There is increasing concern for the plight of young people priced out of the housing market. The ‘Great Australian Dream’ is fading for many.
Innovative measures to help first-time buyers should be received with an open mind. However tax policy is a tricky beast and intentions and outcomes can quickly diverge.
In my home state of Victoria, the State Government proposes to introduce measures to assist first home buyers and tenants looking for rental properties.
The first measure is to abolish, from 1 July 2017, stamp duty for first home buyers spending up to $600,000. There will also be a concessionary rate applying for first home buyers spending between $600,000 and $750,000.
In principle, KPMG agrees. Stamp duties are notoriously one of the least efficient of all taxes – they act as a disincentive to people moving house which can be an economic roadblock with wide ranging impacts, not least of them being to reduce labour mobility and frustrate efforts to lower unemployment.
Efficient taxes don’t damage economic activity – stamp duty does and so needs to be replaced with less distortionary revenue-raising.
But there are inherent consequences of a move like this. For a start, using tax policy to engineer distributional outcomes is difficult – as was made clear by the Henry Tax Review.
Reducing stamp duties for one class of buyers relative to another introduces yet another distortion to an already highly distortionary tax. There could also be a distortion in the Victorian housing market between now and 1 July because first home buyers will delay their purchases and investors may accelerate their purchases.
In a market where demand pressures are pushing up prices it is unclear how much of the stamp duty concession will flow to first home buyers versus vendors. The incidence of the tax is likely to be very different in a “hot” market as opposed to a market that is over-supplied.
First home buyers will likely see the pot of money set aside for duty as forming part of their deposit and having a multiplier effect on their borrowing power. So a $15,000 duty saving may translate into a $60,000 increase to their loan, and a $75,000 increase to their purchasing power. If the tide of first home buyers moves prices even further north then it is really only vendors that win – and new home buyers just end up with a bigger mortgage for the same property.
The stated aim of making home ownership more accessible to first home buyers may best be achieved by other means.
The second measure, also from 1 July 2017, is to restrict the current off-the-plan concession to those buyers that will occupy properties as their principal place of residence. This would remove such concessions to investors. There are risks in this approach, as it could put the brakes on new residential development – slowing sales, making it more difficult to secure finance and raising questions as to Victoria’s reputation as an attractive place to invest.
If the stamp duty moves to limit concessions for investors ended up slowing new housing development, that would also run counter to the purpose of the Victorian Government’s complementary proposal – the introduction of a ‘vacancy tax’ to increase rental availability.
Details of the anticipated exemptions for the vacancy tax will be critical in ensuring that revenue projections – and housing stock increases – are actually realised.
If Victorians believe that it is not in society’s interest to allow properties to sit unoccupied, particularly against a backdrop of housing affordability challenges and a homelessness crisis, then a bold step by government should be applauded. Disincentives to “hoarding” housing stock to feed an affordable rental market are needed.
But the question is whether taxing unoccupied dwellings could start us on a slippery slope with potentially poor outcomes. Particularly as it appears to be a further measure targeted principally at foreign investors, coming on the heels of the foreign purchaser duty and land tax surcharges recently introduced. As a tax on existing holdings it also calls into question the role of government and the impact of sovereign risk when foreign and domestic investors make investment decisions
People make portfolio decisions that include residential assets for all sorts of reasons, so introducing uncertainty through government policy regarding the use of private assets is likely to be negatively perceived.
In an era where tax reform seems to have slipped off the agenda, the Victorian government should be commended for at least attempting a solution to the genuine problem of housing affordability.
And it has swapped the sledgehammer it wielded when imposing significant tax surcharges on overseas buyers for a scalpel, in a more targeted and policy-based tax reform. Again this approach is to be welcomed.
But as so often happens, measures like these can introduce unintended consequences. Other states will no doubt be looking on with interest as to how this move works out. And, if recent history is any guide, may well follow Victoria’s lead.