STATE BY STATE ANALYSIS N E W H O M E B U I L D I N G

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1 HALF YEARLY REVIEW STATE BY STATE ANALYSIS STATE RANKINGS N E W H O M E B U I L D I N G A state by state performance review of residential construction Summer 2018

2 STATES STAMP DUTY DEPENDENCE: WORST IN A DECADE Stamp Duty Watch examines latest developments in stamp duty on home purchase in each of the states and territories. The report compares the typical stamp duty bill across the states and territories, the burden of stamp duty and the effects of stamp duty on household wealth across each of the jurisdictions. HIGHLIGHTS: The dependence of the states on stamp duty revenue has worsened significantly. During 2015/16, stamp duty accounted for 26.1 per cent of tax revenues the highest share since 2008/09. Stamp duty dependence is highest in Victoria (30.0 per cent) and NSW (28.1 per cent). During December 2017, the typical stamp duty bill faced by owner occupiers across Australia was $20,587. This has a detrimental effect on affordability as it adds another 3.1 per cent to the dwelling price. Stamp duty bills eat into homebuyer deposits, requiring them to settle for smaller homes or else take on bigger mortgage loans. In this way, stamp duty increases mortgage repayments by $1,247 per year equivalent to over $37,000 over a 30-year loan term. The escalation in the LVR means that expensive LMI policies may also have to be purchased. Based on December 2017 prices, typical stamp duty bills were highest in Victoria ($31,970), NSW ($25,190) and the Northern Territory ($20,805). Stamp duty bills are typically lowest in Queensland ($7,175) on a median price dwelling. Dwelling prices usually increase over time but governments adjust stamp duty price brackets very infrequently. This is the problem of bracket creep. As a result, the burden of stamp duty has grown heavier in most states including NSW, Victoria, SA, Tasmania and the NT. Stamp duty on foreign investors has been increased over the past 12 months. For the purchase of a median-priced unit, the bills are particularly high in Sydney ($91,115) and Melbourne ($74,524). Such excessive taxes risk hampering the effective operation of rental markets around the country. Typical Stamp Duty Bills, December 2017 New South Wales 25,190 Victoria 31,970 Queensland 7,175 South Australia 16,705 Western Australia 15,485 Tasmania 10,927 Northern Territory 20,805 Australian Capital Territory 18,058 Australia (Weighted Average) 20,587 HIA STAMP DUTY WATCH P2

3 Stamp Duty Bill in $ Thousands Median Dwelling Price ($ Thousands) Source: CoreLogic, HIA Stamp Duty Watch Background Numerous studies both in Australia and internationally have identified stamp duty as among the least efficient taxes. The HIA Stamp Duty Watch report assesses the cost of the tax in each of the eight states and territories with a particular focus on the burden faced by the typical owner occupier homebuyer based on dwelling price conditions during December Over the past year, significant alterations to stamp duty policies have been made in several states: An initiative to improve first home buyer affordability in NSW saw stamp duty abolished on all dwellings purchases up to $650,000 from July 2017 and a FHB concessional rate applying in the $650,000 to $800,000 price bracket The stamp duty surcharge on foreign buyers of dwellings in NSW rose to 8 per cent in July 2017 compared with 4 per cent previously Since the 1st January 2018, a foreign buyer stamp duty surcharge of 7 per cent has been in place in South Australia The Cost of Stamp Duty The chart below compares median dwelling prices and typical stamp duty bills in each of the eight states and territories based on the policies and conditions applying during December The representative purchase is assumed to involve the acquisition of an established dwelling at the median price in the relevant market by an owner occupier who is not a first home buyer. There is considerable variation in the size of stamp duty bills in the different jurisdictions those markets with higher dwelling prices generally tend to see heavier stamp duty bills: Victoria has the highest stamp duty bills amounting to $31,970 on the typical purchase In Western Australia, it has been announced that a similar foreign buyer surcharge of 4 per cent will apply from the start of 2019 The ACT government again reduced stamp duty rates in its most recent budget. This edition of Stamp Duty Watch provides several additional perspectives on stamp duty. The large increase in dwelling prices in most parts of Australia since 2012 has boosted stamp duty receipts but made governments much more dependent on the tax this is risky from the point of view of fiscal sustainability. In addition, the design of the tax means that dwelling price increases translate into disproportionately large escalations in stamp duty bills for ordinary homebuyers, a problem known as bracket creep. Stamp Duty Watch also explores the recent practice of applying large stamp duty surcharges to foreign buyers, a policy which imperils the effective functioning of Australia s rental markets. NSW has the second heaviest stamp duty bills ($25,190) followed by the Northern Territory ($20,805) in third place and the ACT in fourth ($18,058) In SA, the stamp duty bill is typically $16,705, followed by $15,485 in WA and $10,927 in Tasmania Queensland has the lowest stamp duty bill ($7,175) on a typical dwelling purchase. Based on the respective shares of each market in the national total, the weighted average stamp duty bill across Australia in December 2017 was $20,587 which represents an increase of 3.1 per cent compared with November Stamp Duty Bill and Median Prices for Owner Occupier (Non-FHB), December $ $ $455 $452 $ $ $ $610 $700 $600 $500 $400 $300 $200 $100 0 NSW (2) VIC (1) QLD (8) SA (5) WA (6) TAS (7) NT (3) ACT (4) Stamp Duty Bill (LHS) Median Dwelling Price (RHS) $- HIA STAMP DUTY WATCH P3

