Will the stage three tax reforms affect property prices?

With the end of the financial year right around the corner, many Australians are expected to receive larger tax refunds thanks to new income tax cuts. 

From July 1, 13.6 million taxpayers will receive a cost-of-living tax cut, with anyone with an annual income of $135,000 or less receiving an average cut of $1888, according to the Australian Treasury Department.

Housing is a significant factor in the ongoing cost-of-living crisis, so at a first glance the tax cuts seem like an injection of cash that could help boost the property market.

“People will have more money, and they’ll spend some of that on the house, so for both rents and for [property] prices, there’ll be small upward pressure,” says Peter Tulip, chief economist for the Centre for Independent Studies.

“This is not something we have good empirical evidence on … the changes in income tend to be very small and gradual, so it’s hard to associate with movements in the cost of housing, relative to other factors like interest rates, which have a much bigger, more dramatic effects [on the property market],” he says.

Tulip says interest rates tend to dictate prices in the property market more than anything else; any change in people’s income will always put upward pressure on inflation and general prices.

Ray White Group chief economist Nerida Conisbee says the extra cash in people’s pockets is more likely to be used for day-to-day expenses than buying property.

“At the moment, people are pretty strapped for cash,” she says. “People will either use the reduction to pay off debt or … just cover the increases in cost of living.”

Conisbee believes it’s unlikely that the cuts will lead to higher inflation, given Australia’s current economic situation.

“The components of inflation that are driving prices are things like electricity and rent and insurance,” she says. “If you get a $1800 a year tax cut, you’re not going to get better insurance, and you’re not going to use more electricity. You may decide to get a better rental, but even that would be pretty marginal [in impact].”

The government announced electricity and rental subsidies in the recent budget, and Conisbee says those will lower inflation, despite people having a bit more money in their pockets. 

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“The tax cuts are not exactly getting you a deposit, but it will take the edge off of some of the worst bills that people are struggling with,” she says.

Domain chief of research and economics Dr Nicola Powell says the cut to income tax will not “shift the dial on the housing market,” but instead it could improve the borrowing capacity of many buyers.

“Some buyers are really struggling with borrowing capacity at the moment, so this is going to give them a boost,” she says. “For some, that might be the difference of one bid at the auction that will tip them over the edge to win that property.”

Since the Reserve Bank’s aggressive cash rate hikes, the number of new owner-occupier loan commitments has dropped significantly, according to the Bureau of Statistics’ lending indicators. 

“The income tax cut is going to create the difference for those in the lower end where they’re on a lower income and borrowing capacity,” Powell says. “A reduction in borrowing capacity has been a struggle for some trying to get into the property market.

“However, for the upper end of the market [the tax cut] is not going to make any difference at all.” 

Tax cuts have to be very targeted to have a major impact on the property market, Conisbee says.

“You need to look at things like land tax, increasing negative gearing or cutting stamp duty,” she says. “Those are the things that can really move the dial.”

Powell adds that people are now more cautious about their spending compared to the past, so having an additional $1888 won’t shift consumer sentiment. 

“It will be a welcome relief on your everyday purchases and just helping more Australians with their weekly budgets,” she says. 

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