10
Mar
2017

Stamp duty cuts won’t help house price affordability

by John Daley and Brendan Coates


Aust_Perspectives_Housing-postPublished by The Age, Friday 10 March

For governments whose voters are worried about housing affordability, being seen to have a plan matters at least as much as actually fixing the problem. The Victorian government’s new plan is no different.

Proposed cuts to stamp duty for first-home buyers will do little to improve affordability. Other reforms are sensible, but unlikely to change much. And the Andrews government continues to tiptoe around reforms that would make the biggest difference – changing planning rules to boost the supply of housing in inner and middle-ring suburbs where there is good access to the jobs that businesses create.

Changes to stamp duty are the big-ticket items in the package. First-home buyers will pay no stamp duty on properties valued up to $600,000, and less stamp duty on properties up to $750,000. Investors will pay stamp duty on the full value of the property, not just the land value, when buying off the plan.

This sounds like it will improve affordability for first-home buyers at the expense of investors. But in reality it will mostly transfer wealth from inner-city property developers to city-fringe property developers.

That’s because, in effect, sellers pay most of the stamp duty, even if buyers hand over the cheque. When buyers have to pay more stamp duty, they’re prepared to pay less for the property. The precise outcome depends on who is affected. The purchasers of new inner-city apartments are mostly investors who will now pay more stamp duty, leading to lower inner-city apartment prices. Bad news for inner-city apartment developers.

Many more of the purchasers of new houses on the city fringe are first-home buyers who will now be exempt from stamp duty. They will be prepared to pay more for their homes. Unless there is a very rapid increase in supply (unlikely given the time taken to develop new lots), the price of new city-fringe houses will go up. Happy days for city-fringe developers.

The only first-home buyers who will win big are those competing primarily with investors or second-home buyers – as is typical in the middle rings of Melbourne. But good luck finding a home there for under $750,000.

Other parts of the package involve fewer dollars – but they also won’t make much difference to housing affordability.

The government’s proposed shared-equity scheme also sounds like a way for first-home buyers to clear the deposit hurdle, without significant costs to taxpayers. Similar schemes already exist in some other states. Under the Victorian proposal, the government would pay up to 25 per cent of the purchase price for eligible first-home buyers. It gets its money back, and a share of any property price growth, when the property is sold. It remains to be seen whether this makes a real difference – or just pushes up prices further. The Victorian scheme is a pilot for at most 400 first-home buyers, so over the next few years we’ll see.

The proposed 1 per cent annual tax on the value of vacant homes is another idea that sounds good. In theory it discourages investors from leaving their homes vacant and so boosts housing supply. But how much will these investors care? They are already leaving 2 per cent of the value of the property on the table each year by not renting it out. And in any case, how many of them will pay? Accountants are likely to get busy showing how vacant homes fit within the exemptions for those temporarily overseas, holiday homes and those who need a city unit for work purposes. A similar tax introduced in Vancouver this year is yet to show that it has overcome these challenges.

It’s easy to understand the concern about renting in Victoria. For those who cannot afford to buy a house, renting is often a poor substitute. Renters in Australia move a lot, whereas home owners tend to stay put. Typical contracts prevent tenants from making even minor changes to their rental property, or from having pets.

The government plans to write a new optional standard lease agreement for landlords and tenants who agree to a long-term lease. It sounds good. But don’t expect much take-up in real life. Few landlords want longer leases. If the government is serious, it needs wholesale reform of Victoria’s progressive land tax regime, which levies a higher rate of land tax if a person owns more investment property. This discourages investors from owning more than one or two properties. Investors with only one or two properties are generally reluctant to sign long leases because this ties up too much of their assets.

The government’s announcement includes lots of maps showing new supply of housing. It includes plans for 100,000 new lots on the urban fringe, and trumpets the re-development of Fisherman’s Bend. And activity centres around train stations are highlighted.

But what’s missing from the package is a plan for a step-change in housing supply in the inner and middle-ring suburbs of major cities where most people want to live, and which have better access to the city centres where most of the new jobs are being created.

Current rules make it reasonably easy to build apartments in the CBD and to develop new housing estates on the city fringe – so that is what we’re getting. But the rules also make it very difficult to subdivide and create extra residences in the middle rings of our capital cities, up to 20 kilometres out of the CBD. Population density in the middle ring has hardly changed in the past 30 years. New developments on the edge of the city tend to be far from new jobs and existing infrastructure.

For the past decade, successive state governments have told Victorians that that they can fix housing affordability. And all the while house prices have continued to rise. Treasurer Tim Pallas’ plan, like those of his predecessors, has lots of plausible initiatives. But it fails to embrace what matters most: increased supply in the inner and middle-ring suburbs of Melbourne with good access to jobs and where most people want to live.