Yesterday, it was revealed that the Victorian Government will follow the lead of both New South Wales and Queensland and remove the First Home Owners’ Grant (FHOG) on pre-existing dwellings, replacing it with an increased subsidy on newly built dwellings as well as expediting the phase-in of stamp duty cuts. From The Age:
Victoria’s first home buyers will receive a $3000 boost – but only if they buy new homes – the state government has announced.
Stamp duty discounts of 40 per cent have also been brought forward for all first home buyers under the changes.
From July, the First Home Owner grant will rise from $7000 to $10,000 for newly built homes and apartments under $750,000.
However, the existing $7000 first home buyers grant will end on June 30 for those buying established homes.
Treasurer Michael O’Brien said the decision to wind up the grant is offset by stamp duty cuts for all first home owners.
It also brings Victoria into line with New South Wales, Queensland and South Australia, he said…
The combination of the changes mean Victorians buying a newly built $400,000 first home will save more than $16,500.
Targeting the grant to newly built homes will create jobs in the building sector, a key part of the state’s economy, Mr O’Brien said.
It would also lead to more housing and reduced house prices, especially for young Victorians, he said.
While the changes to the FHOG should benefit the Victorian construction industry by helping to soak-up the pending oversupply of newly constructed houses and apartments across Melbourne, the overall impact of the changes for Victorian house prices will likely be negative.
As occurred in New South Wales and Queensland following the removal of the FHOG on pre-existing dwellings from October 2012, we can expect Victorian first home buyer (FHB) demand to fall off a cliff once the changes are implemented on 1 July 2013. And while the state government is also reducing the amount of stamp duty payable by FHBs, a purchaser of a modest $400,000 pre-existing home would still be out-of-pocket by $9,822 in stamp duties after the changes, versus being out-of-pocket by $4,459 under the current regime (i.e. Stamp Duties of $11,459 less the $7,000 FHOG).
To say that FHBs in Victoria are getting a dud deal is an understatement and highlights the inequity of Victoria’s high stamp duty regime. That said, this inequity extends beyond FHBs to trade-up/down buyers as well, and removing stamp duties across-the-board has a lot of merit. As argued in March, stamp duties discourage housing turnover by unnecessarily penalising people that move to homes that better suit their needs. Obvious examples include baby boomers downsizing from large family homes and young growing families upsizing to bigger family-friendly homes. Such disincentives inevitably lead to an inefficient use of the housing stock, such as empty nesters occupying large homes with multiple spare bedrooms. Stamp duties also hinder labour mobility since they discourage workers from relocating closer to employment.
As shown recently by the RBA, just over 4% of the housing stock is currently transacted annually. As such, we have a bizarre situation where only around 4% of the population are paying taxes that support services for the whole community – all for the privilege of moving to a home that better suits their needs! Seeing as we all consume government services, wouldn’t it then be fairer and more efficient to levy each household a much smaller amount, rather than penalising only the small minority?
Instead of tinkering around the edges with changes to the FHOG, the Victorian Government should look to abolish the FHOG and stamp duties altogether, replacing them with a broad-based land tax levied on all residential land. Of course, any abolition of stamp duty would need to ensure that those that recently purchased a property (and paid stamp duty) are not double-taxed. To overcome this concern, the government could look at a gradual phase-in like the ACT model, or, as argued by David Collyer, crediting all landowners with the amount of stamp duty paid and the hypothetical land tax they would have paid since the date of purchase.
The options are there. But it’s the lack of political will and rent-seeking behaviour by high net worth land owners that are likely to stifle reform.