4 Percent of Dwelling Value Source: CoreLogic, HIA Stamp Duty Watch The Burden of Stamp Duty As noted in the previous section, typical stamp duty bills tend to be highest in those markets where dwelling prices are most elevated. For this reason, comparing stamp duty bills as a proportion of dwelling price can shed further light on the differences from state to state. On this basis, the stamp duty burden is heaviest in Victoria where the typical bill is equivalent to 5.2 per cent of the median dwelling price in the state The Northern Territory has the second highest stamp duty burden (4.5 per cent), followed by SA (4.1 per cent), NSW (3.8 per cent), WA (3.4 per cent) and Tasmania (3.0 per cent) At 1.6 per cent, the stamp duty burden in Queensland is by far the lowest. The next lowest market is the ACT (3.0 per cent). On average across Australia, stamp duty on the typical dwelling purchase for owner occupiers is 3.1 per cent of the median dwelling price. As later sections of the report will show, this burden has become higher over time due to the problem of stamp duty creep. Stamp Duty Burden as Proportion of Median Price Dwelling for Owner Occupier (Non- FHB), December % 5.2% 5.0% 4.0% 3.8% 4.1% 3.4% 3.4% 4.5% 3.0% 3.0% 2.0% 1.6% 1.0% 0.0% NSW (4) VIC (1) QLD (8) SA (3) WA (5) TAS (6) NT (2) ACT (7) Stamp Duty and Financial Stress amongst Households For households, the imposition of stamp duty has detrimental effects on their financial health over the long term. Having to meet substantial stamp duty bills at the time of home purchase erodes the funds available for home deposit and means that homebuyers must settle for smaller homes or else take on bigger mortgage loans. Along with higher mortgage repayments, stamp duty also ratchets up the LVR for households meaning that expensive Lenders Mortgage Insurance policies may have to be purchased as well. The chart below summarises the additional mortgage repayments that result from the reduction in the deposit caused by the imposition of stamp duty. HIA STAMP DUTY WATCH P4 The biggest effect is in Victoria where stamp duty causes mortgage repayments to rise by $1,833 per year Mortgage repayments are increased by $1,543 in NSW as a result of stamp duty, followed by $1,263 per year in the Northern Territory, $1,098 in the ACT and $997 annually in SA In Queensland, where stamp duty bills tend to be lowest the tax still causes mortgage repayments to rise by $421 per year Annual mortgage costs typically rise by $897 in WA and $562 in Tasmania as a result of stamp duty. Across Australia, the typical increase in mortgage repayments is $1,247 per year due to the $20,587 stamp duty bill on the typical purchase of a median price dwelling. This adds $37,410 to total repayments over the entre mortgage team.

