Will Tax Cuts Impact The Eastern Suburbs Property Market?

Many eastern suburbs residents received a tax cut on 1 July.

How will this impact property prices?

Most taxpayers effectively received a pay rise on 1 July, with the introduction of stage three tax cuts. We explore what impact this is likely to have on the property market here in Sydney’s east.

How do the stage three tax cuts work?

The stage three tax cuts provide taxpayers with up to $4,529 extra a year.

They did this by reducing two lower tax rates: the 19% tax rate previously payable at $18,200 is now 16%, and the 32.5% tax rate previously payable at $45,000 is now 30%. They also pushed the 37% tax rate from $120,000 to $135,000, and the 45% tax rate from $180,000 to $190,000.

This means anyone earning more than $18,200 will pay less tax, effectively giving them more to spend. However, the biggest difference will be felt by high income earners, with anyone earning $190,000 or above receiving an extra $4,529 every year in their pocket.

How can this possibly impact the property market?

When people have more money to spend it also gives them more that they can devote to buying a property. But it also means they’ll have increased borrowing capacity too.

After all, when banks consider how much to lend, income is one of the most vital factors. Obviously, the more you earn, the more chance you’ll have to meet higher mortgage payments.

While the exact amount of any extra borrowing power will depend on how much a buyer – or buyers – earn, how many dependents they support, and their existing expenses, debts and debt, a couple comprising two relatively high income earners may find they can now borrow approximately $50,000 more (*see calculations below).

As borrowing power can be one factor influencing Sydney house prices, we believe this could give the housing market another small boost. This could be especially true given borrowing capacities power has declined by as much as 30% since interest rates started rising in early 2022.

Potential headwinds

But while tax breaks put more money in our pockets, there are some potential headwinds that could nullify any potential gains. The most obvious of these is interest rates.

If the RBA does choose to put rates up once again, it will immediately curtail the impact tax breaks will have on borrowing power.

Ironically, many believe another interest rate hike is actually more likely now given that the RBA is using them in an attempt to control inflation, and tax cuts have an inflationary effect. So, for many homeowners or buyers it could be a matter of receiving money in one hand and giving it straight back with the other.

There are other potential scenarios too, such as a general economic slowdown or weaker consumer confidence. Some economists argue there is a 50% chance of Australia entering a recession if the RBA does raise rates again.

What impact have previous tax breaks had on property prices?

These tax cuts have been a long time coming. In fact, they were first introduced into parliament by the Turnbull government back in 2018, as part of a three stage plan. This was changed in 2019 by the Morrison government, and altered once again by the Albanese government early this year.

The first two stages of tax cuts – which came into effect in 2018 and 2022 – were aimed at low-to-middle income earners, although – by increasing some tax thresholds (most notably lifting the 32.5% from $90,000 to $120,000) they did provide some benefit to high income earners, too.

However, these are the first tax breaks that have disproportionately favoured higher income earners in some time.

Back in the 2004-2005 budget, the Howard government lifted the top tax bracket (47%) from $62,500 to $80,000 (incredible to think of now) and the second top bracket (42%) from $52,000 to $62,500, over two financial years.

Interestingly, Sydney’s property market remained sluggish in the face of these tax cuts and the citywide median house price actually fell -5.1% in 2005. Then they grew by just 0.5% in 2006. However, prices in more affluent suburbs performed much better than average, with Bellevue Hill recording double-digit growth that year. One reason for this is likely to be that tax cuts were countered by interest rate rises, with the official cash rate rising from 5.25% in June 2004 to 7.25% by July 2008.

What impact are we seeing in the market right now?

In just over a month since the tax cuts were introduced, it’s difficult to tell exactly what effect they’ve had. The market remains relatively stable, with low stock levels persisting.

However, given the eastern suburbs is generally an affluent area – and many locals will be feeling the full effects of these tax cuts – ours should be one of the areas that benefits most.

Want more?

If you’re interested in buying or selling property in Sydney’s Eastern suburbs, get in touch.

* Calculations: These figures are based on a hypothetical scenario using NAB’s Borrowing Power calculator, involving a couple with two dependents, $6,000/month living expenses outside the family home and no other debt. The interest rate was set to the default (6.84%).