HIA Stamp Duty Watch - Autumn 2023

Autumn 2023

BABY STEPS TOWARDS STAMP DUTY REFORM IN NSW

The New South Wales Government’s stamp duty reforms give first home buyers the option of paying stamp duty upfront, or a smaller-but-ongoing land tax, for properties up to $1.5 million. Economists have long pushed the idea that stamp duty should be replaced with a fairer and more efficient tax. It is great to see governments and oppositions across Australia recognise the problems associated with stamp duty and the need for reform.

But the latest move by New South Wales is only a small step in the right direction.

The abolition of stamp duty is a good idea, both for housing affordability and broader economic activity. Homebuyers wouldn’t have to borrow as much money or spend as much time saving up a deposit. One of the other big benefits is that it would encourage people to move towards areas of greater employment, as well as upsize and downsize their living arrangements based on their changing life circumstances:

• Workers could accept the best job opportunities available in other cities or states.

• Retirees could downsize into more manageable homes.

• Young families could upsize into larger homes to meet the needs of their growing families.

Stamp duty is a tax on each of these transactions, undermining all of these trends. Australia loses billions of dollars in productivity growth and economic activity by hindering worker mobility. Large family homes remain occupied by those who no longer want or need the space. New and growing families are squeezed out of the market.

It also prevents socially valuable higher density redevelopments in well-serviced areas. This puts ever increasing pressure on urban infrastructure, services, and amenities to sprawl further outwards, clearing more and more of the natural environment – and producing more carbon emissions than re-developments in existing suburbs.

Stamp duty makes investment in new housing supply less profitable. A large share of the sellers’ proceeds is swallowed up by the tax. Multiple points in the development and construction process are also hit by stamp duty, including the sale of the land to the initial developer. This undermines housing affordability.

So it is clear that stamp duty should be abolished.

New South Wales, however, is only extending its abolition to first home buyers, meaning for the majority of the market that already owns a home, all of the above costs from stamp duty still remain. Even first home buyers, once they have bought a home under the new rules, won’t be able to avoid incurring stamp duty if they ever decide to move again.

This scheme has the right idea, and it is helpful to put a framework in place now that can potentially be expanded and extended in the future. But without the political will to pursue long term structural reform, initiatives like this will remain far too limited to make a real difference in the market.

Foreign investor taxes reduce supply of housing

In the final quarter of last year, Australia commenced construction on 28,590 new detached houses. This would have barely qualified as a good quarter in the 1970s. Multi-unit commencements have also come a long way down. After an unprecedented apartment boom last decade, a series of taxes, restrictions and the loss of overseas arrivals during the pandemic, has halved multi-unit commencements compared to six years ago, when foreign investment surcharges were introduced.

The total number of new homes being commenced across Australia is no better than the average of the last 40 years. And yet, there are almost 11 million, or 70 per cent, more Australians than there were in 1982.

Net overseas migration has grown from around 100,000 per year in the early 2000s to more than 300,000 following the re-opening of international borders. At the same time, a changing demographic composition has seen the average household size fall. Putting these factors together – a larger population, accelerating migration and falling household size – it is not hard to see why we have a shortage of housing in Australia. Greater investment in housing – from both domestic and foreign investors – will be key to alleviating this shortage.

DetachedandMultistarts:3Yearrollingaverage-AUS

Government taxes and fees on foreign investors exceed $100,000 in the major housing markets

The figure below shows estimated fees that a foreign investor today would pay for a capital city dwelling in each State, assuming a land value of $500,000 and using the median dwelling price in each capital city. Beginning in 2016, most States now impose stamp duty and land tax surcharges on foreign investors which add considerably to the cost of investing in Australia’s housing market. We estimate that an overseas investor looking to purchase a property in Sydney – by far the largest market – must pay $150,000 in stamp duty, land tax and Foreign Investment Review Board (FIRB) fees, around three-quarters of which is solely through foreign surcharges. But even though stamp duty accounts for the largest foreign investor surcharge, it’s not the only tax biting on foreign investors. Investors in NSW, Victoria, Tasmania and the ACT also have to pay additional land tax, equivalent to between 1 and 4 per cent of average land value. On top of that, foreign investment fees doubled in July 20221, such that foreign investors looking to purchase residential land now have to pay at least $13,200 in fees to the FIRB2

1 https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/increase-foreign-investment-fees-and-penalties

2 https://firb.gov.au/sites/firb.gov.au/files/2022-07/G10_Fees_210722.pdf

Surcharges introduced for NSW, VIC & QLD*

* NSW, VIC, QLD surcharges introduced in 2016; ACT, SA in 2018; WA in 2019; TAS in 2022

Estimatedtaxesonforeignhousinginvestors

The largest burden by far is stamp duty

Economists have long called for stamp duty to be a replaced by a more efficient, broad-based tax. Stamp duty makes investment in new housing supply less profitable. A large share of the sellers’ proceeds is swallowed up by the tax. Multiple points in the development and construction process are also hit by stamp duty, including the sale of the land to the initial developer. This undermines housing affordability.

Victoria and NSW – which together account for more than half of all dwelling commencements –also have the most punitive stamp duty regimes. Stamp duty on all purchases accounts for an estimated 5.3% of the median dwelling price in Melbourne, and 3.9% in Sydney. Foreign investors in both are slugged with an additional 8% surcharge. In other words, foreign investors in Melbourne pay 13.3% of the median dwelling value in stamp duty alone, and those in Sydney pay 11.9% of the median value.

