NSW land tax could drive demand for entry-level homes

New South Wales’ proposed land tax rule could pump up demand for entry-level houses and apartments across the state, potentially mitigating the worst of the housing downturn for that market segment.

The proposal would give first-home buyers the opportunity to pay an upfront stamp duty or a smaller but ongoing annual land tax on homes up to $1.5 million. Once the scheme becomes law, prices in that segment should stabilise or even rise, according to AMP Capital chief economist Shane Oliver.

“Switching from stamp duty to land tax would provide a bit of 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 $2,500 or so – which means they could get into the property market sooner,” Oliver told The Australian Financial Review. “It does put more money into the hands of buyers and therefore can potentially push prices up, all other things being equal. So it has a stimulatory impact.”

Under the plan, eligible first-home buyers who purchase a property on or after Jan. 6, 2023, and who choose to pay the property tax, will not have to pay stamp duty to complete their home purchase. In an example from the NSW government website, a first-home buyer who chooses to pay land tax on a $1.2 million home will be charged $2,560 a year in land tax, but will save more than $50,000 in upfront stamp duty.

A CoreLogic analysis found that houses in nearly six in 10 suburbs in greater Sydney will qualify for the scheme, and a total of 333 housing markets fall within its parameters, AFR reported. In the unit market, 213 suburbs out of 304 fall within the plan’s price cap.

Read next: NSW stamp duty shake-up to happen in 2023

“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,” CoreLogic head of research Eliza Owen told AFR. “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 increase in demand could easily end up eliminating the plan’s 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 stamp duty savings are likely to be offset by increased purchase prices,” he told AFR.

Abdallah warned that prospective buyers should crunch the numbers before choosing between stamp duty and land tax.

“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 up front will cost less than an annual land tax over the ownership period,” he said. “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.”