The NSW Government has announced a plan to abolish stamp duty in favour of a broad-based land tax, in a bid to remove one of the major hurdles people face if they choose to move homes.
The proposed changes (source here) announced as a part of the State Budget would see home buyers given the option of paying an upfront stamp duty on the purchase of a home or paying an ongoing land tax.
Stamp Duty, which has been in place in some form dating back to 1865, is believed to be a highly inefficient form of tax, that disincentivises many people form moving.
An example would be downsizers, who are now at retirement age and living in a large family home, who would like to move to a smaller, more manageable property, are often hamstrung because of the large transactions costs that come with buying and selling property in Australia.
With a median house price of more than $1 million in Sydney, stamp duty is around $40,000 on the purchase of a property of that value.
The Government has laid out a few key elements of the plan and how it will impact various property buyers.
The land tax would be on the unimproved land value, similar to the way councils charge their rates.
Owner-occupiers would pay less than investors or owners of commercial property.
If you’ve already paid for the property, there would be no land tax charged.
Initially, the Government would implement a price threshold on properties eligible to move to a land tax, in a bid to minimise their revenue shortfall.
The Government will also seek to protect renters from the costs of a land tax.
First home buyers will likely receive a rebate as they would no longer receive a stamp duty concession.
What Does This Mean for Property Prices?
While this is just a proposed change at the moment, we have already started hearing various opinions on what it might mean for property prices going forward.
There is some belief that initially, people might hold off from buying a property, to qualify for any changes should they come about. However, it is also expected that the Government might backdate any changes or offer rebates.
Some economists have also predicted that in the short-term, prices might rise as the money not used on stamp duty, could drive up demand.
Longer-term, however, the belief is that a land tax actually makes the property market more efficient, meaning there could be more supply of larger family homes, which are generally a sought after commodity and could lead to those properties falling in value and being more affordable.
What About Investors?
At this stage, the Government has proposed that owner-occupiers, investors and owners of commercial properties would face different levels of land tax which poses an interesting question for property investors and what it might mean for house prices going forward.
Looking at the numbers and on the surface, it appears that investors who buy large family homes, could be a loser under a land tax.
Based on the initial figures outlined by the Government, investors would be forced to pay, $1500 +1.0% of the land value each year.
Based on the information from the budget, for metropolitan NSW the average residential land value is around $630,400, and the corresponding owner-occupied property tax would be
Contrast that to an investor and they would be looking at paying $7,804 per year for that same property. Given the prices of properties in Sydney and the already low yields, it makes the prospect of owning property as an investor far less appealing over the long term.
In terms of apartments, it looks like the net result might be about the same, given the smaller land component.
It seems like the Government will give people the option of opting in if they buy between now and when new changes coming through. However, on the surface, it looks like Investors will pay more in the future and once a property has opted into the new scheme, it will remain that way in the future.
Similarly, for owner-occupiers who are looking at a home for the long-term, it appears that a land tax would be detrimental compared to paying stamp duty upfront.
Rowan Crosby is a Research Contributor at Wealthi. He is a published Australian journalist with opinions on Australian real estate, worldwide stock markets and commodities. Rowan has a particular interest in small-scale property development and investing.