"Investors dislike change, and if you fit this income and age bracket then other investments like property start to look very attractive."
Super change to encourage property investment
In the days following the federal budget earlier this month the main debate appeared to be driven by political infighting. However, as the headlines start to settle I would like to talk about how changes to super contributions and taxes might be expected to impact the appetite for property among private investors.
The budget also anticipated further cuts to interest rates, and such an outcome would further add to the appeal of property investment. But I will return to interest rates shortly.
First up the history of concessional contributions is mixed, and the use of the federal budget to vary this area of policy is not uncommon.
One of the most notable policies meant that between May 10, 2006 and June 30, 2007, you could contribute up to $1 million of non-concessional contributions to your super fund. This figure looks very generous, as the current budget introduces a cap on eligible contributions for the next two years. If you are 50-plus the cap will be reduced from $50,000 to $25,000.
And while a $1 million contribution may appear overly generous for anyone on an average income, the cap has been on a downward trend from $100,000 in 2007 and 2008 to $50,000 over the 3 years 2009-2011 and now to $25,000 in 2012.
It had generally been anticipated that with some restrictions on the size of individual super balances, the $50,000 cap, which has been in place since 2009, would be retained. Now that cap has been delayed for two years. The other change is that taxpayers with an income of $300,000 and more will have to pay 30% on super contributions up from the current 15%. They do retain the 15% rate up to $25,000.
While it is true that the changes only impact high-income brackets I feel that these changes feed the perception that superannuation policy is an area where policy is more or less forever changing.
Investors dislike change, and if you fit this income and age bracket then other investments like property start to look very attractive. Even more so when the impact of negative gearing is factored in, plus there are the advantages flowing from current low stock levels, low vacancy rates and when it comes to creating wealth, property still looks good in terms of potential capital gain.
For all of these reasons, if your have extra cash available that might have gone to super, then the property alternative looks attractive. There was at least a general indication that in 2007, with $1 million cap about to end that some investors left property so now the reverse trend should not be that surprising.
If we now take a general look at the potential impact on interest rates both the federal government and opposition appear to have a steadfast commitment to cut spending. The risk might be that a return to surplus will dampen economic growth and so further fuel the need for more cuts to interest rates.
If there is slower growth where might this leave the housing industry?
There was no direct stimulus in the budget and so possibly any steps to boost a pick-up in construction will have to rest with the states. However, states some face their own budget deficits and current incentives are about to expire.
It appears that a boost to housing construction may not be on the horizon. However the move back to a budget surplus appears to be the right message given current international settings and this should be a positive for investors.
Peter Chittenden is managing director for residential of Colliers International