Housing slide to hit Victorian Budget

Back in April, RP Data released some fantastic research showing the increasing reliance of Australia’s state and local governments on property taxes.

Two charts from this research stood out. First, the below chart shows how aggregate property taxes rose from around $19 billion in 2000-01 to nearly $32 billion in 2009-10.

And the below chart shows how around 40% of this tax take has come from stamp duties:

The state with the largest stamp duty burden is Victoria, which charges nearly $21,000 of stamp duty and other transaction-related charges on a median priced Melbourne dwelling – 4.5% of the purchase price:

Purchase taxes and fees on a median priced Melbourne dwelling currently consume just over 30% of one year’s median household disposable income (calculated from the most recent ABS Household Income Survey and extrapolated by wages growth):

This means that an ordinary Melbourne family is currently required to sacrifice around 16 weeks of pay for the privilege of purchasing a typical home:

But the stamp duty situation in Victoria – so long the goose that laid the golden egg for the state government – is changing. First, Melbourne dwelling prices are falling, down 4.3% over the past 12 months:

Second, transactions volumes are well below the average level recorded over the past decade:

Falling dwelling prices combined with sluggish transactions volumes equates to significantly lower stamp duty receipts for the state government. Further, it appears that the number of property transfers and house price growth are highly correlated, with prices appearing to lead transactions volumes:

If this relationship between house prices and dwelling transfers continues, Victorian transaction volumes are headed lower still, which should put further pressure on stamp duty receipts.

The gravity of the situation was acknowledged by the Victorian Government last month when, in desperation, it introduced into parliament legislation that would reduce the deadline for paying stamp duty on property purchases from 90 to 30 days after settlement. The move is intended to bring forward around $100m of tax receipts into the current financial year and, in the process, assist the Government in maintaining a budget surplus.

An added concern for the Victorian Government is that the number of mortgages lodged has recently fallen behind the number of mortgages discharged:

On its own, this indicator suggests that Victorians are becoming increasingly averse to debt, which could place continued pressure on home prices and transaction volumes, and ultimately lead to sharp falls in home construction – a key pillar of employment for the Victorian economy.

The financial landscape for the Victorian State Government is set to worsen.

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Hat tip aushousingcrash for pointing me to the Department of Sustainability & Environment data.

Comments

  1. And with receipts tipped to fall, there isn’t going to be anything left in the State coffers to stimulated the property market eg: S/D concessions or changes a la QLD. It looks like the only thing left to encourage more buyers, and get transactioanl volumes back up…. will be a lower price.

  2. One thing I find very depressing, is the history of these issues in Britain. Their rationing of urban land “supply” has been absolutely relentless for decades.

    The councils there remain absolutely addicted to high “planning gain” PER PROPERTY, not to long term stimulation of their economies and honest revenues.

    Meanwhile, every indicator worsens: the inflation of planning gain; the weakness of “supply” response; the actual shortage of housing; the reduction of employment in the building industry; the size and quality of housing; the average age of a first home buyer; the resulting birthrate-related demographics; the economic competitiveness and productivity of cities (now 20% to 40% below Britain’s main trading partners); etc etc.

    DOES Australia HAVE to go this way?

  3. Diogenes the CynicMEMBER

    WA is in the same boat. The State Treasurer expects a 15% rise in stamp duty proceeds for fiscal 2012. That is going to be way off, and a budgetary hole on transfer duties alone will be in the hundreds of millions. Any media coverage on this..nah…except here at MB. +1.

    • darklydrawlMEMBER

      Don’t believe the Labor spin a63. Ted is actually an architect by profession.

      The labor party have desperately (and with some success) tried to convince the public he is a greedy RE swine type and not to be trusted. Perhaps be can’t be trusted, perhaps he is greedy, but he is not a RE agent.

      That said, I think another 6000 homes in Melbourne’s SE ‘only 40 minutes from the city’ (caveat – at 2am on a tuesday – otherwise 2.5 hours in peak hour) is not the smartest idea.

      Actually why on earth we keep building on farmland and trying to farm the desert in this country I will never know.

      Why the hell don’t we live in the desert and farm the tiny bits of productive land we have?

      • “Why the hell don’t we live in the desert and farm the tiny bits of productive land we have?”

        This is a classic question.
        A) I agree. I will volunteer to be one of the people farming the productive land if you volunteer to be one of the people living in the desert. Deal?

