Sydney’s property prices have dropped and a sustained decline in prices is expected as JobKeeper and other subsidies are withdrawn. It’s no surprise the NSW government suggested swapping stamp duty in favour of land tax reform amid the financial crisis triggered by COVID-19 restrictions.
There needs to be tax reforms aimed at stamp duty on real estate transactions because stamp duty is inefficient, says Professor Peter Swan from the School of Banking & Finance at UNSW Business School.
“For example, if I were to buy a property for $2 million, stamp duty would be more than $100,000. That's a huge upfront cost. It makes people less mobile, restricts trading in properties and reduces the level of economic activity in Australia. Any other tax reform which spreads this out more evenly across the economy, or over the life of the investment, would be better.”
So, who pays the stamp duty?
There is economic controversy about who pays stamp duty. Some research indicates that it's the buyer who pays the stamp duty in full. But Prof. Swan disagrees.
“The costs are actually equally spread between the buyer and the seller. It’s incorrect to assume that buyers have a much more inelastic demand for properties than sellers do. In reality, both parties need to pay the costs, and this will have a depressing effect on real estate transactions and make it difficult for people to move to where jobs are being created.”
Prof. Swan says another challenge is the way land is taxed in NSW.
“It’s a rapidly escalating tax rate and depends on the way you pay tax and the number of holdings you have,” he says.
As a result, people could be more encouraged to buy properties in other states or other countries to take advantage of lower taxes.
“It is much easier to manage properties in one’s own state rather than properties thousands of kilometres away. But the current tax system motivates people to buy houses and investment properties interstate or elsewhere.”
Can reform help stimulate the economy during a pandemic?
Prof. Swan says stamp duty reform is expected to create a more competitive market and will enable people to move more freely to where job vacancies are. In contrast, Australia currently has a very inflexible housing and investment market which does not help job mobility.
“The increase in vacancies at the moment also seems to be a looming problem – particularly for commercial real estate as more businesses continue to work from home,” he says.
Prof. Swan warns that businesses – particularly businesses in the CBD – will be largely affected if there is another lockdown in Sydney.
“We're not going to be looking at thousands of bankruptcies, we're going to be looking at tens of thousands of bankruptcies of smaller businesses – which means that continual lockdown is uneconomic and not justified.”
Prof. Swan says NSW cannot afford another lockdown, even if COVID-19 cases escalate as much as they have in Victoria.
“Statistically speaking, 99.9 per cent of people are not significantly harmed by COVID-19. Out of 400 people that die every day in Australia, we’ve only had 128 deaths across the past six months associated with COVID-19. That's a negligible proportion so why are we destroying ourselves, our lives, our futures and industries?” he says.
“If the government continues to keep the country in lockdown, this will prevent many industries from operating and could have consequences for the governments and their future re-election. Two of our biggest export earners – tourism and tertiary education – could face many years of severe restrictions. The popularity of the Victorian Premier has dropped rapidly, and this is just the beginning.
“Businesses seem to be waking up to the fact that they've been destroyed by lockdowns. We need to keep the economy going and we must not let fear get the better of us.
“So, what the PM has to do is to say to the premiers for every day that they keep the economy in lockdown and costing the federal Treasury billions of dollars, that they will in fact take billions of dollars away from subsidies to the states.
“With this perspective in mind, we will soon see a very quick return to normalcy and logic, as we recover from this pandemic which is very mild compared to previous pandemics.”