The phasing out of stamp duty will no doubt be sold to voters on the basis of boosting the housing market and helping people buy property more easily. They’ll also point to savings to be made on home loan repayments.
However in my professional opinion, most people won’t really borrow less. For first home buyers, the main obstacle is usually their limited savings. Abolition of stamp duty would see them borrowing exactly the same amount and simply buy sooner as they don’t need to save extra for stamp duty.
A boost to the housing market also sounds fabulous however this kind of artificial stimulation often only leads to a boom-bust cycle.
Imagine this: the first home buyer - excited at stamp duty savings to be made - goes house hunting. At each open inspection, there are a dozen other eager home buyers and investors. The competition hots up and they end up paying more for the property, blowing a significant chunk of their stamp duty savings. Since many borrow up to 95 per cent of the purchase price, they actually end up with a bigger home loan.
This is precisely what happened following the post GFC stimulus package where up to $25,000 in grant money was up for grabs in SA. Property prices rose due to increased competition, the market became overinflated and a few years later those property’s values are the same or less.
Fast forward a few years from stamp duty abolition and you may also see home buyers stuck with a property they paid too much for and consequently borrowed more for. They’ll then also have to find the cash to pay the extra land tax bill which arrives in their letter box each quarter. If it’s all too much and they decide to sell up they may face making a loss – especially if enough of them suffer buyer’s remorse to flood the market!
No doubt the government would love a smoothing of tax revenue. With the slump in the housing market, stamp duty revenue is down significantly. Switching to a scheme where each and every home owner pays an annual land tax will be much smoother sailing. In the talk so far, there has been an indication the new tax would not apply to people who already paid stamp duty.
The approximated figure being bantered for this land tax is $2,000 per annum. Let’s compare this to the cost of stamp duty:
For a $500,000 home purchase, stamp duty adds an extra $128 to monthly mortgage payments at current variable rates, so that’s $1,535 per annum. However, that repayment is actually paying the debt off.
What would happen to land tax when people reaching retirement? By that time, most people have usually paid off the family home. An annual land tax bill might be a burden which is too much for many.
With an aging population, pensions too meager to survive on and superannuation insufficient to retire on, most of us have realised we need to ‘do it ourselves’ when it comes to setting up for retirement. Property is still a favorite investment vehicle for most Australians.
Property investors usually fund stamp duty using the equity in existing properties. This means they only have to cover the interest charges on that cost. With land tax, they actually have to come up with the cash to pay the bill every time it arrives in the post.
Land tax is already crippling many property investors. They‘ve been lobbying the government to do something about it for years, to no avail. The current land tax scheme actually penalizes multiple property owners– the land tax payable isn’t just the total of the land tax for each property. It actually goes up almost exponentially with each extra property owned.
If a new land tax renders people’s self-funded retirement plans unaffordable, governments of the future will have much bigger problems on their hands.
Stamp duty and land tax reform are absolutely required, there’s no doubt about that.
However, there’s much at stake here and getting it wrong can have serious repercussions.
I do hope the SA government resists the urge to jump the gun and run with what’s an easy-sell at face value without first carefully considering the long term implications for us all.
Miriam Castilla is an award winning mortgage adviser who started her working life as a Petroleum Engineer, with a variety of different businesses and careers along the way.
Born in Germany and emigrating to Australia in her teens as the daughter of a Greek diplomat, she's fluent in three languages and sees herself as a 'citizen of the world'.
Her passion is to empower and support others to achieve their personal, business and financial goals.
Image: slamglobal.com