When NSW Premier Mike Baird announced his resignation on Thursday, he made sure to claim credit for the economic achievements of the earlier O’Farrell government and his own administration.
“We have repaired the state budget,” he said, “rejuvenated the economy, created jobs in unprecedented numbers, boosted frontline services and unleashed an infrastructure boom in Sydney and the regions.”
All true. But those economic pluses have been accompanied by one almighty minus – the collapse of housing affordability within the state.
The affordability blowout
On ABS figures, Sydney residential property prices have risen 60 per cent in the past four calendar years – the Fairfax-owned Domain Group survey puts that even higher, at 65 per cent.
Over the same period, ABS data shows wages grew in NSW by 9 per cent.
Along the way, the O’Farrell and Baird governments oversaw a surge in stamp duty revenues.
As the chart below shows, revenue of between $2.5 and $3 billion blew out to a staggering $6.5 billion last financial year. Baird’s Bounty, if you will.
The problem, as always, is that every time property prices outstrip wages, wealth is being transferred from poorer to richer, and from younger to older.
Property holders win, property developers win, banks win … and the young are forced to take on staggering debts to have any chance of owning their own property by retirement – one of the key determinants of a comfortable dotage.
That’s why the Baird government’s failure to genuinely address the problem through its own tax reform should not be forgotten.
There is a combination of factors causing the Sydney property bubble, but key among them are the federal and state tax systems.
At the federal level, the combination of negative gearing and the capital gains tax discount returns billions of tax dollars to property investors each year.
Those tax concessions make it profitable to bid house prices much higher than rental returns alone would make viable – and young first home buyers have no choice but to bid up to those same elevated levels.
The federal government has pledged not to touch negative gearing and the capital gains discount, but the states can improve affordability by another route – by phasing out stamp duty and replacing it with a broad-based land tax.
And that’s what Mr Baird’s finance minister Dominic Perrottet said publicly in October that they should do – until the Premier, the very next day, said they shouldn’t.
How would land tax help?
Stamp duty on residential property is a highly inefficient tax because it forces home buyers to capitalise a one-off tax charge as part of their mortgage.
Buying a $600,000 established property in Sydney currently incurs $22,500 in stamp duty, which the home buyer then pays off as part of their mortgage.
A land tax levied by a state government, or municipal rates levied by councils, takes the opposite approach – they are based on current land values and are paid in smaller amounts on a yearly basis.
The ACT government is currently four years into a 20-year phase-out of stamp duty, which is being replaced by increasing council rates – made easier by the fact that the ACT only has one local council.
There are several ways this improves affordability:
- There are around 200,000 vacant properties in Australia, many held by speculators who treat bricks and mortar a bit like giant gold bars. When an annual liability is attached to such a property, there is a greater incentive to rent it out or sell it.
- Many older Australians who would otherwise wish to sell the family home and downsize hate handing over large sums of stamp duty for their new dwelling purchase. Land tax turns that incentive around – a working family would pay the tax on a large home, but the retiree would pay less tax on a smaller dwelling.
- Foreign owners of Australian properties would pay a higher tax bill each year, bolstering state coffers and putting further downward pressure on prices.
The other advantage for state governments is a less volatile revenue source – something the NSW government will wish for as stamp duty revenues fall back to earth in the years ahead.
The Baird legacy
Economist Saul Eslake compares Mr Baird’s reign with that of former New Zealand prime minister John Key. Both were popular and adept at arguing difficult policy cases, but on the issue of housing affordability, both did nothing.
“That’s a blot on both of their otherwise good records,” he told The New Daily.
Policy director of the Prosper Australia think tank, David Collyer, went further: “When they floated the land tax idea last year, the property lobby would have phoned him straight away to say ‘you cannot do this’.
“I would say Mr Baird was an apologist for the property lobby, but there comes a time when no individual can continue to apologise for behaviour that is so bad.”
To read more columns by Rob Burgess click here.