Christopher Niesche: Why Australians hang on to houses longer than they need to

Stamp duty on property leads to several perverse outcomes and all of them bad for the Australian economy, writes Christopher Niesche. Photo / Getty Images

COMMENT:

When Australians want to upsize their home, we don't usually sell up and look for a bigger one. Instead, we renovate our current houses, building out or up to accommodate their growing families.

The reason? In large part it's because of stamp duties – a tax which a property buyer has to pay on top of the purchase price.

The cost can be substantial. Buyers of a A$1 million house – about the median price in Sydney – have to pay stamp duty of A$40,000 and the impost, relative to purchase price, rises sharply after that. A A$2 million home – enough to get you something nice but not spectacular in a reasonable Sydney suburb – incurs stamp duty of A$95,000.

Stamp duty leads to several perverse outcomes and all of them bad for the economy.

Firstly, people are reluctant to move. They don't want to sell their house only to lose a big chunk of proceeds when they buy a new house.

It means people stay in houses no longer suited to them, houses which could be better used by someone else. For instance, an older person might live by themselves in a three-bedroom house after they've been widowed and their children have left home, instead of selling it to a family who would occupy all the bedrooms.

Conversely, as families grow, they are reluctant to sell their property. Instead, they renovate and squeeze more accommodation onto the existing property.

The result is tradies are lining their pockets and our suburbs often resemble building sites. The sound of cement mixers and electric drills are as much a part of suburban soundscape as nasal speech and cicadas.

Additionally, instead of people moving house to take up a better job, they either stick with the work they have or traverse the increasingly congested metropolises of Sydney.

This is a highly inefficient use of economic resources, which would be put to better use if it weren't for homeowners trying to dodge an inequitable tax.

There's a second unintended consequence from the tax, and that is inequity.

Stamp duty is used to fund essential services, but only a handful of people pay it each year – that is, those who buy a property.

There were 2.8 million properties in New South Wales in 2018-19, but fewer than 200,000 of property owners contributed to the funding of essential services via transfer duty, according to a report commissioned by the NSW Government last year. "Only one in 20 carried the burden of paying for the schools, roads, hospitals and other services that gave all properties their value," the report, the latest of many examining stamp duty, states.

Home owners who haven't moved have benefitted from these services and received a boost to their capital wealth on the back of huge house price rises in recent two decades. But they haven't made any contribution.

"Others – who have moved to find a job, to be closer to schools, or to match housing size to their family situation – including young buyers without the financial means or parental support to buy their 'once-and-forever' house early in life – have picked up the tab," the report states.

Economists have pointed out the deficiencies of the tax for decades, but until now their pleas for reform have fallen on deaf ears.

That's because stamp duties are a huge cash cow for state governments. The NSW Government raised around $7 billion, or 24 per cent, of annual tax revenue from transfer duty in 2018-19, making it the State's second largest source of tax revenue.

This could all be about to change, with the NSW Government introducing a bold plan to abolish stamp duty and replace it with an annual property tax. The plan would remove this major disincentive to move house and share the burden of paying for essential services more easily.

In theory, it should also make properties more affordable and help first homebuyers get into the property market. However, there is a risk that in hot markets like Sydney and Melbourne, the stamp duty saving just gets absorbed into to the purchase price and the inflationary craziness continues.

In fact, the removal of this major disincentive to buy and sell property could lead to more property speculation as people buy and flick houses, much like they do in New Zealand.

It will likely be a boon for real estate agents, who will be earning generous commissions more frequently, but less so for tradies as fewer people renovate. Hopefully some of the freed up building capacity will go to construction of new houses to address Australia's housing shortage.

The NSW Government estimates the move would inject more than A$11 billion into the economy over the first four years and boost economic output by 1.7 per cent over the long term.

Stamp duty was introduced in NSW in 1865 and abolishing it is the biggest economic reform proposed by an Australian Government for two decades. It's nice to see that in the era of the Twittersphere and post-fact politics, that such bold reforms are still possible. Let's hope other state governments follow.