WA Budget’s housing black hole

On Monday, I showed how the Victorian State Budget is likely to get hit hard from declining stamp duty receipts as house prices and transaction volumes fall.

Thanks to reader aushousingcrash, I was able to source some interesting data on Western Australian (WA) housing transaction volumes which, when combined with falling home prices, paints a similar picture for the WA State Budget.

According to the below chart from the Housing Industry Association (HIA), the WA Government was the most reliant on property taxation in 2005-06, with property-related taxes comprising around 45% of state revenues:

This situation appears to have changed somewhat, with the proportion of taxes from property falling significantly over the past five years:

WA’s revenues from stamp duties and land taxes – the two major taxes levied on property -peaked in 2007-08 at nearly $2.7 billion, up from only $600 million in 1998-99. Property tax receipts have since collapsed, falling to around $1.7 billion in 2010-11, with stamp duties accounting for all of the fall (see below chart).

However, the WA Government expects property taxes to recover in the years ahead, with property receipts forecast to increase steadily each year, reaching $2.7 billion in 2014-15 on the back of rising stamp duties.

The below chart provides the main reasons for the peak and subsequent decline in WA’s stamp duties:

As you can see, the boom revenue period of 2006 to 2008 corresponded to a period of relatively strong transaction volumes and high prices. However, the revenue situation reversed in 2010-11 through a combination of falling prices, lower transaction volumes, and stamp duty relief introduced a few years prior.

Based on current data, the WA Government’s forecast of rising property tax receipts over the next four years appears ambitious. Not only are home prices continuing to slide and transactions remain near GFC lows, but WA housing finance commitments remain sluggish:

All up, the data suggests that WA Budget revenues will remain under pressure. It also highlights why it is risky for a Government to pin its financial well being on a volatile transactions-based tax like stamp duty, instead of more efficient, equitable and stable sources like a broad-based land tax.

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P.S. I would be grateful for reader’s assistance in locating similar transactions data for the other states, in particular Queensland, New South Wales, and South Australia.

Comments

  1. As more people enter the “can’t afford to buy’ zone”, that pushes more people into the “I refuse to buy at these levels” zone. Unless there is an antcipated ‘profit’ to be made from acquiring a/more property, why buy it if the cost of alternative accommodation, rent, is lower and time becomes your friend? Once those who can still afford to buy ( they have savings or additional debt capacity) see others entering the ‘can’t afford to buy’ zone – their ‘profit’ targets for the future on-sale, then turnover…and prices…spiral down…and od not bottom until such time as the ‘can’t afford’s”, can….

  2. Diogenes the CynicMEMBER

    Nice work UE. This was ambitious when it was released in May 2011 with volumes and prices falling there is no way they can make their forecasts. The rates increase markedly as shown by the bands below, if our median house (high 400,000s today?) price slips back (40-50%) then stamp duties will probably collapse even more. Treasury must be a happy rosy place to live, all those forecast revenues climbing higher in a lovely sloping curve.

    For those not in WA here are the residential rates (residential property includes primary residences, rental properties and vacant land where building commences within 5 years):
    Residential rate
    $ 0 – $ 120,000 $1.90 Per $100

    $120,001 – $150,000 $ 2,280 + $2.85 Per $100 or part thereof above $ 120,000

    $150,001 – $360,000 $ 3,135 + $3.80 Per $100 or part thereof above $150,000

    $360,001 – $725,000 $11,115 + $4.75 Per $100 or part thereof above $360,000

    $725,001 and upwards $28,453 + $5.15 Per $100 or part thereof above $725,000

    • Hugh PavletichMEMBER

      JUST HOW INEFFICIENT ARE OUR LOCAL GOVERNMENTS?

      DtC – Many thanks for the WA Residential Rates information – which appears exceedingly high, when compared with Texas when the appropriate adjustments are made.

      One would need to ascertain the average Rates income per household in each jurisdiction.

      It needs to be borne in mind too, that Local Government in Texas provides a greater range of services than is the case in WA – and throughout the rest of the Antipodes for that matter.

      In addition to this, as new subdivisions in Texas are completed and “incorporated” in to adjoining urban Local Government areas, the Texas LGs take responsibility for the MUD bond infrastructure involved for the new subdivision.

      Clearly – this whole issue requires further investigation to ascertain just how efficient our Local Governments are here in New Zealand and Australia, in comparison with their counterparts in Texas.

      It would apppear (if the above figures are any guide) that we have a massive performance problem with our Local Government in this part of the world.

      Hugh Pavletich
      http://www.PerformanceUrbanPlanning.org

    • Right, how do they come up with these forecasts e.g. “lets ignore the last few years and just assume previous trend will reassert itself, I don’t know, say 10% a year?”. Laughable.

      Great article BTW, scary.

      Does anyone have any info on how US municipalities are coping in the wake of the crash there? Property taxes there are value-based, and at some point those values have to be reassessed down presumably? Additionally, the # of houses now unoccupied in some places must have choked off revenue.

  3. Fortunately WA a resource rich state earns serious amounts of royalty income. In an Iron Ore boom, volatile stamp duty revenues is much less of a problem for WA than the parasite economy of the South East.

    • AHC – Whilst that is undeniably true, looking at this from the states point of view, as though we were running the business of the state – if we have a heavy reliance upon one income source that could become volatile, then we should look to diversify our income source.

      Now if reliance on stamp duty from housing transactions peaked at 45% – that is a BIG share.

