Inside NSW’s stamp duty experiment

NSW has a bold new plan. Will it work?

So a couple of people have asked me what impact NSW’s government’s plan to let first home buyers choose between stamp duties or land tax is going to have.

It’s not super clear cut, but I think it is interesting policy in the sense that it probably does make it easier for first home buyers to get into the market, without actually having to reduce prices.

The AFR had an interesting piece looking at the numbers around it all. It’s paywalled though, but I’m sure they won’t mind me sharing the key take-aways. (Get yourself a subscription though. I find I use it almost every day.)

Anyway, the basics of the plan are:

The NSW government recently announced plans in its 2022 budget to offer first home buyers the choice to either pay upfront stamp duty or an annual land tax for properties valued up to $1.5 million – with conditions attached.

The NSW proposal, if it passes parliament this year, would come into effect from January 16, 2023.

The opt-in tax will be $400 a year plus 0.3 per cent of land value. For those who choose to turn their first home into an investment, the figures will be $1500 plus 1.1 per cent of land value.

The annual land tax payments will be based on the land value of the purchased property, which does not consider the home on the property, additional structures and land improvements.

This handy table here shows you how long you have to be holding the property for before it’s worth paying stamp-duty up front.

Since the shortest pay-back period is 15 years, and the average hold time is just 7 or something, it kinda seems like a no-brainer.

By choosing the annual land tax option, a person could be paying up to $67,000 less upfront when buying their first home.

In the long term, for properties valued between $800,000 and $1.5 million which are not eligible for other stamp duty concessions, an owner would have to pay 15 to 18 years’ worth of land taxes to match the upfront cost of stamp duty.

If a first home buyer sells their property after the required six months of living there, they won’t have to pay any ongoing land tax.

For example, a person buying a $750,000 apartment in Sydney’s inner west after five years will have paid only about $5000 in land taxes, compared to over $20,000 in stamp duty.

And the policy does make sense that since prices have risen so much, and stamp-duties have remained the same percentage of the sale price, the absolute dollar burden of stamp-duties has gone up and up an up.

“We want to lower the barriers to owning a home for first home buyers seeking a place of their own,” Perrottet says. “In the past two decades, the share of first home buyers under 35 years of age has declined from 67 per cent to 61 per cent.”

Since 2002, Sydney house prices have risen 280 per cent while the cost of stamp duty has escalated by 406 per cent, according to Domain data. By comparison, wages have grown 95 per cent.

And when it comes to the question of what impact it will have on the market, it’s worth remembering that first home buyers aren’t a huge proportion of the market anyway, so any measure that targets them alone is never going to have a massive impact.

But we also have a living example in ACT, which is on a 20-year plan to phase out stamp-duties.

And when you look at the numbers there’s nothing to suggest that it’s had a big impact on the market, with prices and rents following the same trajectory as the rest of the nation.