Looming tax cuts could add $47k to your home-buying budget

Homebuyers' borrowing power will be bolstered on the back of the upcoming stage three tax cuts, new analysis from PRD Real Estate has found.

A person earning $80,000 a year is set to pay $1,600 less in income tax, potentially allowing them to borrow an extra $18,000 to buy a property. 

Assuming they have a 20% deposit, their home buying budget could rise from around $492,000 to approximately $513,000 thanks to the cuts.

That could offer them greater access to property markets across the nation.

Though, the size of the impact might disappoint would-be buyers earning less than $100,000 a year.

A person earning $140,000 a year could see their borrowing power grow nearly $38,000, increasing their budget to $925,000 – an extra $47,000, assuming they have a 20% deposit.

A person's borrowing power is generally calculated by assessing their income, expenses, and capacity to meet home loan repayments.

Thus, a larger post-tax paycheque typically equals a greater ability to meet regular mortgage repayments.

Here's how the stage three tax cuts could impact your tax liability and borrowing power:

Annual earnings	Financial year 2023-24				Financial year 2024-25
	Income tax payable	Borrowing power	Purchase price (assuming 20% deposit)		Income tax payable	Borrowing power	Purchase price (assuming 20% deposit)
$70,000	$14,617	$360,670	$450,838		$13,188	$375,107	$468,884
$80,000	$18,067	$393,596	$491,994		$16,388	$410,558	$513,197
$90,000	$21,517	$459,769	$574,711		$19,588	$479,257	$599,072
$100,000	$24,967	$525,943	$657,428		$22,788	$547,957	$684,946
$120,000	$31,867	$615,136	$768,919		$29,188	$642,197	$802,747
$140,000	$39,667	$702,364	$877,955		$35,938	$740,037	$925,046

_{Source: borrowing power and purchase price data by PRD, income tax data from Australian Government estimations}

And when considered alongside other first home buyer grants and schemes, the tax cuts could bolster a buyer's budget even more.

"A first home buyer earning, say, $100,000, will see their borrowing power increase from around $525,000 to around $547,000," PRD chief economist Diaswati Mardiasmo told Your Mortgage.

"[Assuming a 20% deposit], their [potential] purchase price will increase from $657,000 to $685,000 [and] if you're living in Queensland and buying a new home, you could access a $30,000 first home buyer grant.

"This increases your purchase price to $715,000. So, beforehand you're looking at properties in mid-$600,000s, now you can look at those in the early-to-mid-$700,000s."

Dr Mardiasmo notes that buyers turning to Federal Government schemes such as the Home Guarantee Scheme could be in an even better position, as they might only need to put down a 2% or 5% deposit.

Housing pool to deepen for buyers on the back of tax cuts

Of course, with higher borrowing power, comes greater market accessibility.

Although housing markets around the country have tightened in recent years, locking out many potential buyers, these tax cuts could slightly improve their fortunes.

Currently, a borrower earning $70,000 can afford 13% of units in Sydney or a quarter of those in Melbourne.

After the tax cuts, they might access 14% of Sydney units and 27% of Melbourne units.

PRD stated the percentage change in housing market accessibility anticipated between this financial year and next was less than it previously expected.

However, buyers who are willing to be flexible about their choice of city could benefit significantly.

For example, a buyer earning $70,000 a year could afford nearly 50% of units in Perth in financial year 2024-25, greatly increasing their chances of homeownership.

While it might be assumed that an increase in borrowing capacity could drive a wave of demand for housing, thereby increasing prices, Dr Mardiasmo thinks that's unlikely.

"Because the increase in borrowing power is quite small and people tend to stay where they are, I don't believe it would create too high of a demand increase," she said.

"However, for certain suburbs where you have a high concentration of high income earners and a big undersupply in housing stock, then the chances of [the stage three tax cuts impacting prices] is much higher."

Higher earners to realise greater borrowing power benefits

Many Aussie earners could realise a notable increase in borrowing power from July, but those earning $100,000 or more will receive the lion's share of the benefits, Dr Mardiasmo notes.

"I think that, for those earning less than $100,000, there will definitely be some disappointment," she said.

"Especially as the tax cuts have been promised to assist with cost of living in a significant way, and we know that housing is a key issue at the moment.

"According to ABS data, about 2.6 million Aussies … earn more than $100,000 a year.

"So, in terms of increasing borrowing power for a property purchase, it will only have a significant impact on about 10% of the population."

Mortgage holders' pain tipped to ease next month amid tax cuts

If you're a current homeowner struggling to meet your home loan repayments, the upcoming tax cuts could provide you with some much-needed relief.

Recent findings from Roy Morgan reveal nearly 30% of mortgage holders were at risk of mortgage stress in May, an improvement from April.

This number could decrease further next month.

"The stage 3 income tax cuts are set to deliver significant financial relief to many Australians in the coming weeks as take home pay is boosted for a large majority of taxpayers - including many mortgage holders," Roy Morgan CEO Michele Levine said.

That could be the case even if the Reserve Bank of Australia (RBA) were to raise the cash rate once again next month.

Inflation data released on Wednesday surprised on the upside.

Experts, including CommBank economist Stephen Wu, have since suggested a rate hike could be on the table when the RBA board meets again in early August.

"Even if the RBA increases [the cash rate] … to 4.6% in August, the level of mortgage stress would still drop [to 29% of mortgage holders] considered 'At Risk' in the three months to August 2024," Ms Levine said.

_{Image by Danny Howe on Unsplash}