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.