How could stamp duty reforms affect the property market?

The NSW Government’s proposed stamp duty reforms could have a significant impact on buyer behaviour and the state’s property markets. As other states around Australia wait to see what happens, and pressure from advocacy groups mounts for a unified approach Australia-wide, let’s take a look at how stamp duty reforms can affect property markets.

What are the proposed reforms to stamp duty?

If NSW Treasurer Dominic Perrottet’s proposal is adopted, stamp duty in NSW in its current form would be scrapped. Instead, property buyers will have the option of paying an annual land tax, or an upfront lump sum similar to the current stamp duty. Once a property has had land tax paid on it, all subsequent owners of that property would have to pay land tax rather than a lump sum.

Under the new model, owner-occupiers would most likely pay less tax than investors and first home buyers may be given a $25,000 grant to assist with their purchase, instead of the current stamp duty exemption and concessions.

The NSW Government intends to consult with the community until March 2021 regarding its proposal.

How does the current system affect the property market?

Stamp duty has been criticised as a tax that distorts people’s buying and selling decisions, since it is such a significant extra upfront cost when buying a property. For example, to avoid paying more stamp duty than necessary, some young couples may buy larger homes than they need so they don’t have to upgrade later, and more empty nesters may choose to stay in their large family home. Essentially, stamp duty has created inefficiency in the use of housing stock.

Stamp duty is also a disincentive to relocate for work or other lifestyle reasons. It means that, for example, a medical professional considering moving to a regional area to provide a much-needed service to the local community, faces a significant financial barrier to a more permanent move.

Stamp duty is also partly responsible for first home buyers taking so long to purchase their home. The average young Australian currently has to save for 4.6 years for a 20 per cent deposit, and this timeframe blows out to six years or more in some areas of Sydney and Melbourne.¹ Stamp duty and saving for a deposit are considered the biggest hurdles for first home buyers taking this first step on the property ladder.

How could the reforms affect buyer decisions?

Removing the financial barrier to the buy-sell transaction is expected to incentivise the turnover of housing stock. The reforms should give buyers the freedom to make property purchase decisions based on their current needs and lifestyle choices, rather than compromising on their purchase decisions to minimise stamp duty.

For example, downsizers and upgraders may be more likely to sell their existing home and purchase a property that better suits their current needs, when the financial disincentive of stamp duty is removed. In addition, particularly for downsizers who no longer have an income, moving to a smaller house makes sense given land tax will be proportionate to the cost of the property.

People wanting to relocate, whether for work reasons or in pursuit of a different lifestyle, will no longer face the significant disincentive of selling where they are and buying a new home elsewhere. In this way, the reforms could bring indirect benefits to employment and gross domestic product if people start to move home more freely throughout the state.

The removal of a large lump sum payment is particularly exciting for first home buyers who wouldn’t qualify for a stamp duty exemption and we may well see earlier entry into the market by this cohort. With stamp duty taken out of the total cost of a property purchase, the cost of a deposit is also reduced. It means these first home buyers won’t need to save for as long before they can make their first property purchase. It will be interesting to see if this has any effect on the rental market, as young people may end up renting for a shorter period.

Could the reforms create a two-tiered market?

The proposed land tax is an ongoing annual fee as opposed to a finite, one-off payment. This means that at some point, the total of annual land tax paid will surpass the alternative lump sum amount. Canstar estimates this to be at around the 14-year mark.² As a result, buyers who intend to stay in their property for longer than this may prefer to make a lump sum payment. Until the property tax becomes the only option for all properties, which could take decades unless it is legislated, we may see skewed demand for properties that still offer the choice for a lump sum tax payment. We could see less demand for properties where the land tax has already been paid, creating a two-tiered market.

How could the reforms affect property prices?

In the short term as the reforms are still being finalised, we may see a slowdown in property prices as buyers adopt a wait-and-see approach. The reforms are slated to be implemented near the end of 2021.

In the medium term, however, it’s possible the reforms may put upwards pressure on property prices since prices are a reflection of what people are willing – and able – to pay. In other words, people may just put the money they would have paid on stamp duty towards their property purchase instead. At an auction, for example, the money that a buyer may have previously needed to keep aside for stamp duty can now be put onto their bid.

On the other hand, the recurrent property tax expenses for buyers could well offset the increase in spending power. That is, borrowers’ expenses would increase and therefore their ability to service their loan – and the amount they can borrow – would be slightly lower, and this could balance out any upwards pressure on prices.

Over the longer term, however, it is thought the reforms could potentially reduce some of the upwards pressure that high demand puts on prices, since it would increase turnover and make the market more efficient.³

The impact on the rest of Australia

The ACT has already begun transitioning to land tax from a stamp duty model, and South Australia has made tax reforms in its non-residential sector. It is expected the move from NSW will have prompted other state governments to be on notice. They may well wait to see how the reforms affect the NSW property market and there could then be pressure to implement changes in these other states.⁴

Real Estate Institute of Australia (REIA) president, Adrian Kelly, has called for a coordinated approach to stamp duty reform. He said owner-occupiers are now paying around 4% of their property value in stamp duty and he would like to see this barrier to home ownership removed.

“Stamp duty reform, while a major exercise, would have outstanding ‘knock-on’ benefits to the economy and help Australians into the right housing solution for whatever stage they are in their life. It’s time for Australia’s treasurers to get serious about getting rid of stamp duty.”²

SOURCES: ¹https://moneysmart.gov.au/saving/save-for-a-house-deposit, ²https://www.realestate.com.au/news/nsw-stamp-duty-vs-property-tax-what-are-the-proposed-changes-and-how-could-they-affect-you/, ³https://www.theguardian.com/australia-news/2020/nov/19/nsw-property-tax-what-are-the-proposed-changes-to-stamp-duty-and-how-would-they-affect-you, ⁴https://www.smartcompany.com.au/finance/economy/nsw-stamp-duty-reform/