Stampdutyas%ofmediandwellingprice

Foreign investor taxes exacerbate the inequities of stamp duty

An ideal tax should be efficient and equitable. Considering each of the main charges applicable to foreign investors:

• Stamp duty fails both criteria – first, it distorts the housing market which makes it inefficient. Second, it imposes a far greater burden on ‘mum and dad’ investors and is borne only by those transacting in the property market, which makes it unfair. Foreign surcharges on stamp duty exacerbate the existing problems with stamp duty.

• Land taxes perform better than stamp duty, however foreign surcharges arguably do not: first, by creating a price wedge between foreign and domestic buyers they will affect the market price, making them inefficient. Second, it is inequitable that foreign buyers pay more than domestic buyers.

• FIRB fees are not quite as bad (and in fact are not technically considered a tax): the government does incur costs in assessing the suitability of foreign purchasers, and they should be able to re-coup those costs. But the FIRB noted in its latest annual report that foreign investment application fees are likely to have contributed to a decline in foreign demand for residential real estate. And that report was released before the doubling of fees in 2022, meaning the effect on investors will likely be larger now3

The incidence of each of these taxes technically falls on the investor. But the cost is ultimately transferred to future renters and the wider economy, and the net effect is less housing: either investors have to pay more for investment properties, which may deter them from entering the housing market; or builders will be forced to accept a lower sale price, which will discourage them from taking on new projects (or perhaps more accurately, lessen the appetite for banks to lend to them).

At a time when overseas arrivals are soaring, combined with longer term growth in a population which needs more houses per person, we need more houses to be built, not less. The housing market can ill afford surcharges on foreign investment which in major markets account for nearly 15% of the median dwelling price and which ultimately will lead to fewer houses being built.

Note: stamp duty calculations based on median dwelling prices in capital cities, Land tax calculations assume an unimproved land value of $500,000. All investors (domestic and foreign) pay ‘base’ stamp duty and land tax. In some states the assumed land value means ‘base’ land tax does not kick in. Foreign investors must pay stamp duty and land tax surcharges on top of the base amounts, as well as FIRB fees.

3 https://firb.gov.au/sites/firb.gov.au/files/2022-04/FIRB-Annual-Report-2020-21.pdf

The dollar cost of Stamp Duty

• Nationally, the typical stamp duty bill for the median property in December 2022 was $26,245. This is based on a weighted average across the states using transaction volumes.

• Stamp duty bills fell over 2022 in most jurisdictions as dwelling prices declined under the weight of increasing interest rates.

• Stamp Duty is highest in Victoria. This reflects high property prices and a punitive rate of stamp duty. The typical Victorian homebuyer pays $39,170 of duty – down by $2,400 since May 2022 – on the median property worth $735,000.

• Stamp Duty is also high in New South Wales: $33,340 on the median property, down by $2,142 since May 2022. This is still high, due to high property values in New South Wales.

• The ACT is part-way through a process of abolishing stamp duty. Combined with declining dwelling prices, the ACT saw the largest decline in stamp duty bill, down by $3,645 since May 2022 to $23,580.

• SA overtook ACT to have the third largest stamp duty bill at $24,905, through a combination of elevated prices and punitive rates of stamp duty.

• Tasmania and the Northern Territory are next in the rankings with stamp duty bills of $22,510 and $23,527 respectively. Tasmania’s bill is driven more by elevated dwelling prices, while the Northern Territory’s is driven more by its punitive rate of stamp duty.

• Western Australia’s relatively affordable dwelling prices produce a relatively low stamp duty bill of $17,765.

• Queensland imposes the lightest duty. The typical homebuyer there pays $12,715 of duty on the median property worth $597,000.

• In each state, stamp duty is estimated for the ‘median buyer’ of the ‘median dwelling’. It is assumed the median buyer is an owner-occupier, is not a first homebuyer and is buying an established dwelling.

The Rate of Stamp Duty

The chart below compares the size of the typical stamp duty bill relative to the median dwelling price across the states and territories. This allows for a better comparison between the jurisdictions.

• The rate at which stamp duty is charged is most punitive in Victoria. The stamp duty is equivalent to 5.3 per cent of the property’s value in Victoria.

• The Northern Territory and South Australia have the second and third most punitive rates of stamp duty: 4.8 per cent and 4.4 per cent respectively.

• Queensland has the least punitive rate of duty. Stamp duty on the median property is equivalent to 2.1 per cent of the median dwelling price

The impact on households

The chart below summarises the total value of additional home loan payments a homebuyer would incur, because of borrowing more to cover stamp duty. It assumes a 30-year home loan, and an interest rate of 5.97 per cent.

• This value across Australia amounted to $55,500, compared to $43,400 in May 2022. This increase was driven by the RBA, with the assumed interest rate increasing from 3.70 per cent to 5.97 per cent.

• Victoria and New South Wales are the standout states with respect to this burden.

• If stamp duty were not levied, homebuyers would have the choice of buying the same home with less debt, as they could put down a larger deposit. Therefore, stamp duty potentially causes homebuyers to take on more debt. Put another way: some homebuyers are likely borrowing more to cover the cost of stamp duty.

• Where homebuyers are not borrowing more to cover the cost of stamp duty, this means they are purchasing a less expensive home than they could if stamp duty was not levied. These homebuyers are effectively covering the cost of stamp duty by forgoing a back garden, reducing the space of their home environment, increasing their commute to work, and/or reducing their proximity to friends and family.

Source: RBA; CoreLogic HIA Stamp Duty Watch