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The Growing Burden of Stamp Duty – Prop Track Report

Stamp duty, a substantial financial burden, is a significant cost for Australians aspiring to buy or relocate. To purchase a median-priced home, stamp duty engulfs half a year’s income in Sydney and Melbourne and three months’ income in Perth, significantly impacting individuals’ financial situations.

Reflecting on the past, stamp duty was not always such a significant financial hurdle. In fact, stamp duty relative to incomes is now four-and-a-half to six times higher than a generation ago, depending on the state, a stark contrast that should raise concerns.

Over the past decades, home prices have outpaced incomes, and stamp duty thresholds have failed to keep up. This phenomenon, known as “bracket creep,” has led to more homes falling into higher-taxing stamp duty brackets, a key driver of the growing burden. This process has resulted in 95% of buyers today facing a stamp duty rate of 3% or more of a property’s purchase price, compared to as few as 12% of buyers in the early 1990s, a situation that urgently calls for reform.

This high burden has real costs for Australia. Joint research by the e61 Institute and Prop Track finds that a 1 percentage point increase in stamp duty reduces home sales by 7.2 percent.

How stamp duty is hurting the Australian property market

Higher stamp duty makes people less likely to move within their local area or move interstate. This means people are less likely to move for jobs, which may hamper productivity. It also means that stamp duty is among the least efficient ways to raise revenue.

While the transition from stamp duty would undoubtedly pose challenges, the potential benefits are significant. Australia, one of the most reliant OECD nations on stamp duty, could see a more efficient and equitable tax system. The ACT and Victoria offer promising models for this transition.

Stamp duty is a significant upfront cost to moving home and has become much larger compared to previous generations

The upfront cost of stamp duty is very significant in every state and territory.

A buyer purchasing a median-priced home in Sydney and Melbourne is looking at paying around $42,000-45,000 in stamp duty – equivalent to about six months of average after-tax full-time employee wages, excluding concessions.

Even in jurisdictions with lower stamp duty, like Perth, buyers need the equivalent of three months’ worth of income to cover stamp duty.

While stamp duty rates across Australia are progressive – meaning buyers pay disproportionately more in stamp duty for more expensive homes – even buyers looking at more affordable homes face a large burden.

Previous generations of home buyers didn’t pay as much stamp duty.

While stamp duty has increased in all states compared to prior decades, the increase has been particularly acute in Melbourne. Compared to the early-to-mid 1980s, a buyer in Melbourne today faces a burden from stamp duty 6.1 times higher relative to their income. Stamp duty today is equivalent to six months of full-time after-tax income, whereas in 1983 it was less than one month.

Similarly in Sydney, someone looking at buying a median-priced home today would pay just under $45,000 in stamp duty – equivalent to six months of income. In 1983 that same buyer would have needed to pay just $1,550, or 1.1 months of income. That represents a 5.4-fold increase.

Stamp duty is an upfront cost to buying a home and adds to the deposit a first-home buyer must save. This extra saving matters because, for most first-time buyers, saving a deposit is a key constraint to being able to obtain a mortgage. State governments recognise the burden, which is why most states offer concessions or complete waivers for first-home buyers. This works well for first-time buyers looking at more affordable homes within the lower price class, but not all first-home buyers benefit. The concession phases out in most states at relatively low price thresholds, meaning many homes are not eligible. Indeed, first-home buyers looking at median-priced homes will, in all but Brisbane and Canberra, receive no concession on stamp duty at all.

Western Australia’s first homeowner grants and concessions could include the following when buying south of the 26th parallel: A $10,000 first homeowners grant on the purchase of a new home (or land) under the value of $750,000; no stamp duty when buying your first home valued under $430,000; and concessional stamp duty rates on homes valued at $431,000-530,000.

Australia’s heavy reliance on stamp duty is unusual

Australia is unusually dependent on stamp duty among OECD nations. In 2021, 5.5% of government revenue—across all levels of government—came from stamp duty, second only to South Korea.

