Holidays Are Over & Now We Are in Election Mode!

by Dominique Schuh

Nearly everyone is back from holidays now and as expected, that means Australia is basically in election mode. And while more details will no doubt emerge over the coming months, there are a few issues that are becoming increasingly clear from both major parties:

1. Housing will likely play a big role in the final election promises of both parties. Housing prices in most capital cities have been declining for over 15 months now, and the tightening credit may see the fall continue. For years, as housing prices boomed, our politicians were wringing their hands over what to do about housing affordability. With little room to push borrowing costs lower, the only way to truly make housing more affordable is to make it cheaper. As prices fall, it's likely to spur demand from first home buyers who have been locked out of the market for years. Ultimately, that will put a floor under the market. If the housing prices continue to drop it may also mean the Labor thinks twice about its planned changes to negative gearing, as this investment strategy would naturally become less attractive if property values are not growing.

2. Possible Negative Gearing changes.
This proposed policy was announced some time ago by Labor apparently in an attempt to slow down the property market – something the banking credit slowdown has probably already achieved. Labor's proposed policy is to limit negative gearing to new homes and to also cut the capital gains tax discount from 50 per cent to 25 per cent. Suffice to say, the building industry is not in favour of this proposed policy.

3. Franking credits.
We've previously spent some time discussing the possible changes here, but this will certainly impact the self-funded retiree population more severely, and even more so those with high exposure to Australian shares. With certain sectors of the population, this proposed policy is widely unpopular, but it appears as though little would be changed to the policy if Labor is elected.

4. Wages.
Up to now, wages growth may have been the slowest on record but unemployment is low, inflation is barely registering and the economy has been growing at an impressive clip. That's not all. Despite coming through the financial crisis in better shape than any other developed nation, we've been clocking up budget deficits ever since. That, however, is about to change as we do legitimately appear to be getting closer to a budget surplus. If the superannuation guarantee is immediately lifted to 12 per cent, as proposed under Labor, this may increase pressure on small businesses quite quickly, and actually, mean wage growth stays low for a much longer time to come.

The next few months will be an interesting time ahead for Australia, but no doubt the fundamentals of wealth creation remain as strong as ever: Spend less than what you earn, try to minimize your tax where possible, and invest what's left over for the long term.