This week, the NSW government handed down a budget with proposed reform to the current transfer duty and land tax system.  Following the broad consensus of academics, economists and think tanks, NSW Treasurer Dominic Perrottet announced consultation will be sought on a proposed model for changes to stamp duty, and replacement with the option for an annual property tax. 

The proposal in its current form, suggests people looking to purchase a home would have the option of paying an upfront, lump sum tax, or opting in to an annual land tax. Owner occupiers would potentially pay less tax than investors under the model, and first home buyers could still be incentivised to purchase via a $25,000 grant, which could be used to either offset their tax payment, or fund a renovation of the property.

So what are some of the impacts that stamp duty reform could have based on the current proposal? 

Replacing stamp duty with a land tax may not reduce the cost of housing, or increase affordability. 

As has been seen with demand-side housing incentives, any reduction in the upfront cost of a property, or grants given for property, is theoretically built back into the price, because the price with stamp duty is a reflection of what people are willing to pay. 

However, prices may be affected by the consideration of an ongoing, annual land tax to be serviced on residential property, which could at least reduce upfront costs. This could incentivise more first home buyers into the property market. Previous research from CoreLogic suggests first home buyers perceive one of the biggest hurdles to home ownership is stamp duty, together with saving for a deposit. 

Reform to property taxes could increase turnover and efficiency in housing stock. 

Stamp duty has historically created distortions in property buying and selling decisions because of people’s aversion to pay large, upfront duties. 

This has created inefficiency in the use of housing stock, such as empty-nesters being reluctant to downsize, young couples buying larger homes than needed, and people not moving for work in order to avoid paying stamp duty twice. This distortion makes stamp duty and expensive tax, with treasury modelling suggesting stamp duty in its current form costs the economy around 70 cents for every dollar raised.

The replacement of an upfront, lump sum with an ongoing land tax based on the unimproved value of land could incentivise more turnover, and more efficiency in the use of housing stock.

However, the proposed model could take over 18 years to implement. 

Interestingly, the proposal put forward by the treasurer is a model where only home buyers would be subject to the new scheme, and even then have an option to opt in. 

In other words, if you have already paid stamp duty and are not moving, the new model would not apply. This means housing reform would be achieved over a much longer period, as a new model of property tax is gradually phased in. Based on the current 5-year average turnover rate of 5.3% in NSW, it could theoretically take over 18 years for each property to transact and be subject to reform. While it is a step in the right direction, it creates no urgent incentives for downsizing, and could thus limit greater turnover of real estate. 
Another risk associated with the proposal is that some prospective buyers could delay their purchasing decision until the policy is finalised.

The proposed model could make property taxes more expensive for investors, with a lower tax rate for owner occupiers. 

This could increase home ownership rates. The timing is right, as ABS data shows investor participation in the NSW mortgage market is at near-record lows anyway, at around 28%. First home buyers will also see some changes, with stamp duty concessions reverting to a $25,000 grant providing greater flexibility for first time buyers in how they use the capital. 

The grant could be used to at least partially fund stamp duty, or spent on renovations.  Added to the first home buyers grant, then HomeBuilder and the first home buyer deposit scheme, the incentives for first time buyers are substantial.

Ultimately, this is a proposal which will be subject to public consultation. The impact on the property market will depend on the final details of its execution. But based on what we know so far, it is promising to see a large state government take a step in the right direction for improving the efficiency of housing. The ACT has already begun a 20-year transition to land tax over stamp duty, and South Australia has made reforms in non-residential property. The move from NSW could prompt other major states to follow in the future.