Stamp duty is back in the spotlight as the federal government draws up a raft of emergency plans and structural reforms to get the economy back on track after the devastation wrought by COVID-19.

Many key figures are urging the government to abolish stamp tax as an unwieldy weight on both the property market and people’s flexibility, making homes unaffordable for first-time buyers, and creating barriers for those wanting to move closer to work, upsize or downsize.

However, others argue that now isn’t the time for such sweeping change, when state governments are using stamp duty revenue for a major series of funding measures to soften the blow of the pandemic.

“Stamp duty is a terrible tax, it should be repealed and this is the perfect time to do it,” said Dr Shane Oliver, AMP Capital chief economist.

“It will have to be a gradual removal and replacement with some kind of land tax so later buyers aren’t unfairly affected.

“The problem with stamp duty is that it’s a massive impost on a single transaction which inhibits economic decision-making in a less-than-optimal way. But land tax would be levied on the value of land and applied to all landholders equally and be done in a much fairer way.”

The critical issue is the timing. With the Reserve Bank predicting the economy will shrink up to 10 per cent in the first half of this year, hours worked to plummet by 20 per cent and unemployment to remain over 6 per cent for the next couple of years, the danger is that stamp duty’s abolition could prove a deflationary move.

Yet Reserve Bank governor Philip Lowe this week said, in planning the recovery, the first on the list of reform measures was “the way we tax income generation, consumption and land”.

It’s widely believed Dr Lowe was referring to a series of reports commissioned over the years with proposals to raise less money from state conveyancing duties on property transactions and income tax in the future, and more from state land taxes and GST.

Domain Group economist Trent Wiltshire co-authored a Grattan Institute report in 2018 on how to improve housing affordability, and recommended axing stamp duty in favour of a broad-based property tax.

He said removing stamp duty had the almost unanimous support of economists, academics, the Productivity Commission, Infrastructure Australia and government tax reviews.

Now, he still feels the same, but has doubts about the timing of such a move.

“Long term, reform will create benefits for the economy and boost the Gross Domestic Product significantly,” he said. “But those benefits take a while to accrue and whether now is a good time to do it … It’s not something that will provide a short-term boost to the market.

“Abolishing stamp duty and replacing it with a broad-based, flat-rate land tax is a policy that should be pursued and could be part of a whole bunch of reforms once we emerge from this, but it isn’t a policy that will help the market rebound over the next few months, and that’s what we need.”

The arguments for axing stamp duty include that it’s an inefficient tax, levied only on those buying property in any particular year, and makes property more expensive for both purchasers and then, by association, renters. It thus also becomes an obstacle for people – and businesses – wanting to move and is also expensive to collect, costing 70 cents for each dollar raised, according to Treasury modelling.

On the plus side, it raises a great deal of revenue for state governments which they now have never been more in need of, to arrest some of the economic fall-out from the pandemic.

But that sum does rise and fall, sometimes quite dramatically, according to the number of property transactions taking place, and the strength of the property market, making planning difficult.

State budget papers show that in NSW, for instance, stamp duty revenue in 2018-19 was $7.4 billion, down 24 per cent from 2016-17’s $9.7 billion. In Victoria, it slumped by 13 per cent over the same period to $6 billion in 2018-19.

Ken Morrison, chief executive of The Property Council of Australia, pulls no punches.

“There’s a consensus among economists and policy-makers that stamp duty is the worst thing in Australia,” he said. “It distorts behaviour, cripples job creation, lowers growth, and locks people into housing that might not be appropriate for their needs.

“Really, by anyone’s standards, it’s a terrible tax. There’s a lot of debate at the moment about corporate tax, but stamp duty is two times worse for the economy than company taxes and sets a new economic benchmark for worst taxes.

“We need to get the economy going and facilitate construction growth, and getting rid of stamp duty will help.”

However, he doesn’t like the idea of replacing it with a land tax as he says the rate would have to be too high to replace the revenue raised by stamp duty.

“Let’s rewind the decision to five to six years ago when we had GST being put on the table as the centrepiece for reform and getting rid of some of our worst taxes,” he said. “That’s what we would encourage governments to do as they move into reformist mode.”

Economic and policy consultants Urbanised Advisory Services is also advocating for the abolition of stamp duty. Managing director Stephen Albin says the whole system of property taxation needs urgent attention, and the time is ripe.

“It’s a bit of a mess at the moment and we should take the opportunity in the existing circumstances to really review the tax system and create different ways or securing revenue,” he said. “There should be more stable sources of revenue so the ebbs and flows don’t have such a major impact on budgets, and ways of making housing more affordable.

