So, the election is done and dusted and we now have a Labor Federal Government…. well, that was the expected lead in to this update when we drafted it last week.

The largely unexpected outcome over the weekend now requires a bit of a reassessment. Coming into the election the Coalition had relied on its economic record and an attack on Labor for proposing tax increases. Apart from the budget tax plan, much of which would not be delivered for years and infrastructure commitments, it has not made many headline promises in the housing sector.

With Labor’s stated intention to implement changes to the negative gearing and the CGT allowance we were gearing up for some interesting changes to the development landscape.

In response, the Coalition’s policy was something of a non-event, throwing its hat in the ring with a low-cost loan scheme for up to 10,000 eligible buyers per annum. With first home buyer loan approvals at a 6 year high of around 100,000 in the past 12 months this may well help to kick start some increased building but it’s unlikely to have a massive impact on the sector. In our view this is a small positive but unlikely to be material in the scheme of things.

The Morrison scheme enables first-home buyers who save at least a 5% deposit to take advantage of the guarantee rather than having to save 20% typically required to qualify for funding.

The proposal involves the Coalition investing some $25m in the National Housing Finance and Investment Corporation who will then partner with private lenders to deliver the scheme commencing on January 1 2020. It will be available to first home buyers earning up to A$125,000 p.a. or $200,000 for couples and the value of homes eligible under the scheme is to be assessed on a regional basis to take account of varying markets.

Dan Holden of HoldenCAPITAL. Source: HoldenCAPITAL

Lenders would undertake their normal credit checks to ensure that borrowers can meet their repayments but would benefit from a lower interest rate and not being required to pay the lenders mortgage insurance. The benefits are good for as long as the borrowers maintain the loan.

It now remains to be seen just how far the coalition actually takes the plan. Our view is that this proposal will do little to invigorate the stalled Sydney and Melbourne markets, which are the engine room of the sector. These two markets will continue to contract, while growth in the Brisbane and Perth markets will continue to be constrained and depressed respectively, as they rely on Melbournians and Sydneysiders taking advantage of the significant affordability gap, to relocate to Queensland and WA.

It’s also unlikely that the scheme will have much impact on the regional markets which remain under extreme pressure as ongoing population centralisation continues to impact their economies.

More importantly, the coalition win combined with the removal of the prospect of negative gearing changes is likely to have a positive but subdued impact on markets generally. Our view is the win will improve economic sentiment and that to some extent it will be business as usual for the smart developers who understand that there is always an underlying demand in most market sectors and that by doing their homework there are good returns to be made.

The key to that proposition is doing your homework and while understanding all the factors at play sounds simple, it requires appropriate dedication and patience and sometimes means sitting on your hands until all the pieces fall into place.

This is further reflected in the fact that funding for well-conceived projects is almost always readily available with lenders/investors looking for diversity from the constant fluctuations of the stock market, and residential housing continues to attract as a fundamentally stable asset class despite the bubble rhetoric of the press.

The one thing we can count on is that the market inevitably finds its own level and, in this instance, we are expecting relatively calm seas going forward, allowing underlying demand through natural growth to create opportunities. The challenge for developers is to correctly read the specific demands and cutting your cloth accordingly.

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