Wed. Sep 27th, 2023
    Will Removing Stamp Duty Increase Home Ownership? A Closer Look

    Removing stamp duty and implementing a broader land value tax has been proposed as a popular tax reform in Australia. The idea is to replace stamp duty, which is a state tax on property transactions, with an annual tax based on the assessed land value. This change is believed to have several benefits, including increased home ownership, more household relocations, lower housing costs, and greater economic efficiency. However, these claims are largely based on hope rather than evidence.

    A recent paper in the Economic Record examined the impact of removing stamp duty on home ownership rates in Australia. The paper estimated that the proposed tax swap could increase home ownership by 6.6% through changes in purchaser holding periods, a shift of tax burden from investors to owner-occupiers, and a relaxed deposit constraint. Overall, the modelling suggests that home ownership rates could increase from 67.1% to 71.5% in the long run.

    However, looking at the case of New Zealand, where stamp duties were removed in 1988 and 1999, we see a different outcome. Home ownership in New Zealand is now at its lowest level in 70 years. The decline in home ownership rate from 73.8% in 1991 to 64.5% today is much larger than what Australia has experienced with its stamp duties.

    The paper’s assumption that higher turnover will lead to a higher proportion of first-home buyers is questionable. In a pure home ownership market without investor buyers and no change in the stock of housing or number of households, changing the frequency of trades does not change the home ownership rate. Only if investors sell relatively more can higher turnover lead to higher home ownership.

    It is also important to consider the impact on renters. Stamp duty not only affects home buyers but also taxes housing trades between investors, which can force renters to move when they don’t want to. In New Zealand, renters are more likely to be forced to move due to a home sale compared to Australia. Reducing the cost of transacting by removing stamp duty is likely to have a greater effect on the rate of transactions of landlords compared to home owners.

    While the idea of removing stamp duty to increase home ownership may seem promising, it is important to consider the real-life examples and potential consequences. The evidence from New Zealand shows that removing stamp duty does not necessarily lead to higher home ownership rates. The impact on renters and the assumptions made in the study should also be carefully examined. It is crucial to base policy decisions on solid evidence rather than hope.

    Economic Record: [link]
    – Stats NZ (New Zealand): [link]
    – New Zealand Treasury: [link]
    – Australian Bureau of Statistics: [link]