“There are good arguments for land tax to replace stamp duty and the Productivity Commission and Treasury are now looking at how they are going to levy taxes in the future. This is the perfect time for reform.”

Stamp duty is certainly becoming an ever-greater cost of buying homes. According to Domain figures, stamp duty paid on a median-priced home went up between 2004 and 2019 by 102 per cent in NSW to a high of $42,269, 183 per cent in Melbourne to $44,164, and 189 per cent in Brisbane to $11,013.

“It’s an awful tax,” said Adrian Kelly, national president of the Real Estate Institute of Australia. “It’s most particularly a drag on first-home buyers, with the ANZ ceasing to offer mortgage insurance products – which I suspect the other banks will follow – which means they’re have to raise a 20 per cent deposit plus stamp duty.

“So it’s becoming an even bigger problem in the current climate. It also reduces the mobility of everyone else with the housing stock, including older people wanting to downsize to a smaller home, and people wanting to change jobs. We need a broader tax base, and one that doesn’t provide so many impediments to buying a home.”

Sue Williams/ DOMAIN REPORTER/  APR 27, 2020

Are house prices falling? Not yet, but residential property prices are certainly not immune to the impacts of the coronavirus pandemic.  

Predicting property prices is a favourite pastime for many economists but in most circumstances, forecasts are inaccurate. During the coronavirus crisis, there have been projections of house price increases as well as major price falls, while some say the falls are already occurring.

What we can say with some certainty is that major financial support measures from the Federal Government will reduce the likelihood of significant price falls – at least in the short-term.

Stimulus is keeping house prices steady but transactions are slowing

Without wage subsidies in the form of JobKeeper payments, increased welfare through JobSeeker payments and mortgage holidays from the banks, the housing market would have been experiencing potentially large price falls by now.

However, the stimulus has resulted in a fall in the number of property transactions taking place. While sales are still happening, it is more a case of willing buyers and sellers transacting on property as opposed to distressed sales, which are typically seen during a recession.

It’s worth noting, while lenders have offered mortgage holidays in the past including during the Global Financial Crisis in 2007, welfare payment increases and wage subsidies are not typically features of economic downturns.

This reflects the fact that COVID-19 is not a financial crisis but rather a health crisis, which has stopped businesses from operating and people from going about their everyday lives.

Listings are on the rise as COVID-19 restrictions ease

The reduced demand for properties during COVID-19 has been coupled with a reduction in an already low volume of properties listed for sale with many vendors choosing not to list homes for sale amid the pandemic.

But interestingly, since state and territory governments began lifting COVID-19 restrictions, the property market has responded with a jump in the number of new properties being advertised for sale on realestate.com.au.

From here, the challenge for the property market, assuming COVID-19 remains under control, is what happens when JobKeeper payments and mortgage holidays are removed and JobSeeker payment amounts are reduced in September.

What happens when Federal Government stimulus run out?

Many hope that the Federal Government and lenders would take a pragmatic approach to winding-down financial support measures, particularly since a $60bn miscalculation in the cost of the JobKeeper program was announced last week.

But for now, all levels of government seem keen to re-open businesses and get the economy moving again, as they know these support measures can’t remain in place for good.

The Reserve Bank (RBA) has forecast an unemployment rate peak of 10% in June 2020, falling to 9% by the end of the year and dropping further to 7.5% by the end of 2021. The current forecast period is until June 2022 and has the unemployment rate remaining well above the pre-COVID-19 level of around 5%.

Additionally, the RBA is not forecasting underlying inflation to return to its target range of 2% to 3% any time between now and June 2022.

While low inflation and high unemployment significantly reduce the likelihood of any movement in the cash rate between now and June 2022, a slow reduction in unemployment could pose challenges for the residential property market.

A high unemployment rate won’t necessarily lead to price falls – it hasn’t in the past – but if the projected high rate of unemployment leads to distressed sales after wage subsidies and mortgage holidays expire, then depending on the magnitude, that could be a hurdle for the housing market.

On the flip side,  with the official cash rate at a record-low of 0.25% the cost of servicing a mortgage debt has never been lower. This also means borrowing costs for lenders are lower, which could lead to their willingness and ability to lend more money for longer.

House prices are a waiting game for now

Unlike shares, property is difficult to buy and sell with back-and-forth offers, cooling-off periods, pest inspections and finance approvals. In a situation such as COVID-19, the non-liquid nature of residential property is somewhat advantageous.

While it is still too early to tell if property prices are falling or will fall, the financial support that has been put in place will dramatically reduce the likelihood of significant price falls.

But the litmus test will come when the Federal Government and the banks end their financial support and the economy moves into the recovery phase.

Cameron Kusher / realestate.com.au/ 25 May 2020