        “Why the hell don’t we live in the desert and farm the tiny bits of productive land we have?”
        Why doesn’t Singapore move all its people to a desert somewhere and grow tomatoes on Singapore instead?

        Why do people like living on comfortable lush land instead of living in a desert?

        “Why the hell don’t we live in the desert and farm the tiny bits of productive land we have?”
        Because we have millions of acres of productive land and we live on only a tiny fraction of that.

      • Whilst I see your point, the success of Vegas, Tucson, Phoenix etc. in the US South West would show this not to be impossible. A dry sunny environment is desirable to many people.

        A reliable supply of freshwater is the tricky bit…

        PS, I think salinity, soil erosion etc are much much greater threats to our farmland than housing.

      • Excellent, Claw.

        HOW MUCH land in the world/ each region/ each country, is “urban”? The following data is from the Lincoln Institute’s “Atlas of Global Urban Land Consumption”.

        Worldwide: 0.47%. Sub-Saharan Africa: 0.12%.

        Between 1% and 2%: USA, India, Bangladesh

        Between 0.5% and 1%: China, Indonesia, Pakistan

        As a percentage of ARABLE land:

        Worldwide: 4%. Sub-Saharan Africa: 1.5%

        Between 4% and 8%: USA, Egypt, France

        Between 2% and 4%: China, Russia, Spain, Mexico

        Between 1% and 2%: India, Bangadesh, Canada, Vietnam, Ethiopia

        Less than 1%: Afghanistan, Sudan

        For the UK, their figure is 5.73% of total land, and 23.39% of arable land. For the Netherlands, the figures are 10.68% and 38.34%.

        The issue of “food security” is a vexed one. Some nations eg Japan, could use this as an excuse to invade other countries. As a rule, it is cheaper for land-pressured countries to buy their food from land-rich food exporting countries anyway. As long as international peace prevails.

        There is no correlation at all, between a nation’s ability to feed itself, and its wealth. Wealth is always correlated with the extent of “value added” industry in a nation. Even a nation that has to mostly import commodities, but successfully exports value added goods, will be far wealthier than a nation that produces mostly commodities whether for domestic consumption or export.

        Even nations like the UK and the Netherlands, could “grow” their urban areas and keep urban land prices affordable, (and their industries competitive) for centuries before they finally did “run out of land” – if they ever did. Demographic busts and reduced immigration are highly likely in both cases.

        Urban growth is far more equal in its social and socio-economic effects, and far less unsightly, if densities are LOW and there is abundant “green space” conserved, around and beyond which urban development is permitted. “Green belts” and Urban Growth Boundaries result in “a green and pleasant land” for the enjoyment of a wealthier minority, and “overcrowded squalor” for the majority of lower income people.
        Britain’s system actually lacks the “pretty” peri-urban “sprawl” of Paris and Rome and other continental cities, and even the extremely “green” LOW density sprawl of Atlanta and other US cities, where the amount of “green” visible on Google Earth is visibly several times greater than the amount of rooftops. On the ground, the result is a highly “democratised” enjoyment of local greenery.

        Overcrowding, everywhere it occurs, is due to excessive density, not overpopulation. China; India, Bangladesh, Pakistan, Indonesia; all are about as NON-sprawled as Victorian era first world countries, and have similar urban-to-total land ratios i.e. 1% to 4%. All these countries could raise public health and living standards immensely by “sprawling” to at least Europe’s level.

      • darklydrawlMEMBER

        Our ‘productive’ land is largely a myth. We have gobs of land, but the only bits that is naturally productive is where we had a bit of volcanic and glacial action. So East Coast around Byron, Down south – east / west of Melbourne and Mt Gambier, Tassie and the SW tip of WA.

        The rest of it is largely a giant sand pit that we can grow stuff in by throwing bucket loads of water and fertiliser at…

        Now is this sustainable for the long term (say next 200 years?). Dunno. There are educated and clever folks who say it can’t last and Australia’s long term future is doubtful.

        Importing your food is find and dandy when you are not fighting a war and have a reliable and cheap supply chain.

        Is that something we are going to continue to have into the future?

        Money is all good and fun, but you can’t eat the stuff if the supply chains stops coming with the food.

        There have been plenty of examples in history where this has happened before.

