Shellabears Blog

Markets, Momentum & the Federal Budget

I’ve intentionally held back from sending commentary on the market over the past couple of months. The reason is fairly simple – the core fundamentals locally haven’t materially changed.

We are still operating in a market defined by low stock levels, strong underlying demand, and ongoing construction constraints. At the same time, broader factors including geopolitical uncertainty, persistent global inflation, and the Federal Budget have all weighed on confidence and decision making.

Start at the Easy End

Supply Remains Tight

There is still a significant backlog of people wanting to downsize, however the product simply isn’t available for them to move into. That lack of movement creates a chain reaction throughout the market, with those looking to upsize also unable to transact due to the shortage of quality stock.

Interest Rates Are Impacting Borrowing Capacity

Every 0.25% increase in the RBA cash rate reduces borrowing capacity materially – roughly $20,000 at the lower end of the market and closer to $50,000 at the premium end.

Importantly, sentiment has become increasingly sensitive not just to actual rate rises, but to expectations around future movements.

Construction Constraints Continue

Replacement costs remain elevated, which continues to support the value of existing properties even as affordability becomes more stretched.

In many instances, buyers are still finding it cheaper, faster, and less risky to purchase established homes rather than build new.

Inflation Remains Sticky

Global inflation has moderated from peak levels, however it is still forecast to remain elevated for some time. That continues to influence household confidence, investment decisions, and broader market psychology.

NOW THE MORE NUANCED END — THE FEDERAL BUDGET

In reality, markets tend to price in uncertainty first, then adjust later once the finer details become clearer. That hesitation is one of the reasons we’ve seen a lag in new stock coming to market.

Negative Gearing

Banks are already beginning to adjust how they assess investor borrowing, incorporating anticipated policy changes into serviceability models.

What this is likely to do is shift investor focus more heavily toward new properties, with existing stock effectively becoming grandfathered.

In established coastal suburbs, that dynamic may actually constrain supply further and, in my view, have a relatively limited impact on prices overall.

Capital Gains Tax (CGT)

Speak to most accountants and they’ll tell you the same thing — tax is the structure of an investment, not the reason for making one.

The focus should always be on maximising after-tax returns rather than simply minimising tax payable.

The “TINA” trade also continues to play a role here — “There Is No Alternative.” Investors still need somewhere to deploy capital that can generate long-term growth and income while outpacing inflation.

Even with tax settings under scrutiny, quality assets in tightly held locations continue to stack up well when compared to cash or lower-yielding alternatives.

Underpinning All of This

Population growth continues to provide a strong base level of demand, while the rental market remains extremely tight by historical standards.

Although rental growth has eased from recent peaks, vacancy rates are still sitting at levels that support ongoing investor demand.

This is particularly evident in well-located established homes, where yields remain relatively attractive when compared to replacement costs and holding expenses.

A Timely Example

If you are looking for a property that captures a bit of both worlds in the current environment, 23 Clive Road, Cottesloe sits in a particularly interesting position.

The property still qualifies for negative gearing benefits, has never been lived in, and is ready to move straight into or hold as an investment.

It’s a good example of the type of asset that continues to make sense in today’s market — where quality, location, and timing are doing most of the heavy lifting.

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