      I haven’t seen the state financials, but I can bet that the other big income producer is Mining Royalties, which are also volatile.

      It really doesn’t need a financial genius to put two and two together, and ask the question “what happens when housing is in the doldrums, and our mining boom ends, or even falls from the peak” That would mean future budget deficits in my book.

      Queensland would be similar, and in fact the majority of states would have a strong element of volatile income sources.

      I still come back to my argument for a broad based land tax, as a source of a non- volatile income.

      When mining is going gangbusters, that extra income above the norm should be conserved for the future, instead of being used to balance this years budget, as it has been in the past.

      Thanks UE – all good information.

      • Good point Peter, I suggest that the major trigger for a housing price crash here in the west will be the end of the mining boom.

  4. GST redistribution is a forgotten factor. Whilst WA is raking in the massive mining royalties the Fed Govt will ensure other states also benefit by redistributing more of WA’s GST revenue.

    This means if WA’s state revenues collapse then all states will suffer.

  5. reusachtigeMEMBER

    Seriously, sucked in! All part of the lesson that needs to be learned from the problem that is the Australian housing ponzi cult.

  6. Thanks for the analysis UE…the graph I find striking is the house sales vs median house price, which shows the resilience of prices during a large downturn in volume of sales. RE agents here must be miserable.

      • I keep telling RE Agents that it is NOT in the interests of their industry to have boom bust volatility, and they need to start funding research and lobbying by intelligent people like Leith Van Onselen, Alan Moran, Bob Day, Hugh Pavletich, and so on.

        The Builders Federation in NZ has actually done some good lobbying. The RE Agents Institute is simply out to lunch on these issues. I don’t know whether it is the same in Aussie.

  7. Should note that we are talking not about “property tax” in the US sense, but almost entirely “turnover tax” ie stamp duty. It doesnt go to local governments in WA but to the State government – where it takes a lot of the load of the Commonwealth in paying for general infrastructure. Actual local government rates in Australia are very low cf USA – because local governments here do not provide police, education etc as they do in the USA

    Stamp duty is an inefficient tax because it discourages turnover in the stock, preventing it from being allocated more efficiently. Personally I would prefer to see the whole lot go onto rates, where it is not dependent on the business cycle.

      • Hugh PavletichMEMBER

        Joe – thanks for your comments. When you look at the Rates per $100 outlined above for WA – and make an adjustment for the hugely different average / median housing and apartment prices in WA and Texas – I wonder if Texas LG Rates on average may be lower.

        My underastanding is that they run ar about 2 – 3% of assessed property value in Texas.

        I should would appreciate more discussion and clarification on these important issues.

        New Zealand incidentally did away with Stamp Duty well over 20 years ago.

  8. Also I dont regard the stickiness of Oz property markets on the downside to be a good thing. It prevents prices dropping to where they should be after a boom, as they do in the stock market, and so prices steadily ratchet up with every cycle.

    What forces markets down in the US is credit defaults. Because we dont have those here much, with the market effectively featherbedded, prospective vendors just sit on their properties and ride out a slump – pushing down turnover even further while prices barely change. The WA case is a perfect example.

      • Certainly you would expect the volatility on the downside to be high when “no recourse” mortgages are legally mandated, as in California.

        But then you would expect greater recklessness on the “upside” too.

        • That’s an good point. You would definitely expect more recklessness from borrowers with non-recourse loans, but surely you would expect more conservatism from banks?

          Although the banks and the MACs were selling off loans as quickly as possible so they probably didn’t care about what would eventually happen as long as they weren’t caught holding them.

    • Agree with the sentiment, and….I read somewhere that the stock on market in WA has fallen dramatically again recently as most vendors have taken their houses off the market and are prepared to sit out the downturn until things pick up. But… every year house prices fall or stay around the current level, inflation is eating away at real house prices so will you still emerge a big winner by choosing to hold in this market? Also there is the question of whether this is just a blip on the ‘normal’ trend or whether we have a real shift in perception of housing/debt in Oz such that people are no longer quite so willing to load themselves up with debt in the belief it will be fine because house prices always rise.
      time will tell

  9. Interesting charts. I wasn’t aware that volumes were so far down on pre-GFC levels.

    Also noteworthy, this Landgate data clearly shows median WA house price is now c. 10% below peak (c. $450k vs peak of c. $500k).

  10. This is an interesting point – VOLUMES drop long before prices, in a supply-induced house price bubble. In fact, volumes are often low through the peak quartile or so of price INFLATION.

    But using Britain as an example of what happens when “supply” restrictions remain unrepealed for decades, the “volume” long term trend only drops, while councils increasingly seek higher and higher shares of “planning gain” via fees, to keep their revenue up. Sickeningly, the greater the actual shortage of housing becomes, the more this actually “WORKS” for the councils. “Planning gain” gets larger and larger.

  11. Hi UE – I suspect the WA govt is relying on the fact that the aggregate value of transactions still remains reasonable. Using your July-01 as the base month (index 100), transaction numbers are down about 20% today (index 78), but the aggregate value of transactions is still 200% up (index 212). Stamp duty is calculated on the value of the transaction, so if the aggregate values are still strong, then they probably figure the SD revenue will remain strong.
    I think they’re in for a rude shock as you’ve pointed out, but for some reason aggregate transaction value is still reasonable (granted its off its highs, but it hasn’t yet plummeted).