The announcement by the NSW government of the abolition of stamp duty has property investors salivating. Will other states follow?
In last weeks newsletter we spoke about the drop in interest rates and the the impact it has on borrowers, investors and savers. Couple that with this weeks announcement in the NSW state budget on the abolition of stamp duty, and you have a NSW property boom brewing.
How the property market has gone from Bust to Boom!
In 2019 the Australian Prudential Regulation Authority (APRA), had been clamping down on lending by requiring borrowers to meet a higher serviceability buffer – around 7.5%. The Royal Commission attacked the banks on their slack lending practices and massive claim settlements were announced to aggrieved borrowers.
These restrictions, along with the natural course of the property cycle, saw values ultimately slow down and even fall. The environment was also being impacted by the prospects of a Labor victory at the Federal Election which could have seen the removal of negative gearing tax benefits.
When APRA dropped it’s lending requirements and Scott Morrison became Prime Minister, the RBA also began to further ease interest rates.
This week’s bold move by NSW Treasurer Dominic Perrottet to initiate the abolition of stamp duty in NSW and replace it with a broad-based land tax, is as historic a tax reform as they come.
Ultimately, the short-term price impact will depend on how the reform is structured and the timeline for its introduction. The NSW plan is open to consultation with the community until March next year.
Ultimately, Perrottet’s shift away from stamp duty towards an annual property tax, if successful, will create one of the most efficient and stable sources of revenue ever enjoyed by an Australian government.
How will it work?
New buyers will be given a choice: pay upfront for stamp duty, or opt to pay the ongoing annual property tax. Everyone else will be untouched by the new annual tax until they decide to sell.
Is it a good move?
Stamp duty has long frustrated home buyers for years because it represents another burden when taking the plunge and buying that property. Stamp duty on shares was abolished some time ago and this made investing in shares more attractive.
The way we live because of Covid-19, interest rates and stamp duty will change forever.
Removing the state stamp duty disincentive will, over time, and if implemented in full, result in a radical reshaping of the way we live in NSW.
If you feel like adding another bedroom or downsize then you will probably move rather than renovate or build a duplex to avoid stamp duty.
We will become more mobile and work from home more often. City office blocks will convert to apartments. Executives will relocate to the country and won’t need to hop on and off planes for meetings. The impact on schools, transport and infrastructure will also be felt.
“Over time, this will effectively add to the supply of housing and help to ease price pressure.”
Most importantly, the reform offers first home buyers a fighting chance at getting into the market earlier than otherwise. Of course, that could be offset if it is met with a surge in home values, as buyers simply use their newly available funds to outbid each other.
What about Inflation?
If we have a surge in price inflation from property then wages pressure will result and then interest rates may have to increase.
If home buyers really stretch themselves, then we could have a problem going the other way. i.e interest rates increasing. The Reserve Bank will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.
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