Taxing decisions!

The big news for New South Wales home buyers is that from 16 January 2023 they will have the choice of either paying a one-off stamp duty payment or an ongoing property tax.

But what effect will this policy have on property prices?

The policy is designed as an incentive for first home buyers. However, a by-product of the potential rise in first home buyer numbers could be an unwitting rise in house prices due to increased demand.

So, what are the key features of the First Home Buyer Choice policy?

• From 16 January 2023, first homebuyers can opt out of paying stamp duty in favour of an ongoing annual payment. If the property purchase settles before 16 January, first home buyers can still access the scheme by seeking a reimbursement on stamp duty from 2023.

• The scheme applies for properties valued up to $1.5 million. For the purchase of vacant land for construction of a new home, the price cap on the scheme is $800,000.

• The scheme is open to owner occupiers only, although you can later convert the property to an investment, with a markedly higher rate of ongoing property tax. Purchasers must move in within 12 months of purchasing the property and live in it continuously for at least six months before it becomes an investment.

• In place of an upfront stamp duty payment, the annual property tax will be equal to $400 per annum, plus 0.3% of the value of land.

• The property will not be subject to an ongoing property tax once it is sold on.

• The average property tax payment is set to grow in line with Gross State Product per capita (a measure of average income). Over the past 15 years, GSP per capita has seen average annual growth of 3.2%. The legislation provides that individual property taxes cannot grow by more than 4% annually.

• Stamp duty exemptions will still apply for properties up to $650,000 (no stamp duty), and stamp duty concessions will still apply for properties up to $800,000 (stamp duty sliding scale).

• Only first home buyers have the option to pay an ongoing property tax, while all other home buyers must pay stamp duty.

Information sourced from: https://www.nsw.gov.au/initiative/first-home-buyer-choice

This policy is designed to help first home buyers enter the market by reducing the amount they have to pay upfront to secure a property. However, this can also leave the buyer with more money to put towards their purchase which can unintentionally apply upward pressure on prices, benefitting sellers rather than buyers.

Modelling by NSW Treasury estimates the majority of first home buyers purchasing a property between $800,000 and $1.5 million would pay less on an ongoing property tax than on stamp duty because first home buyers are thought to have relatively short hold periods.

Now, what about older homeowners looking to downsize?

Recent census data shows the portion of two-person family households in NSW in dwellings with four or more bedrooms increased from 25.9% in 2016 to 28.9% in 2021, indicating longer hold times for the family home and less freeing up of stock for growing families. However, introducing an annual property tax and removing stamp duty payable on a downsized purchase could make it more expensive to hold onto the family home and less expensive to downsize, encouraging the transition to more suitable accommodation.

The NSW Government’s First Home Buyer Choice policy does not extend to empty nesters, other downsizers or upsizers and the government is aware of the potential political fallout of doing so, being that they have already paid stamp duty. There are creative solutions to apply the tax more broadly but for now the NSW government and its constituents are testing the waters for the rest of the nation.

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Published November 23, 2022

By Belinda Cassano