Ditching stamp duty in NSW may inspire other states to quickly follow suit, experts say

Radical reform to stamp duty to be announced in the New South Wales budget on Tuesday could be a gamechanger for affordability and supply in Australia’s most expensive housing market.

And its progress will be closely watched by the other states, which are also looking at long-overdue housing tax reforms, meaning the imminent overhaul could see dominos fall around the country.

The NSW scheme – which would give homebuyers the option to ditch the hefty one-off stamp duty hit in favour of much smaller annual land tax payments – has been a pet project of Premier Dominic Perrottet since he was state treasurer two years ago.

“It is expected to expand the NSW economy by 1.7%, or more than $10 billion additional annual income for NSW residents,” Mr Perrottet said when pushing the plan last year.

As well as helping people into their own homes sooner and for less, the major overhaul will have significant economic and employment benefits, he said.

“Mr Perrottet flagged it as a reform he wanted to make,” PropTrack economist Angus Moore said. “But I don’t think anyone expected to see action as soon as this budget.”

Why change is urgently needed

Stamp duty, long criticised by economists as a regressive and inefficient tax, is seen as a key impediment for first-home buyers trying to crack the market, as well as a disincentive to move for upsizers, downsizers, and people wanting to be closer to work.

The one-off payment adds between 3.4% and 5.7% to the cost of a $1 million property, depending on the jurisdiction. In NSW, the stamp duty impost on a home of that value is around $40,000.

Stamp duty can add an extra 18 months of saving for first-home buyers. Picture: Getty

While it fills state government coffers – and in NSW stamp duty accounted for 28% of all tax revenue last financial year, with an even greater return expected this year – it stifles the property market.

Mr Moore estimates that stamp duty can add an extra 18 months of saving for first-home buyers, who already face the onerous task of saving for a 20% deposit.

It also acts as a smother on mobility, with people reluctant to pay what amounts to a tax on moving. That impacts on supply, which is a key driver of house price growth.

“People stay too long in houses that are too small for them, and too long in houses that are too big,” Mr Moore said. “In my view, a broad-based land tax is far more efficient than stamp duty.”

Buyer’s agent Peter Wargent from BuyersBuyers described the planned reform as a “political hot potato”.

“People don’t like the idea of a forever tax on a forever home, but the government is getting around that by phasing it in and making it optional,” Mr Wargent said.

“It will mean more transactions, people being able to move more easily, and that’s a good thing for the economy.”

Devil is in the details

The NSW Government is keeping the details of its reform close to its chest until the budget is handed down.

Mr Perrottet and Treasurer Matt Kean have acknowledged that the significant loss of tax revenue during the transition from stamp duty to land tax, estimated at $2.5 billion per year, would require some Commonwealth assistance.

NSW Premier Dominic Perrottet says federal support is needed to abolish stamp duty. Picture: Getty

But without any such guarantee in place, there is speculation the reform may initially only target first-time buyers.

“If they can’t get that full federal support, they may start with baby steps for first-home buyers,” Mr Wargent said. “Once you’ve introduced it, it may be easier to [expand it] in the future.”

The government, however, has revealed that the top 20% of sales would be exempt from the opt-in model, with the current stamp duty payment still applicable for those properties.

Mr Moore, who questioned that exemption, estimates it would include homes worth more than $2 million.

“If we think it’s a good reform for 80% of the market, then it must be a good reform for the rest of the market too,” he said.

Mr Wargent was blunter and described the 20% threshold as a “bull**** measure”.

“The reason they’ve done it is because stamp duty this financial year will be something like $15 billion, which is a phenomenal windfall, and they really can’t face losing the top slice of those transactions,” he said.

“You shouldn’t really set a tax policy that excludes the top 20%. It should really be a wholesale change if you’re going to do it.” 

New hope for first-home buyers

There’s little doubt that first-home buyers will be the biggest winners from this stamp duty reform.

“If there’s no stamp duty, it’s going to make it easier for first-home buyers,” said buyer’s agent Simon Cohen from Cohen Handler.

“It’s a big out-of-pocket expense you’re not going to have. You have to earn up to an extra $100,000 to pay a $50,000 stamp duty bill.”

First-home buyers will be the biggest winners from stamp duty reform. Picture: realestate.com.au

The abolition of stamp duty would also allow first-home buyers to enter the market sooner.

Recent analysis by PropTrack revealed that based on the estimated cost of an entry level home in Sydney of $750,000, the 20% deposit of $150,000 would take buyers 7.1 years to save, with the full stamp duty of $29,100 adding another 1.4 years to that timeline.

On top of removing that cost and delay, ditching stamp duty would allow those young buyers to upgrade faster when their families expand, without worrying about paying another hefty tax bill.

Modelling by the Tax Institute found that a home valued at $650,000 in Western Sydney – the price at which current stamp duty exemptions cut out – would attract an estimated $1300 annual land tax bill, as opposed to the immediate $24,457 stamp duty slug.

Those inadequate stamp duty exemptions and concessions, which have not been adjusted in NSW for five years, even as house prices boomed, cover only 12% of properties in Sydney. “First-home buyers tend to buy cheaper dwellings but with concessions cutting out at the $800,000 level, that still rules out most free-standing dwellings in Sydney and about half of units,” Mr Moore said.

Will property prices rise?

The short answer is, probably – at least in the short term.

“Buyers will have more money to spend,” Mr Cohen said. “But the flip-side is that prices will probably go up to match the savings on stamp duty.”

Mr Moore agrees.

“In the short term, I would expect it to raise prices. Buyers will have more money, so they’ll be able to bid up prices.

“But in the longer term, it will help housing affordability because we’ll have a better use of bedrooms. It will free up supply and make housing more affordable.”  

Reaction from the property industry

The reaction to the NSW reform has largely been positive, with most industry participants saying it is long overdue.

“Stamp duty reform is a fundamental driver of economic growth and productivity at a time when Australia needs it the most,” Real Estate Institute of Australia president Hayden Groves said.

“Done well, it will contribute to addressing the housing supply problem and allow Australians to move closer to job opportunities and not feel locked into their current housing option.”

REA Group CEO Owen Wilson spoke about housing affordability alongside business leaders and Federal Treasurer Jim Chalmers. Picture: Sky News

Speaking at a forum on Australia’s economic outlook last week, Owen Wilson, chief executive of REA Group – publisher of realestate.com.au – urged the Federal Government to participate in the reform.

“Longer term, we would like to see more progressive reforms, particularly around the most regressive tax in this country, which is stamp duties,” Mr Wilson said.

“That is state-based, I understand it’s not federal, but I think the Federal Government can help in the transition … and play a leadership role across the states.

“If we can do that, the efficiencies that it will drive in our economy, from people being able to live close to their place of work to being more mobile around the country – I think there’s some huge benefits in that.”

But Real Estate Institute of NSW boss Tim McKibbin sounded a note of caution, saying the change has the potential to create a two-tiered housing market.

“Like-for-like properties, one of which will incur stamp duty and the other which will be subject to the ongoing property tax, may not be in equal demand,” Mr McKibbin said.

“The prices achieved for these properties may differ because of this. We question whether replacing one tax with another is the right solution.”