The NSW government has flagged “it is time to change”. The debate whether to keep the centuries-old stamp duty tax or to replace it with a more efficient land tax has been ongoing for years. Economists, politicians, policymakers and academics all agree that the current one off duty tax is not efficient. However, there is strong resistance to change due to the stamp duty tax being a major source of revenue for state governments.
In Sydney, the stamp duty per transaction could be as high as $100,000 or even more, which is a significant extra outlay that prohibits property transfers. This tax leads to inefficiency in the allocation of resources, which is bad for the economy. Many home buyers delay their purchases due to the stamp duty tax; and many sellers delay the sales because they will have to fulfill a large tax bill for their next homes.
Under the new proposed change by the NSW government, homeowners will have the choice to pay annual land tax on new property transactions or the usual one-off stamp duty. The proposed model includes a property tax rate that would be lower for owner-occupiers, with higher rates for investors and commercial properties.
This will free up significant financial resources that can be used for home deposits; or to enable more buyers to enter the market sooner. Overall, the proposal is expected to stimulate the economy at this critical stage of post-covid recovery.
However, this tax is not without a caveat. Assume that the housing supply remains the same, and suddenly home buyers have more money, they will likely bid up the prices.
Therefore, besides the stamp duty tax reform, the government will need to simplify the process of housing development in order to make housing available where people want to live.
Experience shows that the Sydney and Melbourne markets are volatile to the policy changes: prices could go up and down by up to 15% per year. Therefore, the government will need to closely monitor the movements of the housing market and to deploy policies to cushion any unexpected increases that may do more harm than good for home buyers, especially for first-home buyers.
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