Stamp duty scale for purchase of principal place of residence (Victoria)

At the same time as many Australian households live in dwellings larger than they need, others can’t find affordable homes big enough to cope with family life.

The average number of bedrooms in our homes has increased over the last 15 to 20 years, yet average household size has declined.  Older Australians in particular are spoiled for space – 84% live in homes with one or more spare bedrooms.

“a 2 percentage-point increase in stamp duty may reduce mobility of homeowners by around 40 percent.”

The problem with this mismatch is it makes it harder for some households to find affordable, appropriately-sized housing in locations they prefer. Some may travel longer distances to work than they otherwise would. Some, like “empty-nesters”, who already occupy dwellings larger than they want are deterred from down-sizing.

A key reason is the high level of stamp duty levied on home purchases by State Governments. In Victoria, for example, a dwelling that costs the median price (circa $530,000) incurs a stamp duty liability of $23,770 (see exhibit).

That’s equivalent to 4.5% of the purchase price! For households who have the option of staying put, that’s a very large disincentive to moving to a dwelling that’s a better fit. It limits the ability of property markets to sort households into appropriately sized and located dwellings.

A new study undertaken by the Spatial Economics Research Centre at LSE throws light on just how large that impediment can be. The researchers, Christian Hilber and Teemu Lyytikäinen, find that higher stamp duty on dwelling purchase negatively affects a household’s propensity to move.

The scale of the effect is astonishing. Their headline finding is a “2 percentage-point increase in the stamp duty may reduce mobility of homeowners by around 40 percent.”

Hilber and Lyytikäinen exploit a “discontinuity” in the UK tax schedule where the duty payable jumps particularly sharply, from 1% to 3%.

This discontinuity allows us to isolate the impact of the stamp duty from other determinants of mobility. Specifically, we compare households with self-assessed house values on either side of the cut-off, while controlling for flexible but smooth functions of house values.

They find stamp duty in the UK has “very substantial detrimental effects on the functioning of the housing market.” However its impact is largely confined to short distance moves (less than 10 km).

They interpret this as meaning stamp duty discourages households from moving to their preferred form and size of housing. It has only a limited effect, though, on longer distance moves made by households for job-related reasons and hence, they say, doesn’t significantly affect the efficiency of labour markets.

Hilber and Lyytikäinen also conclude that stamp duty is an inefficient tax compared with something like land tax. They cite research that finds a 2.5% stamp duty imposes a dead weight loss of 17-34% of the revenue collected.

Caution is in order in applying their findings directly to the Australian context. The sheer size of the estimated impact might be affected by the peculiarities of the UK tax system.

The duty on a £250,000 dwelling is £2,500 (1%), but on a £250,001 dwelling it’s £7,500 (3%). As the exhibit shows, the tax scales in Australia are relatively smooth.

Nevertheless, a scale like Victoria’s that takes 4.54% on a dwelling costing $550,000 and 5.11% at $551,000 is bound to have a large retarding effect on households changing to more suitable dwellings/locations as their circumstances change. Replacing stamp duty on principal place of residence transactions with a land tax levied annually on all properties would be a more efficient approach.