Hidden cost of falling housing prices


Rivers of gold have poured into the Victorian Government’s coffers over the past five years courtesy of the housing boom that has played out across south-eastern capitals and beach towns.
But with prices and volumes of sales now heading south, the stamp duty bonanza is destined to go the same way. Meanwhile, Victoria is about to embark on some of the most expensive infrastructure undertakings of the last half-century.

Something has to give, says AMP Capital’s chief economist Shane Oliver. He’s worried that if the downturn runs long or grows deeper, then paying for Melbourne’s infrastructure needs of the future is in doubt. “If the property downturn turns out to be deep and long, then there are some threats to those projects.”

This sees stamp duty come in at number two for the most important source of state income, just shy of the $6.3 billion collected in payroll tax in 2016/17.

However, CoreLogic data shows the volume of sales for 2018/2019 is down 16 per cent, and the value of properties sold down 4.4 per cent, on average, in Melbourne alone. This may represent a significant drop off in land transfer duty revenue collected, Tim Lawless, CoreLogic head of research, told The Citizen.

“Clearly there’s a double whammy of less turnover and fewer stamp duty events,” he said.

“That’s going to have to have an impact on budgets and revenues for a state government.”

Stamp duty is levied on the purchase of existing homes, it is not paid on apartments and properties bought off the plan. In addition, several other state governments have carved out exemptions for first home buyers to encourage them into the market, as many had complained its high cost acted as an insurmountable barrier.

Buyers of a $1 million home bought in Victoria will pay an additional $55,000 in stamp duty alone, the highest rate in Australia. As the panel below illustrates, no state comes close to Victoria’s levels of land tax levied on properties. This means the greater the fall in volumes of homes sold, the greater the hit to Victorian finances and the greater the pain from the erosion of the value and numbers of homes sold.

Earlier this year, an analysis by CoreLogic found property tax collection had climbed 5.9 per cent for the year, and that 52.8 per cent of all tax revenue for state and local governments across Australia was derived from property.

To understand the impact of a housing market downturn on state budgets, look across the country to West Australia, which saw declines in house prices 25 per cent from the peak in 2007 and a fall in sales volumes 17 per cent below the long term average.

This resulted in stamp duty as a percentage of total property-related revenues for WA fall to 28.5 per cent last financial year, down from 54.5% of revenues at the peak in 2007.
The collapsing housing market in WA saw stamp duty tax receipts fall from $2.04 billion in 2007 to $1.5 billion last year.

West Australia has gone from economic powerhouse to economic madhouse in the post-boom years. WA Premier, Mark McGowan, last year described his state’s financial situation “the worst since the Great Depression”.

So are there lessons for Victoria in the west. AMP Capital’s Shane Oliver says that the recent property downturn in Victoria “will certainly translate to a decline in revenue.” The question was to what degree Victoria had factored in a potential downturn in recent spending announcements.

Those infrastructure spending announcements over the last few years, and heading into the State Election on November 6, have been big, whether it’s the $10.9 billion estimated for the Metro Rail project, or the $6.7 billion West Gate Tunnel, of which Victoria foots $2.7 billion. Then there’s the recent announcements of the north-east road link, at $16.5 billion, and the possibility of a return of the outer circle rail link, at $50 billion.

In this year’s budget papers the government pointed to falling stamp duty, saying “transaction volumes are expected to contract” but assumes a return to “moderate growth in the final years of the forecast period.”

But in a statement, the Victorian Treasurer Tim Pallas said that declining stamp duty would not endanger the overall financial position of the state.

“The diverse nature of Victoria’s revenue base means the state is well-positioned to weather any moderation in the property market,” Mr Pallas said.

Shane Oliver doesn’t share that confidence, and he doesn’t see any easy solutions. He warns that if the state government had to start cutting back on infrastructure spending, it could translate into a further deterioration of the economy and by extension the housing market, with many pointing to infrastructure spending as the floor holding up Victoria’s economy as the heat comes out of the housing market.
One of the problems with stamp duty is that when times are good, so are revenues, but when that turns around times can be very bad indeed.

But many economists say there is a solution to irregular stamp duty collection – extending land tax, which is currently only levied on investors and businesses in Victoria. “With land tax, you’re not dependent at all on transactions,” Oliver argues. In 2016/17, this brought in $2,512,000, almost 40 per cent of the state’s stamp duty income.

CoreLogic’s Tim Lawless also supports a land tax, which he said would “provide a much more efficient playing field to market participants”.

But while economists may fancy such a solution, persuading citizens – and voters – of the merits of land tax is another story. Having paid stamp duty when they bought their homes, many Victorian citizens would likely resent the double whammy of paying land taxes on their homes year on year, as Victorian businesses already do.

A report in June found Australia stood to gain $24.3 billion every year in GDP from 2047 if state governments replaced stamp duty with a broad-based land tax. The idea has been floated many times, with only the ACT so far taking the leap to wean itself of stamp duty, giving itself 20 years to move towards a land tax.

Tempting as the payoff might appear, it seems many politicians around Australia see only death at the ballot box for any government trying to untie the Gordian knot that is stamp duty.

Victorian Treasurer Tim Pallas said: “There is no plan for a broad based land-tax.”

A version of this story by David Ross is also published today in News.com – find it here.