It’s every where. Internet, Newspapers, TV and it’s part of every day conversation. The discussion of stamp duty and how grossly unfair it is.
I’m going to look at the other side of the coin in this instance. By comparing other countries true transaction costs against ours. I’ll also look at why eliminating stamp duty could be a problem rather than a benefit.
These views are not necessary my own. Yet in the spirit of having a better housing market I do see the upside of having the ‘friction’ that stamp duty creates. I’ll also show some reasons why they actually might even benefit you.
First up we are going to discuss the entire transaction costs rather than stamp duty when buying a property. The chart as part of this post shows transaction costs across many different countries.
Australia is indeed expensive when buying property. Yet when you compare Australia to a country like Belgium, we seem lucky.
For a home buyer to acquire a property in Belgium, they’d expect to pay on average 14% of the property value on transaction costs. These transaction costs defined by the OECD, include taxes, legal costs and agency fees. An $800,000 property purchase in Belgium would likely mean the purchaser finding an additional $112,000 in costs!
In Victoria for instance, which has the highest stamp duty in Australia, we don’t even get half way to that figure including other costs associated with purchasing.
Other countries such as France, Italy, Spain, Portugal and Germany all have extremely high transaction costs as well.
The bottom three countries; Britain, Denmark and America have relatively lower transaction costs. All of these countries have experienced sharp property downturns and still have soft conditions.
Now this information above does not reveal to a conclusive level that higher transaction costs are actually good for property markets. Belgium currently has plenty of national debt which could flow onto the housing market and Spain which has high transaction costs has had a dreadful housing bust. Spain however did suffer for being over supplied in new property for its population.
So what do transaction costs such as stamp duty do the the overall market?
Transaction costs lower the amount of transactions which limits supply. People think twice about moving so quickly. A family needing more accommodation might decide to renovate and go ‘up’ rather than find another property. As they lose valuable capital through selling and buying costs, they might decide to spend money on a renovation instead.
Many families will still choose to move yet the volume of this happening will always be lower if transaction costs are prevalent.
New Zealand has very low transaction costs. Stamp duty fees are non existent in New Zealand and they’ve suffered from a big drop in prices. Speculation was rife with many Australians buying into their market due to the attraction of no stamp duty. For many, this hasn’t worked out.
Now large transaction costs can be a huge burden if the property market does drop or even collapse. That ‘friction’ will work against the market and could make downturns extend for larger periods of time.
So what would happen if Australia became a zero stamp duty country tomorrow on all property transactions? Besides the lack of government income, I think we’d find ourselves quickly in a bubble market were prices would peak and then crash.
Property in Australia is not controlled by big business like in many other countries. 95% of property is owned by everyday people. My concern would be that a lack of ‘business smarts’ would cause irrational behaviour to take place. This ‘crash and burn’ market would see many everyday people loose their shirt.
Eliminating stamp duty for 1st home buyers I think could be a good idea to help them enter the market. Assistance to other demographics such as the elderly could also be beneficial. Yet as much as my capitalist cap would suggest to open up the market and remove all taxes and duties. I think for many Australians, this could be a bad thing.