In 2020, COVID-19 mildly impacted Australian housing prices, but created volatility in transaction activity. These factors have drawn renewed scrutiny of stamp duty on residential property, and may have influenced some of the timely reform and discounting in stamp duties over the year.
What’s wrong with stamp duty?
There is broad agreement among academics, economists and advocacy groups across the property industry that stamp duty is a less than optimal property tax.
The main critique of stamp duty is that it is an inefficient tax. As noted previously, modelling has shown stamp duty on residential property is one of the most expensive taxes, costing the economy over 70 cents for every dollar raised in revenue.
This is because paying stamp duty on the transaction of residential property is thought to deter more frequent property purchases, even where a change in living situation may be more efficient for the individual. An example of this may be buying a new home in the process of moving for work. It is argued that replacement of stamp duty with a broad-based land tax would provide added incentives for people to find the most suitable housing for their needs, such as incentivising empty-nesters to downsize.
Another criticism of stamp duty is its evident volatility as a source of revenue. This is because negative economic shocks, or housing market downturns, can reduce the number of property sales that take place, and hence the amount of revenue collected.
This was a concern over 2020 when stage 2 restrictions initially dampened sales volumes. April saw around 22,400 transactions, which was down -33.8% from March. It was also -19.3% below average April volumes for the previous 5 years.
Fortunately, sales volumes have since recovered nationally, with the number of transactions estimated to be 420,665 in the year to November, up 4.4% on the year to November 2019.
The problem with volatility in sales volumes, is that stamp duty accounts for a high portion of state government revenue.
The chart below shows the average contribution of stamp duty on conveyances to total state and local government revenue in the 10 years to June 2019. In Victoria, stamp duty has contributed, on average, one fifth of state government revenue for the past 10 years. Changes in revenue imply governments may need to take on additional debt during periods of low sales activity or may not be able to execute on planned projects within budget constraints.
This is also an argument for the substitution of stamp duty with a broad-based land tax, which would allow property tax revenue to be collected consistently, irrespective of how much stock is transacting. A broad-based, regular land tax also spreads duties across a much wider section of the tax base, rather than just collecting revenue off the average 5% of properties transacting each year.
Finally, stamp duty is perceived as being an impediment to first home buyers. In reality, the removal of stamp duty is unlikely to do much to lower house prices, because stamp duty is likely already built into the price buyers are willing to pay for property.
How has stamp duty changed since the pandemic?
There have been multiple tweaks to stamp duty with the onset of COVID-19. Most notably, the NSW state government floated a proposed model with a view to partially phase out stamp duty, and introduce a property tax. While it is likely this policy proposal has been in the works for some time, the volatility perpetuated in transactions through COVID, and perceived relief that this would provide for buyers, made the announcement timely.
Before this announcement, which was delivered with the state budget, the NSW government had temporarily increased stamp duty concessions for first home buyers. Up until the 31st of July 2021, stamp duty will be exempt for eligible first home buyers for newly built property worth up to $800,000. Concessions will extend for newly built property worth up to $1 million. This is an extension of the existing exemption, which was for newly built property worth up to $650,000, with concessions up to $800,000. The stamp duty exemption on vacant land has also increased temporarily, from $350,000 to $400,000.
The Victorian government also announced discounts to stamp duty with the 2020-21 budget. Up until 1 July 2021, new and off-the-plan properties will see a 50% waiver on stamp duty, and established property will see a 25% discount. These stamp duty discounts will be available to both investors and owner occupiers, and the threshold for discounts is on properties up to $1 million. The relatively short time frame on this policy is likely to bring forward property purchasing decisions, concentrating housing demand over the next 6 months.
Other states and territories have not handed down reforms to stamp duty as a part of their 2020-21 budgets. The stamp duty debate has potentially been more pertinent in NSW and Victoria, where affordability constraints are the most pressing. The CoreLogic ‘Perceptions of Affordability’ report showed that transactional costs including stamp duty were cited as one of the most formidable barriers to participating in the housing market (along with saving a deposit). However, with eastern states leading the charge on stamp duty reform and discounting, the next economic shock could trigger other parts of the country to follow suit.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
