Does stamp duty limit housing mobility?
At the same time as many Australian households live in dwellings larger than they need, others can’t find affordable homes big enough to cope with family life. The average numb
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Housing
Jul 30, 2012
At the same time as many Australian households live in dwellings larger than they need, others can’t find affordable homes big enough to cope with family life.
The average number of bedrooms in our homes has increased over the last 15 to 20 years, yet average household size has declined. Older Australians in particular are spoiled for space – 84% live in homes with one or more spare bedrooms.
“a 2 percentage-point increase in stamp duty may reduce mobility of homeowners by around 40 percent.”
The problem with this mismatch is it makes it harder for some households to find affordable, appropriately-sized housing in locations they prefer. Some may travel longer distances to work than they otherwise would. Some, like “empty-nesters”, who already occupy dwellings larger than they want are deterred from down-sizing.
A key reason is the high level of stamp duty levied on home purchases by State Governments. In Victoria, for example, a dwelling that costs the median price (circa $530,000) incurs a stamp duty liability of $23,770 (see exhibit).
That’s equivalent to 4.5% of the purchase price! For households who have the option of staying put, that’s a very large disincentive to moving to a dwelling that’s a better fit. It limits the ability of property markets to sort households into appropriately sized and located dwellings.
A new study undertaken by the Spatial Economics Research Centre at LSE throws light on just how large that impediment can be. The researchers, Christian Hilber and Teemu Lyytikäinen, find that higher stamp duty on dwelling purchase negatively affects a household’s propensity to move.
The scale of the effect is astonishing. Their headline finding is a “2 percentage-point increase in the stamp duty may reduce mobility of homeowners by around 40 percent.”
Hilber and Lyytikäinen exploit a “discontinuity” in the UK tax schedule where the duty payable jumps particularly sharply, from 1% to 3%.
This discontinuity allows us to isolate the impact of the stamp duty from other determinants of mobility. Specifically, we compare households with self-assessed house values on either side of the cut-off, while controlling for flexible but smooth functions of house values.
They find stamp duty in the UK has “very substantial detrimental effects on the functioning of the housing market.” However its impact is largely confined to short distance moves (less than 10 km).
They interpret this as meaning stamp duty discourages households from moving to their preferred form and size of housing. It has only a limited effect, though, on longer distance moves made by households for job-related reasons and hence, they say, doesn’t significantly affect the efficiency of labour markets.
Hilber and Lyytikäinen also conclude that stamp duty is an inefficient tax compared with something like land tax. They cite research that finds a 2.5% stamp duty imposes a dead weight loss of 17-34% of the revenue collected.
Caution is in order in applying their findings directly to the Australian context. The sheer size of the estimated impact might be affected by the peculiarities of the UK tax system.
The duty on a £250,000 dwelling is £2,500 (1%), but on a £250,001 dwelling it’s £7,500 (3%). As the exhibit shows, the tax scales in Australia are relatively smooth.
Nevertheless, a scale like Victoria’s that takes 4.54% on a dwelling costing $550,000 and 5.11% at $551,000 is bound to have a large retarding effect on households changing to more suitable dwellings/locations as their circumstances change. Replacing stamp duty on principal place of residence transactions with a land tax levied annually on all properties would be a more efficient approach.
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Andrew Leigh has performed similar analysis using Australian data, available in working paper form here: http://andrewleigh.org/pdf/StampDuty.pdf
Roughly, he finds that a 1 percentage point increase in stamp duty results in a 10-12 per cent reduction in the number of housing transactions.
In NSW the stamp duty thresholds have not changed since at least the 1970s. No stamp duty is paid on homes worth less than $14,000, and a rate of 1.25% applies to homes worth between $14,000 and $30,000. In 1970 the median house price in Sydney was $18,700, so perhaps a third of houses were not subject to stamp duty and the median house was subject to a 1.25% rate. With the effects of inflation over the decades, the average tax rate applied to a median house transaction has trebled.
Stamp duty is the most inefficient of state taxes. For every dollar of tax revenue transferred from a tax payer to the government (which can then be spent on public services) an additional 62 cents of economic value is destroyed (ie marginal excess burden is 62% of the revenue generated). See Chapter 13 in the NSW Government’s Review of State Finances, which did more detailed modelling of stamp duty than did the Henry Review. http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0014/21605/NSW_Financial_Audit_Report_Part_2011-_Full_pdf.pdf
How many times have I considered moving, only to be put off by the associated costs? Stamp Duty is the No1 disincentive. I’m not in favour of land tax though – the bloody rates bill is bad enough! I would prefer the Fed Govt to man up, take the political hit (not like they are going to survive anyway) and increase GST to 15% and get rid of a bunch of stupid taxes such as this one (wasn’t it supposed to go as part of the original GST implementation?).
