Why abolishing stamp duty for first home buyers may not work

The Victorian Government is considering abolishing stamp duty (5.5%) for first home buyers and replacing it with a land tax that would be paid on an annual basis. This would result in an immediate saving of around $40,000 on an average  price of a  house and result in a annual land tax of just under $3000.

But it may not work quite that simply

At present, people buying a house for the first time split their money like this.

On the price of the average Melbourne house money goes on stamp duty is around $44,000.  So this is what may likely happened under the new policy.

The total funds available for purchase (purchase + stamp duty) are now available solely for the purchase. Nothing needs to go to stamp duty.

There is now an extra $44,000 available to spend at auction to fend off the cashed-up property investors who are competing against first-time buyers. But this has consequences.

This serves to push prices up, not only for first-time buyers, but for all of the buyers, investors included, through a knock-on effect in the market .

As this knock-on effect works its way into marketplace, it will adversely impact housing affordability for first home buyers forcing them back into the rental market. This will maintain the attractiveness of the rental market for housing investors. This attractiveness will be further enhanced by the Federal Government’s obstinate and self-interested refusal to act on negative gearing.

The irony of this particular policy is that the first homebuyers, who have ultimately been forced by market pressures to sink their savings from the abolition of the stamp duty into the purchase of their first home, will find themselves compensating the government for the loss of the stamp duty revenue through the progressive payment of land tax. The ultimate double whammy (shown in red).

The net result of this policy could be to make first-time buyers pay stamp duty twice. Once by transfer of the payment of stamp duty into the price of their first home and second through the compensation of payment of land tax.

And all this because no one will move the elephant out of the room.

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