How Anthony Albanese's phase three tax cut will make it even harder for young Australians to buy a home

Property experts fear Labour's controversial phase three tax cuts could stop young people from saving enough to buy a home during a cost-of-living crisis.

Prime Minister Anthony Albanese last week reversed his support for his Liberal predecessor Scott Morrison's tax cuts, which were due to come into effect on July 1.

Mr Albanese will no longer abolish the 37 per cent tax bracket, just as higher interest rates erode household savings.

This means that those who have low six-figure salaries now will have to pay much more in taxes in the coming years if they earn more than $135,000.

CoreLogic's head of residential research in Australia, Eliza Owen, argued that the tax bands and higher interest rates would prevent potential borrowers from having enough mortgage deposits to buy a home in 2024.

“Housing demand growth is expected to slow due to higher cost-of-living pressures, higher tax receipts from the tax hike and high interest rates,” she said.

'This means that less savings need to be spent on purchasing homes. The latest national accounts data from the ABS shows that the household savings rate has fallen to its lowest level since 2007.”

Household savings as a percentage of income fell to just 1.1 per cent in the September quarter, the lowest level since 2007, Australian Bureau of Statistics national accounts data showed.

Australian property prices rose 8.1 percent last year, even as the Reserve Bank raised interest rates to a 12-year high of 4.35 percent.

But a CoreLogic survey of 1,400 real estate industry professionals found that only 13 percent expect an increase of more than 5 percent by 2024.

“Consumer confidence remained very low in early 2024, which may also indicate that households are reluctant to make expensive decisions with high liabilities,” Owen said.

Labor in government and the Opposition had pledged to maintain the former Coalition government's phase three tax cut plan, with many hoping more tax relief would help Australians cope with the Reserve Bank's 13 rate hikes since May 2022.

Under existing tax rules, the 37 percent marginal tax rate kicks in when someone starts earning $120,000.

Former Liberal Prime Minister Scott Morrison's government, with Labor backing, had introduced new laws in 2019 that would ensure a 30 percent marginal tax bracket would apply from July 1, 2024 to those earning between $45,000 and $200,000.

But last week Labor announced it would keep the 37 percent tax bracket for those earning $135,000 to $190,000, so Australia will continue to have five tax brackets instead of four.

Above that level, a marginal tax rate of 45 percent would be triggered.

Home buyers are faced with steep rates

The Reserve Bank's most aggressive pace of rate hikes since 1989 also means banks can no longer lend as much as before.

The Australian Prudential Regulation Authority, the banking regulator, requires lenders to assess a potential borrower's ability to cope with a three percentage point increase in variable mortgage rates.

The RBA has raised rates by 4.25 percentage points in 18 months, with the last increase coming in November.

Monthly variable mortgage repayments have increased by 69 percent since May 2022.

When the RBA cash rate was at a record low 0.1 per cent, banks could lend more than six times what a borrower earned before tax.

But the thirteen rate hikes since then have reduced that debt-to-income ratio to just 4.8.

Someone with an above-average salary of $120,000 can now borrow $576,000, compared to $720,000 two years ago.

This person could be buying a $720,000 house right now, but this would be the case require a 20 percent mortgage down payment of $144,000 to avoid expensive mortgage insurance from the lender.

The home value would be slightly below Adelaide's average house price of $763,606.

How much more tax will Australians pay?

An H&R Block analysis found that those earning $120,000 would actually pay $804 less per year in taxes under Labor's plan, getting back $2,679 instead of $1,875.

That's because Labor is proposing to cut the marginal tax rate from 19 percent to 16 percent for those earning $18,200 to $45,000.

An Australian earning $140,000 would pay $454 less in tax under Labor, compared to the Coalition plan, and get a tax cut of $3,729 instead of $3,275.

But those with an income of $160,000 would end up paying $946 more a year in tax under Labor, and get a tax cut of $3,729 instead of $4,675.

Mark Chapman, tax communications director at H&R Block, said Labour's plan to target tax relief at people on low and middle incomes would help more people pay off their mortgages already.

'The heavy emphasis of the original package on the highest income earners is difficult to justify in the current economic climate, and with the cost of living having a disproportionate impact on low and middle income taxpayers, this will provide some much needed additional funding deliver the bags. of hardworking families to pay mortgages, food and fuel bills,” he said.