      • Oh, come ON, that argument applies to Japan and Britain. But Australia? You have got to be KIDDING, right? How much food does Australia EXPORT right now? How many times would the “urbanised area” have to double before Australia became food-trade neutral?

      • You know Claw, with alternate farming methods that desert could be very productive. We have so much land blessed by great sunlight, and sunlight is enery waiting to be transformed into another energy source.

        Sure there are obstacles, but there are also solutions if they try.

        Cheers…

      • I haven’t looked to be honest.

        Qld is in a different position to Victoria. In Victoria they were up to their snouts in the stamp duty trough, but Qld was quite a mild duty state. Qld has now increased their rates, so the net effect of the lower volumes shouold not be that great.

        http://www.treasury.qld.gov.au/knowledge/docs/annual-reports/2010-11/pdf/docs/financial-statements-annual-report-2010-11.pdf

        page 53 – I think that the item “Duties” is what you are after, but no volume data – Qld treasury should provide that for you, but it could take a while.

        Income fell in 2011 by about 10% on 2010 figures but I haven’t compared that to prior years.

        It is Victoria that will be hurt the most, and check out the ACT as well, they had a heavy reliance on stamp duty income.

        The states already have a land tax in place, so it is possible they will broaden that and lower stamp duty. It might be politically possible in this climate, especially after a change of government as an austerity measure????

        They should have taken Peter Costello’s offer.

      • There was a fabulous essay in the July-August 2011 issue of “Quadrant”, by David F. Smith, “The Greening of the Arid Boundary”. Very unfortunately not online without a subscription access.

      • I seem to have started something here. Thanks for the info on Ted dailydrawl.

        As for the topic of UE post here, all I was thinking is that Ted was opening up land to generate more state revenue. They have to do something given the size of our VIC debt, but I don’t agree with housing. How about industry instead that would generate long term employment? I know all the reasons why that gets ignored, but I can only hope.

        I have young daughter, and I don’t see how she’ll ever be able to buy in Melbourne even at the lower levels unless something happens to regulate housing investment vs home ownership. We’ve discussed the topic many times before on this blog, but no side of politics will make a brave move. I personally don’t trust any politician as I don’t believe any of them act in the interest of the citizens on any topic if you look into most decisions they make. It’s all about staying in power, and self interest.

        If we can somehow put more capital to productive use in developing IP from R&D and support industry as opposed to housing and mining (I’m not a mining hater BTW), but think we somehow have get a balanced economy, and I don’t see green jobs saving us…where are the green jobs for a start?

  4. Do you think a broad based land tax to replace stamp duties would help?

    It would remove the reliance on something as volatile as transaction volumes, something the land tax itself probably tends to inhibit, and depending on how it’s levied, reduce the reliance on ever rising values. I think it would be a bit fairer, as stamp duty is unequally borne by those who move more frequently.

    • Lock in robust land tax increases over the next few years. All blamed on the ongoing reluctance of the Fed Government to replace Stamp Duty taxation with a non-property national tax. SMH

    • +1 hamish

      A land tax was recommended in the Henry Tax Review. The problem, of course, lies in the lack of political will from the clowns in parliament.

    • Yes, land-tax revenue is more stable than stamp-duty revenue through the bubble/burst cycle; see the bottom two curves in this graph.

      To say nothing of the fact that greater reliance on land tax, by inhibiting speculation, would tend to smooth out the bubbles and bursts that lead to volatility in revenue.

      One way to encourage this reform is to BOYCOTT STAMP DUTY: if you’re a home owner and need to move, don’t sell your old address and buy the new one; put tenants at the old address and rent the new one. If you do this, the relevant State government(s) will miss out on stamp duty at both addresses; and if the interest on your old address exceeds the rent, you’ll qualify for negative gearing into the bargain.

      • I like it.

        Pity the great mass of people can never be “sold” good ideas like land taxes (or “renting during a bubble”) even though it is a powerful vested interest group that are the main, but hidden opponents.

      • Gavin – That may not be financially possible for many homeowners in need of another home in another part of the nation, and would it not encourage more residential investors by default – which then cuts across the grain on many of the arguments made by many bloggers here.

        I’m certainly against stamp duty and pro a broad based land tax, but I don’t know if that is the best way of achieving that aim.

        In the end I think that economic pressure will achieve the result – states don’t have many revenue options and their coffers need to be fed.

