Federal Budget 2023-24: Implications for Australia’s Housing Sector

This year’s Federal Budget recognises that housing is a key component of the current
cost-of-living pressures facing Australian households. The Federal Budget seeks to address these housing cost pressures with a range of small but carefully targeted supports.

Housing support measures in this year’s Budget will provide:

1. Immediate Rental Assistance increases to over 1 million low-income renters.
2. Wider eligibility criteria for 50,000 First Home Buyer Guarantee places.
3. More funding for NHFIC loans to build 7,000 social and community housing dwellings.
4. Tax incentives for private-sector build-to-rent projects which could add up to 150,000 rental dwellings over the next decade.
5. Data-driven planning and transaction solutions that will improve residential and related planning processes, property transactions and local housing supply capabilities.

These provide a small – but very welcome – degree of immediate cost relief to recipients, with some potential to increase affordable housing supply for renters in the medium term, through new social housing and build-to-rent projects.

Over the longer term, the Budget confirms the risk of an escalation in Australia’s housing availability and affordability crisis. Housing supply is unlikely to keep up with demand and is set to fall further behind, at least until housing supply volumes can pick up again sometime after 2025. Treasury forecasts confirm that housing demand pressures are growing due to strong population growth, driven by a post-pandemic surge in net migration, together with an underlying trend toward smaller households. On the supply side, Treasury expects dwelling investment volumes to fall in each of the next three years, following the pandemic-related building boom and in response to rising interest rates and building costs.

This difficult outlook for the housing sector is in line with National Housing Finance and Investment Corporation forecasts for net dwelling growth to slow down over the next three years, even as household formation picks up. The NHFIC estimated the impending shortfall in dwelling growth would add another 106,400 homes to Australia’s current ‘supply gap’ by 2027. It is also in line with a more widespread deceleration in the economy over the forecast period, as local activity slows from the post-pandemic consumption boom and slows in response to high inflation and high interest rates.

Over 1 million Commonwealth Rent Assistance recipients will benefit from a 15% increase in the maximum rental assistance payable, from 1 July 2023. This increase in rent assistance will be in addition to separate increases to welfare payments for various categories of recipients. The total cost to Government of this increase will amount to $2.7 billion over 5 years from 2022–23..

For individual recipients, this measure will lift the maximum Rent Assistance payment by around $31 per fortnight. This is the largest Rent Assistance increase in 30 years, but it comes at a time of very high rental inflation. For many households – and particularly for those who have moved recently – it will not cover recent increases in rents. Advertised rent increases have averaged 13% nationally for capital city houses and 22% for capital city units over the year to March 2023 (Domain Rent Report).

Increased Support for Commonwealth Rent Assistance Recipients

The Government extended the eligibility criteria for the First Home Buyer Guarantee (FHBG) program to include any two joint borrowers from a range of household and family members, as well as all permanent residents and former home-owners who have not owned a home for 10 years or more.

This support is not a grant. Instead, the Government guarantees up to 15% of the mortgage, but the recipient is still liable to pay the full loan amount and must meet other lending criteria. The benefits for recipients are (a) being able to purchase with a very small deposit of 5% and (b) avoiding the additional cost of mortgage insurance that is required by banks on loans with small deposits.

The annual quota of 50,000 FHBG places is maintained. It includes 35,000 FHBG places, 10,000 Regional FHBG places and 5,000 Family Home Guarantee places.

These changes to eligibility may broaden the diversity of participation – and possibly improve the uptake rate – but there is no increase to the maximum number of buyers who can receive a guarantee for their home purchase. This program will assist the individuals who qualify, but it is not limited to newly constructed homes and is unlikely to add to net housing supply.

The NHFIC’s total liability cap will rise by $2bn from $5.5 bn to $7.5 bn from 1 July 2023. This will enable the NHFIC to immediately provide a greater pool of low-cost and long-term loans to community housing providers for new social and community housing projects. This measure was announced by the Housing Minister the Hon Julie Collins MP in April and confirmed in this Budget.

This increase will directly increase the supply of social and community housing across Australia. It is expected to support an additional 7,000 new social and affordable dwellings over the budget outlook period (the next four years).

This measure will complement the affordable housing supply initiatives in the National Housing Accord and Housing Affordability Future Fund that were announced last October but are yet to pass the Senate. PEXA urges the Senate to pass this Bill, so that urgently needed federal funding can begin to flow into new social and affordable housing projects.

Further amendments to the Housing Accord and Future Fund in this Budget include:

• Amending NHFIC’s Investment Mandate to require NHFIC to take reasonable steps to allocate a minimum of 1,200 homes to be delivered in each state and territory within 5 years of the Housing Australia Future Fund commencing.
• Providing an additional $2.7 million in 2023–24 to the Treasury to support the delivery of priority housing measures. This will include, for example, enabling up to three additional members to be appointed to the National Housing Supply and Affordability Council, in order to provide a greater breadth of expertise to national housing policy.

Under the auspices of the Housing Accord, Federal, State and Territory Planning Ministers will work with the Australian Local Government Association to propose further measures to increase housing supply and affordability. These proposals will be presented National Cabinet in the next 6 months.

