House price forecasts released this week offer hope to first home buyers wanting to get a foothold in the market, with unit prices predicted to fall in the next three years in all Australian capitals except Hobart, Adelaide and Canberra.
But there’s less hope for those looking for a ‘family home’.
House prices in Melbourne, Hobart and Canberra will leap 10 per cent, 11 per cent and 16 per cent respectively, and Brisbane and Adelaide by 7 per cent, according to the annual QBE Housing Outlook report.
One of the frustrations in that segment of the market is the phenomenon of ’empty nesters’ living in large family homes, wanting to downsize, and yet baulking at the huge stamp duties they would have to pay to move.
The crazy part of that situation is that they’re sitting on their hands due to one of the most inefficient taxes ever devised.
Economists consider a tax to be ‘efficient’ if it is easy to collect, and doesn’t distort people’s decisions to buy and sell things too much.
Australia’s GST, for instance, is fairly efficient – economists estimate that the distortions it causes reduce economic activity by about eight to 10 cents for every dollar collected.
Stamp duty really is at the other end of the scale.
The Productivity Commission has just released a new shopping list of ways to improve Australia’s productivity, in which it notes that each “dollar collected by way of stamp duties on residential property reduces the living standards of Australian households by 72 cents in the long run due to the lower investment and mobility effects”.
Think about that for a minute. State governments, which are addicted to the huge revenue streams they collect from stamp duties, then have to pay for all kinds of services to help offset those two factors.
The ‘lower investment’ factor means that price signals that should flow to home vendors or property developers to build more homes are diluted by the fact that around 4 per cent of every sale is skimmed off by the government.
The ‘mobility’ factor means that working parents who would buy family homes near to their workplaces, instead have to live much farther afield – putting more pressure on state budgets to fix traffic congestion problems or upgrade public transport.
So what could fix this ridiculous situation?
The obvious answer, described in the Productivity Commission report, is to gradually phase out stamp duties and phase in a broad-based land tax instead.
Land taxes are about as efficient as tax can get – very easy to collect, and strictly linked to the value that can be extracted from a particular location.
A land tax would feel to households a bit like a rates increase. Based on the Productivity Commission report, a median land-tax bill would be around $1500 a year rather than requiring a home buyer to borrow a huge chunk – $52,000 for a median-priced house in Sydney – to pay stamp duty at the time of purchase.
There are benefits for state governments too. Bursts of activity in the housing market can see stamp duty revenues vary enormously, whereas land tax would flow in every year regardless.
The Productivity Commission is careful to point out that many people could not afford such a tax, and that land tax could therefore be deferred, to be paid only when a home is sold.
These suggestions are not just theory. The ACT decided to go down the land tax path some years ago, and expects to have fully phased out stamp duty by 2030.
Blocked by politics
Getting the states and the Northern Territory to do likewise would be difficult politically, but would, according to a recent Grattan Institute study, add $9 billion to GDP.
And, of course, it would help release thousands of empty nester family homes onto the market, to put downward pressure on prices.
So what’s stopping us? Largely it’s the tendency for such sensible reforms to be blown up into to ‘winner vs loser’ headlines, which are then used to bash the side of politics brave, or stupid, enough to take it on.
But on an issue so clear-cut, perhaps journalists could dial back the sensationalism just for once and explain a great and pressing reform that would ultimately make everyone better off.
Journalists who say ‘land tax is too difficult politically’ are forgetting the role they play in keeping it that way.