outpaced wage growth. The affordability index published quarterly by Performance Property Advisory (PPA) shows that currently an average interest-only mortgage repayment costs 44% of the average male income before tax (this figure may apply differently to duel income households). Furthermore, PPA’s historical research highlights that Melbourne has some room to move but when the affordability index hits 50% the market becomes unaffordable for local buyers.

From an advisory perspective, this raises concerns because the policy encourages FHB’s to enter a market nearing its peak. Although the new policy will assist as an incentive to FHB’s, the market is opposed to waiting until it balances out through price adjustment and an increase in wage growth. Timing is crucial when entering the property market, and entering at the top of the cycle can be dangerous. All buyers should consult a professional in the industry before going ahead with a purchase to ensure the right choice is made.