For homelessness services that are provided by State and Territory Governments through the National Housing and Homelessness Agreement, the Federal Government will provide an additional $67.5 million in 2023 24 only. This funding will support these homelessness services in 2023-24, which is being extended for one year while negotiations for a new Agreement are underway with states and territories. The current National Housing and Homelessness Agreement provides over $1.6 billion annually to states and territories, so this single-year boost amounts to a nominal increase of 4.2%, against a background inflation rate of 7%.

Two taxation changes are intended to promote Australia’s infant build-to-rent (BTR) sector, in order to increase the supply of rental dwellings:

• Increase the depreciation rate from 2.5% to 4% per year for eligible new BTR projects that commence construction after 9 May 2023; and
• Reduce the withholding tax rate for eligible fund payments from managed investment trusts to foreign residents on income from newly constructed residential build-to-rent properties from 30 to 15% after 1 July 2024, subject to further consultations on eligibility.

These tax concessions will apply to BTR projects consisting of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold individually and tenants must be offered a lease term of at least 3 years for each dwelling.

These tax changes are estimated to be worth $10m in 2025-26 and $20m in 2026-27. This relatively low cost suggests the Government is not expecting a large take-up for this program. The BTR sector is still in the early stages of development in Australia but is long-established in comparable international markets. Encouraging stronger BTR growth in Australia is wise.

The Property Council of Australia has previously estimated that “levelling the withholding tax rate [on BTR projects] may create an extra 150,000 homes over the next decade”.

The Budget documents note that further consultation will be undertaken on implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time that dwellings must be retained under single ownership.

For existing housing, a new Household Energy Upgrades Fund will support home upgrades that reduce energy usage. The Fund will be established with $1.0 billion and will provide more than 110,000 low-interest loans through the Clean Energy Finance Corporation for energy saving home upgrades, in partnership with private lenders. The Fund will also provide $300 million for energy-efficient upgrades to 60,000 social housing properties, in partnership with states and territories.

The Budget notes that data and digital technologies are one of the four key structural shifts shaping Australia’s economic outlook. In response to this structural shift, the Budget includes a range of data-related measures that have strong potential to improve residential and related planning processes, property transactions and local housing supply capabilities. PEXA as a critical data insights business is well positioned to assist Government on these critical data measures.

•  Empowering community-led change with data. The Government is increasing funding to the Stronger Places, Stronger People initiative by $64 million to support
  place-based partnerships in 10 communities and shared decision-making solutions in six of these communities. This will include $16.4 million to build community data capabilities and assets for long-term planning and decision-making.
• Consumer Data Right (CDR). The Government is investing $88 million to support the CDR in banking, energy and the non‑bank lending sectors, progress the design of action initiation and undertake a cyber security uplift. This provides Australian consumers, both individuals and small businesses, with a more secure way to safely share data online. The CDR gives consumers an enhanced ability to control and benefit from the sharing of their data. The CDR will empower consumers to make better informed decisions and find better prices from everyday utilities to the most competitive home loans for their circumstances.
• Expanding Digital ID. Australia’s identity system is critical national infrastructure that enables a wide range of services. This system includes solutions such as Digital ID, which can provide a secure, voluntary and convenient way to verify a person’s identity online, while minimising collection of their personal information. The Government is investing $26.9 million in 2023–24 to sustain and develop the next stage of the Digital ID program. This will help increase consumer protection, reduce the chances of fraud occurring, improve efficiency, and make it easier for people to access services online.
• Small business cyber security program. The Budget provides $23.4 million to support small businesses to build resilience to cyber threats. Small and medium businesses are the target of 60 per cent of cybercrime, which is now costing Australia more than $33.0 billion in reported losses per year. The Cyber Wardens program will address this vulnerability by equipping small businesses with the foundational skills they need to improve cyber safety. This program will be delivered by the Council of Small Business Organisations Australia and will support more than 15,000 small businesses.
• Investing in the digital future. Data and digital transformation continue to present new opportunities for governments, businesses, communities, and households to change the way Australians live and work. This Budget ensures Australians are at the forefront of the digital economy while protecting them from the potential risks of the digital transformation. The Government is investing more than $2.0 billion in 2023–24 in digital and ICT to deliver easy, accessible, and secure services for people and businesses.

Looking ahead, the Government’s own forecasts indicate that Australia’s housing availability and affordability problems are likely to worsen over the next few years, in response to growing demand pressures and supply-side constraints.

Demand for housing

The Budget confirms that Australia is currently experiencing a post-pandemic population boom. Population growth is accelerating to 2.0% in 2022–23 and 1.7% in 2023–24 (up from an estimated 1.4% for those years in last October’s Budget). This is entirely driven by a temporary post-pandemic surge in net overseas migration, which is forecast to reach 400,000 in 2022–23 and 315,000 in 2023–24. This population boom is expected to be temporary, with migration forecast to return to long-term averages of around 235,00 per year from 2024–25. The structure of this migration-led growth means that almost all this population surge consists of working-age adults, so it adds directly and immediately to demand for housing to a greater degree than population growth arising from birth rates.

