The Cycle Must Continue! How Can We Be So Sure?

5th May, 2016

We are often asked by people “How can you be so sure that the Real Estate Cycle will continue”. Prices are so high! how on earth could they go any higher? We have an affordability crisis and debt levels are so high?

And yet we so confidently answer “that while the 5 Essential Drivers are in place these MUST manifest back into higher real estate prices.” How these drivers will manifest this cycle we can’t yet quite say, but we DO know with confidence that the cycle MUST continue and property prices WILL go higher.

So this week’s Federal Budget is most interesting from a cycle point of view. There were several measures of interest that caught my eye, especially some of the changes in the laws that govern your superannuation savings. The government tightened up some of the tax incentives of superannuation for higher income earners.

• The concessional caps have been reduced to $25,000pa
• Lifetime non-concessional contributions cap of $500,000 now exists
• A maximum of $1.6M can be held in the Zero tax pension environment
• Those earning over $250,000 will be charged 30% contribution tax instead of the concessional rate of 15%.

In essence, if you are a high income earner, the tax attractiveness of super has just been reduced for you!

However the much mooted changes to negative gearing from earlier in the year seem to have disappeared???… Treasurer Scott Morrison even emphasised that the government had no plans to touch it in the future when he said

“We have no wish to undermine the value of Australian’s homes”

Which brings us back to the cycle.

My question whenever I read something like this is how does it both relate and how will it impact the current cycle.

So to quote the Sydney Morning Herald article (04/05/2016) titled Budget 2016: Why the super crackdown could add fuel to the housing affordability fire.

“… if super was made significantly less attractive to wealthy savers, they might find other investments, such as negatively geared property or share portfolios, more attractive.”

BINGO!

It is highly likely that the federal budget that has just been given will do nothing but inflate the cost of property.

Some will say that the impact will be dampened as it will only affect the very top income earners. But by Governments continually tampering with the rules of superannuation, it just feeds the distrust and scepticism of the super environment which will just push people further into the direct property space.

Our view on super, is that despite the many changes that consecutive governments have continued to make, it still remains Australia’s premiere concessionally taxed environment.

However, Superannuation should be only part of an overall wealth creation strategy.

So thankyou Mr Morrison, the cycle continues!

PS for those who are interested in a summary document of the Federal Governments Budget click here.