The Budget Leaks Suggest Higher House Prices to Come

There’s no shortage of bears on Aussie property.

Prices in Melbourne and Sydney are tipped to fall by as much as 4%. That’s according to the last week’s report from property firm SQM Research.

But they’re just the latest in a long line of experts tipping house prices to fall.

Property analysts at CoreLogic predict double digit falls over the next couple of years. As much as 10% to 15% in Sydney, and 5% to 10% in Melbourne.

Those bearish views follow on the heels of research released last month by Capital Economics. They forecast years of decline for Aussie house prices.

It seems there’s plenty of people who can tell you property will fall.

But few, if any, will give you the reasons why house prices can go higher.

We can get a few clues from some of the Federal budget leaks so far.

Tax cuts mean higher land prices and rents

In tonight’s Budget the treasurer Scott Morrison has flagged personal income tax cuts.

It got a lot of media attention, which caused the treasurer to qualify the tax cuts as modest.

On the surface it seems like a windfall for workers. But will it be? Could it be we’re overlooking something?

You just have to know, for those renting, tax cuts simply mean they can afford to pay a little more in rent. Any personal tax cut only increases the borrowing capacity of those purchasing a house. House prices will rise as a consequence.

The direct benefits of personal tax cuts are frittered away in higher land prices and rents.

Only workers who already own will feel the benefits. You must understand this process, it will make you a better investor. Land price takes all the gains, which is why you must own some.

Immigration is good for house prices

Another leak from tonight’s budget is of a big infrastructure spend.

In the run up to tonight’s budget, the coalition has touted it will spend $24.5 billion in commitments around Australia.

New motorways and freeway links. Airport rail links, major road upgrades, new rail connections and on it goes. That’s on top of the $75 billion already earmarked for major road and rail projects over the next ten years.

Better infrastructure, wherever it goes in, will cause house prices (land) to rise. Again, you must come to understand this process. When you do, it makes you a better investor.

The concern with infrastructure is that it’s not keeping pace with growth in our cities. That’s caused some to talk about winding back current levels of migration.

So far the government has resisted calls to cut the immigration rate.

Under the current intake program, our population is expected surge to over 36 million by 2050. We’re growing by about 350,000 a year. More than half of that is due to immigration.

Since 2005, net overseas migration has averaged 200,000 people per year. That’s well up from 100,000 in the previous decade.

Immigration is good for the country, but understand, it’s also very good for land price.

Tax cuts, infrastructure spending and immigration. There you have three reasons why house prices can go higher.

People say housing simply can’t go higher, it’s unaffordable. But they’ve been saying that for the last five years now.

Land is fixed in supply around the amenities and infrastructure we all enjoy. It’s also highly sought after as a place to live and for investment. With a growing population, land fixed in supply, will always sell at the red line the economy can afford.

Housing has always been unaffordable.

And as the land price continues to rise, the speculation only gets more intense. We’re still in the first half of the real estate cycle. If history is to repeat itself, it’s in the second half of the cycle that land price really takes off.

I know it doesn’t seem to make any sense, but house prices can go higher. A lot higher.

Just don’t be buying at a real estate cycle top. You just have to know the real estate cycle is all.

To find out more about that and to time all your investments to your advantage, then go here.

Terence Duffy,

Lead researcher,
Cycles, Trends and Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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