Land value contains a large proportion that is due to services paid for by taxes. Tax charged should have some relation to ability to pay and people with more land have the ability to pay more. Land tax is reasonable. It also encourages efficient use of land.
Apart from stamp duty, and the agent’s commission, there is also moving costs. OK for youngsters who have not had time to accumulate much in the way of goods.
They can load up the family car, especially if the change is a few streets away, or even rent a truck. But when you have been living together for near 40 years, there is a lot of accumulated stuff. This is the very devil to pack up, and even worse to think of throwing away.
Out of the four items discouraging moving, stamp duty, agent’s commission, moving costs, and packing up, I don’t know which is worst, but I suspect that the sheer enormity of packing must be close to the top of the list. But certainly stamp duty won’t help, and while other taxation often seems to have a logical reason, and a useful benefit when the money is paid out, stamp duty – and land taxes – just looks like money for nothing.
So, renting out your oversize home, and moving to a smaller rental home does not avoid the stamp duty problem? Never sell seems to be good advice to home owners.
Would starve a lot of useless parasites to death. Are realtors a protected species?
Rental management fees not enough? Where is the bloody productivity commission?
Stamp duty and agent costs are the two things stopping me moving closer to work. I would be apprehensive about moving to a townhouse or apartment, but I think I might, if it would get me within walking distance. Not being wealthy, and not so many years from retirement, I just couldn’t lose those costs moving in, and then moving back out when I retired.
Real estate agents costs are crazy. We had to sell my mother’s house last year – a 90 year old who would not leave her large house for more appropriate accomodation – and the agent quoted a fee of $27,000, plus $5000 for advertising (featuring large pictures of his smiling self), $5000 to have his painter smarten the place up, X$ to rent ‘much better furniture’, x$ for professional photographs, plus the garden etc etc. Luckily my sister lived close by and was retired so she did it instead: I took the snaps and she paid some outfit to put them on websites. It took 5 months to sell, but if you were working full-time you couldn’t really do it.
So, stamp duty and agent’s fees. Once again, I don’t support land higher taxes; I don’t think people should be pressured out of their houses because of high taxes. I would prefer to reverse the tax cuts the rich have enjoyed in recent times. Maybe a financial transactions tax, if we need to raise more.
There was an article on Online Opinion recently by Ross Elliott about how much of the cost of a new home was due to taxes. If what he says is true, and if we value home ownership, this is all getting crazy.
I’ve long been an advocate for dropping stamp duty, and replacing it with an annual land tax (much like the US) based on the improved value of the land. Whilst definitely politically unpopular, it would discourage home owners from having homes inappropriate to their needs.
It would remove the largest proportion of the ‘change-over’ cost of changing homes. There would be some encouragement to first home-buyers to buy a smaller more affordable home, then when they start a family later, there wouldn’t be the large stamp duty cost of change-over (although some may still buy the larger home for ‘capital growth’).
It would also actively discourage older residents from staying in their large homes if un-necessary. Even if the tax could be deferred for some residents, the fear of mounting debt may encourage them to down-size. It would create a greater turn-over of property, and put up the costs of living in a larger/more expensive house, discouraging residents from doing so.
My parents have only ever owned one house, and still live in it, despite being bigger than they need, and needing a lot of work. If they were to sell, and purchase a unit in the same Melbourne suburb, the difference in price would be about $50,000, but the costs of stamp duty and agents commission would take more than that. The government’s exemptions from stamp duty for pensioners is good, but it only applies up to $500,000. With the average Melbourne price above that, it doesn’t provide the broad incentive that it should.
AD, sorry, a bit off-topic (you should set up a drop-box/suggestion-box). (you can delete this post if you want to do a story on it yourself later; I’m cool with that.).
Interesting story this morning about plans to rebuild Christchurch CBD. Of course the reason I bring this to your notice is that it soooo conforms to my own preferences. They plan to buy up a lot of outer-fringe property so as to make an inner CBD more compact than currently (apparently over the years it has expanded and left a lot of empty lots and created inefficiency). New height limit of 28 m (note: spot on my sweetspot of 7-8 floors!) with lots of provision for walking, cycling. Overall it will be much higher density than currently, despite the current bunch of mid- and high-rise. The only possibly disturbing thing was talk about lots of open space, green space etc. –that needs very careful handling to avoid dead zones (a la Melbourne Docklands) and the thing they have already identified as negative in the current status, ie. spreading things out too much.
Otherwise it sounds like a useful discussion/experiment and perhaps example for elsewhere.