Comparable nations like New Zealand (which does not have stamp duty on residential property transfers), Canada (1.3%), and the United Kingdom (2.4%) rely far less on stamp duty to raise government revenue. Across the OECD, around 1.6% of government revenue comes from stamp duty—far below Australia’s 5.5%.

That wasn’t always the case. In the 1970s and early 1980s, Australia’s reliance on stamp duty was much lower – around 2-3% of government revenue and largely in line with the then-OECD average.

A 1 percentage point increase in stamp duty reduces sales activity by 7.2%

The regression estimates find that the removal of the owner-occupier concession caused 7.2% fewer purchases across the policy change period (relative to sales volume in 2011-12). This estimate is statistically significant, and placebo tests support the results’ robustness.

Accounting for the size of the stamp duty change implies that a 1 percentage point increase in stamp duty (as a share of purchase price) leads to a 7.2% decrease in housing market turnover.

Stamp duty goes beyond property markets

Stamp duty discourages people from relocating for work, lowers productivity, discourages downsizing, and is an inefficient revenue-raising tool.

The impacts of stamp duty are not confined to the housing market. Making it costly to move homes affects where people live, which could affect the jobs they choose to take and, relatedly, how far they must commute.

Stamp duty discourages older households from downsizing when their house becomes surplus to their needs because it adds tens of thousands of dollars to the cost of doing so.

Because households are quite responsive to the cost of stamp duty, it is an economically costly and inefficient way to raise revenue compared to many other taxes, which do not induce as large a change in households’ choices.

Numerous studies find that stamp duty ranks as one of the least efficient ways of raising revenue.

While reform will be challenging, the ACT and Victoria show how we could move away from stamp duty

Replacing stamp duty with a broader-based land tax would be fairer and more efficient.

Broad-based land taxes are a more efficient way to raise revenue. They are also fairer because they spread the burden of taxation. Unlike stamp duty, they do not differentially tax households of otherwise similar income and wealth simply because one moves home more often.

Replacing stamp duty with land tax is not the only option. Stamp duties are among the least efficient ways of raising revenue, so almost any other tax would improve. However, states have few other revenue-raising options, so land tax is a natural choice.

While transitioning from stamp duty to land tax is difficult, the Henry Tax Review (Treasury 2010) outlines several approaches: a gradual transition, a ratchet change, and an immediate change with credit past stamp duty paid.

A gradual transition, with credit for recent buyers, would be the simplest and fairest reform

It’s crucial that we start addressing our current housing problems. Adopting a gradual transition away from stamp duty provides the simplest and fairest approach.

By slowly reducing the rate of stamp duty, state governments do not face large short-term revenue shortfalls – unlike a ratchet transition in which upfront stamp duty revenues are immediately forgone. Similarly, by gradually increasing land tax rates rather than immediately changing over, homeowners are not faced with unexpected and unplanned taxes.

Credit should be provided for recent buyers and buyers who pay stamp duty during the transition period. This credit would be equal to the stamp duty paid and offset future land tax obligations, avoiding any perceptions of recent buyers being “double taxed”.

For recent buyers, this credit should be pro-rated depending on how long ago they purchased so as not to provide unnecessary compensation for those who last paid stamp duty some time ago.

State governments should consider undertaking this transition over a five-to-ten-year period so that they can benefit from the abolition of stamp duty sooner and minimise the risks of the reform being abandoned.

For retiree, asset-rich but low-income households, for whom annual property tax could be a substantial impost, a deferral scheme should be available that would allow property tax obligations to accumulate and be discharged on the sale of the property.

If you are considering selling a property in Albany, Mount Barker, Denmark or Walpole areas, please contact or call me to discuss your needs. Consultation, advice and appraisals are free of charge, with no obligation or harassment – ever.

Main Source: Angus Moore – Senior Economist with REA Group’s Prop Track – 29 Feb 2024

Link to the full report: The Growing Burden of Stamp Duty – PropTrack Report