        Amusingly someone here mentioned a tax on breathing, but a reappearance of death duties is more probable, so a tax on NOT breathing? that would redistribute wealth especially if the Boomers actually do own all of those properties, but no one likes it except perhaps those in their early years, especially when deceased estates are being settled.

        I have a half idea that those who would support it the most would be those most disadvantaged by it in the immediate term.

  5. I’d love to see the transaction data adjusted for population growth. That would make the Victorian Home Transfers graph look very interesting.

  6. If the SHTF in relation to state budgets over the next few years (which seems likely) this may provide a rare window to seriously consider the introduction of a Henry-style broad-based land tax, which I generally support.

    Only issue I see is that the rent-seekers and vested interests move in and we’ll end up with a watered down, MRRT-style ‘half-solution’.

  7. Oh yay, a tax on transactions is turning out to be a bad idea. Who would have known?

    I’m just curious whether changes to land tax would be a federal or state domain – if it’s the latter, I can see a sudden push emerging to make uniform land tax a replacement for stamp duty, providing certainty for the budget.

  8. The problem with stamp duty is that it unfairly hits people who move frequently or who need to downsize or upsize (as Hamish pointed out) but our greedy state government doesn’t like to talk about it. Just like the pokies and speed cameras they are in denial about their dependence on the rivers of money coming in from it citing some other spurious logic for why it needs to remain in place. We’ll be in diabolical trouble if the pokies legislation gets through at the same time as housing transactions/values slump, they will probably need to put a tax on breathing to make up for the revenue shortfall!

    • “they will probably need to put a tax on breathing to make up for the revenue shortfall!”

      Not tax collection because that would be unpopular. But they might have no choice but to clampdown on the uncontrolled spiral of youth road carnage. (Putting on my ACA hat here)

      They have done double demerit points before. I think they will have a go at “Double penalties” over the Xmas break.

      • My own idea, Steve, is that they will probably attach satellite tracking/recording devices to repeat speedsters cars and simply add up all the money they owe every month and invoice them. It would be easier to bankrupt people than take their licenses away and it would also save $$$ on traffic police (who aren’t doing much more than collecting tax at the moment anyway). I recall a Brumby minister saying how pleased they would be if everyone suddenly stopped speeding overnight but I don’t think anyone seriously believes them when they spout rubbish like that… they badly need the money and everybody knows it. However instead of making it a 1 in a 100 chance of getting caught, why not make it a dead certainty? It would be far more efficient to collect this revenue in a fully-automated fashion and let the police focus on property or personal crime; we’d probably need half the number of police to do the same jobs if traffic fines were fully automated.

      • take a look at how much we spend on car accidents and the lifelong economic drain they cause us – far outweighs money earned from speed cameras.

  9. Diogenes the CynicMEMBER

    The Henry Review recommended a broad based land tax. It is a good idea as it forces land users to be productive with their land investments rather than sitting on land bank and speculating. But as I understand a lot of people currently do not pay land tax on their principal place of residence if that changes there will be a lot of screaming, wailing and gnashing of teeth.

    I expect a push for such a land tax to replace transfer duties as soon as state governments realise that transfer duties are never coming back (probably 3 years away).

    • I really like that news, I never heard of the Henry Review before. They sound like quite wise men.

  10. The revenue incentive to land ration and so drive up land prices is quite noxious. We should be like Germany and ban official discretions constitutionally (either make a rule, or don’t bother; none of this “what an official thinks is a fair thing approval” nonsense). Germany also provides an incentive to local governments to service people (since a significant part of their revenue is per head) rather than drive up land prices.

    Increasing supply is a good thing, btw: I wish they would go further.

  11. My suggestion for a breakthrough of the affordability impasse:

    Create a special new right for young people who have never owned a home, to form “co-operatives” which are entitled to develop homes for their members, anywhere the co-operative has legally purchased land. This right would over-ride any planning proscriptions.

    Any critics of such a scheme would be even more vulnerable to charges that they are culpable oppressors of the young, than they already are. In fact, it would bring this issue really out into the open.

  12. “reduce the deadline for paying stamp duty on property purchases from 90 to 30 days after settlement. The move is intended to bring forward around $100m of tax receipts into the current financial year and, in the process, assist the Government in maintaining a budget surplus.”

    See – it’s forward thinking, long term policy, like this – that inspires the masses to bother heading down to the local school on voting day and putting a tick next to their favorite monkey.