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October 18, 2022 by ash

NSW land tax to pump prices of entry-level homes

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Demand for entry-level houses and apartments across NSW is expected to rise, potentially shielding this market segment from the worst of the housing downturn, as first-home buyers anticipate the introduction of the state government’s proposed land tax rule, experts say.

For properties worth up to $1.5 million, prices stabilise or even lift in the short-term once the new first-home buyer scheme becomes law, according to Shane Oliver, AMP Capital chief economist.

The NSW state government is offering first-home buyers the option to pay a hefty stamp duty upfront or a smaller but ongoing annual land tax on homes up to $1.5 million. 

“Switching from stamp duty to land tax would provide a bit of a short-term stimulus because it boosts the upfront buying power of the purchaser, so rather than paying $50,000 in stamp duty, they’re only paying $2500 or so, which means they could get into the property market sooner,” Dr Oliver said.

“It does put more money into the hands of buyers and therefore can potentially push prices up, all things being equal. So it has a stimulatory impact.”

The NSW state government is offering first-home buyers the option to pay a hefty stamp duty upfront or a smaller but ongoing annual land tax on homes up to $1.5 million.

Dubbed the “First Home Buyer Choice”, the property tax option will become available once it is legislated, which is expected in the second half of 2022.

Eligible first home buyers who buy a property on or after January 16, 2023, and who choose the property tax, will not have to pay stamp duty to complete their property transaction.

An example from the government website shows a first-home buyer who opts to pay land tax on a $1.2 million house will be charged $2560 a year in land tax, but will save $50,875 in upfront stamp duty cost.

Analysis by CoreLogic found that houses in nearly six in 10 suburbs within greater Sydney will qualify, and a total of 333 house markets will fall within the threshold. In the unit market, 213 suburbs out of 304, or 70 per cent, fall within the land tax cap.

“This scheme will create additional demand and probably put price pressure on properties that are worth up to that $1.5 million price point and insulate this segment,” said Eliza Owen, CoreLogic head of research.

“So this could be one of those structural reforms that helps boost first home buyer demand in the downswing. So in that sense, it would be well-timed to increase property demand, but it doesn’t seem to be addressing much of the affordability issue in NSW housing.”

Fady Abi Abdallah, tax partner at BDO, said the demand boost created by the land tax could easily swallow up the potential upfront savings.

“”The market is likely to quickly adjust to reflect the increased purchasing power of first home buyers, so it’s a bit of a double-edged sword as any upfront duty savings are likely to be offset by increased purchase prices,” he said.

“Prospective first home buyers will need to be mindful of their own personal circumstance and how long they intend to hold the property, as there will be a point when paying stamp duty upfront will cost less than an annual land tax over the ownership period.

“The key is to work out the break-even point before making a decision. First home buyers should also be aware that the land tax rate will edge higher each year as the value of their property increases, so they will need to budget accordingly.”

Tony Greco, general manager, technical policy at the Institute of Public Accountants said the benefits of the proposed annual land tax would likely diminish after 10 years.

“As a rule of thumb, if you plan on holding the property for less than 10 years you will be better off under the proposed annual tax property regime if it becomes law,” he said.

“The time period advantage of the annual charge versus one off stamp duty hit will vary depending on the value of the land, but over time, as the value of land increases, so too, will the amount of land tax you pay. The advantage of paying annual land tax could diminish after 10 years.”