Treasury notes that Australia is most definitely experiencing a catch-up surge, and not a step-change in migration numbers. It also notes that even with this stronger near term outlook, “total net overseas migration is not expected to catch up to the level forecast prior to the pandemic until 2029–30”. That is, migration and population levels will still be lower than they would have been if the pandemic had not occurred.

Most inbound migrants over the forecast period will be temporary residency visa holders. For the 2023–24 permanent Migration Program, the Government will return the planning level to the longer term level of 190,000 places and will allocate 137,100 places (around 70 per cent) to the Skill stream, helping address Australia’s longer term skill needs.

Long-term changes in Australian household structures are also adding to housing demand. Our ageing population and rising average incomes have contributed to a long-term trend toward smaller household sizes, including a greater proportion of single-person households. This was compounded during the pandemic as people sought more space to live and work. This recent drop in household size (or density) has not yet unwound and may represent a structural, permanent shift in housing demand. It means we require more homes for the same number of people; the RBA estimated that the drop in household size during 2020 and 2021 added around 120,000 households to national housing demand and has not been reversed.

This latest demand outlook is in line with RBA Governor Lowe’s recent observation that:

“Population growth … will soon be around 2 per cent, which would be close to the peak reached during the resources boom. In contrast, … It takes a long time for housing supply to respond fully to shifts in population growth – in the previous episode of strong population growth, it took around five years.  … the balance between demand and supply in the housing market will result in rents inflation being quite high for a while. “ (RBA Governor Lowe, “Monetary Policy, Demand and Supply”, 5 April 2023).

Supply of housing

The Budget papers indicate that a significant pipeline of dwelling investment projects is still under way in 2023, as the sector works through the tail end of recent strong demand, supply chain delays and weather disruptions.

Looking ahead however, as this backlog of work is completed and the impact of earlier interest rate hikes and house price declines flow through the system, dwelling building activity is expected to contract by 3½% in 2023–24 and a further 1.5% in 2024–25. Treasury warns that even these negative forecasts for dwelling investment may prove optimistic, noting that: “There is some downside risk to the near term outlook associated with the weak financial position of a number of builders, due to elevated construction and financing costs. However, as capacity constraints ease, these pressures are expected to moderate”.

A strong recovery in dwelling investment is expected after 2025, in response to high net overseas migration, strong rental yields, (expected) lower interest rates and a reduction in building input costs, particularly in medium and high-density housing. Government initiatives to boost supply (outlined above) will also assist in supporting investment in new dwellings.

This outlook is in line with NHFIC’s annual housing supply forecasts published in early April. The NHFIC estimates that net additions to national housing stock will average 138,000 per year over the three years to 2026, down from around 150,000 in 2022. The annual increase in housing stock will be lower than annual net additions to demand (new household numbers) until 2029. And it will be lower than the Housing Accord target of 200,000 new dwellings per year, until 2033 at least (the Housing Accord stretch target is 1 million new homes over 5 years from 2024, or 200,000 per year).

The NHFIC says Australia’s existing housing ‘supply gap’ will grow by a further 106,400 homes by 2027, and then moderate to a shortfall of 79,300 homes by 2033. This national housing ‘supply gap’ seems unlikely to be wholly filled in this decade (NHFIC, State of the Nation’s Housing 2022-23, April 2023).

It is therefore crucial that housing support measures focus firmly on growing adequate supply.

Australian economy – detailed forecasts(a)

a)    Percentage change on preceding year unless otherwise indicated.

b)    Excluding second‑hand asset sales between the public and private sector.

c)    Percentage point contribution to growth in GDP.

d)    Through‑the‑year growth rate to the June quarter.

e)    Seasonally adjusted rate for the June quarter.

f)     Key commodities are assumed to decline from elevated levels over four quarters to the end of the March quarter of 2024: the iron ore spot price is assumed to decline from a March quarter 2023 average of US$117 to US$60/tonne; the metallurgical coal spot price declines from US$342 to US$140/tonne; the thermal coal spot price declines from US$260 to US$70/tonne; and the LNG spot price declines from US$16 to US$10/mmBtu. All bulk prices are in free‑on‑board (FOB) terms.

g)    Net overseas migration is forecast to continue at 260,000 in 2025–26 and 2026–27.

Note: The forecasts for the domestic economy are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level – a trade‑weighted index of around 60 and a $US exchange rate of around 67 US cents. Interest rates are informed by the Bloomberg survey of market economists. World oil prices (Malaysian Tapis) are assumed to remain around US$87/barrel. Population growth is forecast to be 2.0 per cent in 2022–23, 1.7 per cent in 2023–24 and 1.5 per cent in 2024–25.

Source: ABS Australian National Accounts: National Income, Expenditure and Product; Balance of Payments and International Investment Position, Australia; National state and territory population; Labour Force Survey, Australia; Wage Price Index, Australia; Consumer Price Index, Australia; unpublished ABS data and Treasury.

For further enquiries and details about this budget summary, please contact research@pexa.com.au

Danielle Wood, CEO Grattan Institute – You can view the Grattan Institute’s commentary on the Federal Budget here.

Alan Oster, Group Chief Economist NAB – You can view NAB’s commentary on the Federal Budget here.