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Get rid of stamp duty – but don’t expect improved housing affordability

Posted by on August 20th, 2015 · Affordability, Tax

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Stamp duty is Australian tax reform’s pantomime villain, booed and hissed by everyone whenever it appears on stage. As a tax levied on transfers – in particular, transfers of real property, including housing – it is decried by economists as a lumpy and inefficient cost to transacting parties, and an unhappily volatile revenue source for State and Territory Governments. The Howard Government’s GST deal was supposed to get rid of it; the Henry Tax Review would have abolished it; and just about every interest group in the housing sector – from ACOSS and National Shelter to the Real Estate Institute and the Property Council – say they want it gone. This week the Housing Industry Association has held a summit focused on tax reform and ‘killing stamp duty once and for all.’

Okay, stamp duty is bad – but it’s not all bad, and it’s not bad for the reasons most people think.

In particular, it doesn’t really make housing more expensive for purchasers. This is because the cost of stamp duty, though legally payable by the purchaser of a property, is actually borne by the vendor, who receives less of the purchaser’s money than they otherwise would.

This happens because in the property market, purchasers have more room to move than vendors: considering the state of the market (ie what they’ll have to pay to outbid other purchasers), a purchaser can adjust the quality and amount of the housing they will buy (eg they can adjust the location in which they’ll buy, or the number of bedrooms, or the quality of the fittings); whereas a vendor can sell only what they’ve got, and they’ll either sell it – the whole of it – or not. (In other words, the vendor is more ‘price inelastic’ than the purchaser). So when a given purchaser meets a given vendor in the market, having this additional room to move allows the purchaser to push the burden of stamp duty onto the vendor. In fact, a review of the evidence by Ian Davidoff and Andrew Leigh indicates that where the cost of stamp duty is increased, an even greater cost is pushed onto vendors – that is, it appears stamp duty tends to reduce house prices.

Of course, in the property market many – perhaps most – purchasers are also vendors (they buy a house having just sold one), so over the course of their double transaction they do get hit by stamp duty. On the other hand, first home buyers are purchasers only – they’ve no prior house to sell – so stamp duty is not really a cost to them, and to the extent that it reduces house prices, they benefit from it. Stamp duty really becomes a pain once a person is in the housing market, and is looking to sell and buy again.

And that pain works in two ways. One we’ve just discussed: stamp duty exacts a cost on those who sell. The other is that the prospect of suffering that cost causes some would-be vendors not to sell. This effect, too, is indicated by Davidoff and Leigh’s analysis: stamp duty tends to reduce property turnover. This is a problem because some of those foregone sales would represent good moves for people: for example, they might have moved to take up a new job (more income for them, better allocation of skills and productivity in the economy), or be closer to work (reducing travel time and traffic), or they might have moved to a house that better suits their changing household (young families upsizing, older couples downsizing). On the other hand, others of those foregone sales would be sales by landlords – so the reduction in turnover is a benefit to tenants, in terms of greater stability.

So there’s good and bad to stamp duty; on balance, probably more bad than good. So let’s get rid of it, but let’s not kid ourselves that doing so will make housing more affordable – it won’t – and let’s make sure we’ve got arrangements in place to substitute for the good things stamp duty does. These might include a landlord vendor duty, to put a bit of a brake on rental property turnover, and they would certainly include a broad-based land tax, to discourage speculation in housing. Indeed, in the theatre of Australian tax reform, the spotlight should be on land tax – fair, efficient, simple to administer, impossible to avoid – as the hero of the tale.

One Comment so far ↓

  • Philip Graus

    Good summary of issues. We should make it as simple and inexpensive to move as possible. Let those who want to downsize do so. Let’s use our housing stock as efficiently as we can!

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