5 Billions of Dollars Percentage of States' Total Tax Revenues Source: RBA; CoreLogic, HIA Stamp Duty Watch Additional Yearly Mortgage Repayments Resulting from Stamp Duty, December ,000 1,800 1,833 1,600 1,543 1,400 1,263 1,200 1, , NSW (2) VIC (1) QLD (8) SA (5) WA (6) TAS (7) NT (3) ACT (4) States Stamp Duty Dependence: worst in a decade From the perspective of the state and territory finances, stamp duty is a major source of tax revenue with the yield totalling $20.6 billion during the 2015/16 financial year the highest cash total for any year on record. This was equivalent to over one quarter (26.1 per cent) of total tax revenue during the year. The last time the state finances were more dependent on stamp duty was during the 2007/08 financial year (when it accounted for 26.9 per cent of their tax revenues). The dependence of the state finances on stamp duty has increased steadily since 2011/12 when the housing market was at a low ebb. The dependence of states on stamp duty is problematic from a Stamp Duty Dependence, 2001/02 to 2015/16 40 number of perspectives. First, stamp duty is a highly inefficient tax and the fact that stamp duty revenues has grown means that the economic burden of the tax has got higher and higher. Second, stamp duty receipts can be very volatile from year to year and this means that the threat to the stability and sustainability of the states finances increases as dependence becomes greater. For example, tougher economic conditions resulted in total stamp duty revenues in 2008/09 falling by one third compared with a year earlier. With new home building activity set to move lower over the next few years, the risk is that overdependence on stamp duty could translate into fiscal headaches for Australia s states and territories in the near future. 30% % 24.0% 25.7% 22.7% 24.4% 26.3% 26.9% 18.8% 22.4% 21.3% 19.4% 20.2% 23.3% 25.0% 26.1% 25% 20% % 10% 5% / / / / / / / / / / / / / / /16 Source: CoreLogic, Office of State Rev enue Stamp Duty Revenue ($bn) [LHS] Share of Total Tax Revenue (%) [RHS] 0% HIA STAMP DUTY WATCH P5

6 Percentage of State's Total Tax Revenue Even though aggregate stamp duty dependence has increased significantly over the past five years, there is considerable variation from state to state in terms of how reliant government revenues are on the tax. The chart below summarises the rate of stamp duty dependence in each state during 2011/12 (when the housing market was weak) and in 2015/16 (the latest year for which data are available). Unsurprisingly, stamp duty dependence was highest in Victoria during 2015/16 and accounted for 30.0 per cent of tax revenue in the state The second highest dependence rate is in NSW (28.1 per cent), followed by Queensland (23.9 per cent) and Tasmania (20.2 per cent) Stamp duty dependence is lowest in the ACT (18.2 per cent), the NT (18.8 per cent) and WA (19.4 per cent). The case of Queensland is interesting. Per transaction, the stamp duty burden there is easily the lowest of the eight jurisdictions but this appears to have a stimulatory effect on market activity as total stamp duty revenue is still relatively high in the state. Since 2011/12, stamp duty dependence has increased in each of the six states. Due to large gains in dwelling prices locally and a strong recovery in the state s new home building market, Which States are the Most Stamp Duty Dependent? NSW s government has experienced the largest increase in stamp duty dependence over the past five years. Victoria s state revenues have also become much more reliant on stamp duty over recent years, with its share of tax revenue in the state rising from 22.3 per cent to 30.0 per cent. Tasmania has also seen its dependence on stamp duty deepen, with the tax s share of revenue rising from 15.3 per cent to 20.2 per cent. In contrast to the six other jurisdictions, stamp duty dependence has declined in both the NT and the ACT but for different reasons. Back in 2011/12, the NT had been the most stamp duty reliant jurisdiction of all but the dependence rate has since dropped from 23.1 per cent to 18.8 per cent. This was caused by the reversal of fortunes for the NT housing market involving dwelling price falls, big reductions in new home building activity and shrinking turnover on the established side of the market. In the case of the ACT, the local government s ongoing attempts to phase out stamp duty over the long term has contributed to a reduction in the dependence rate from 20.2 per cent to 18.2 per cent. This initiative is to be commended from the perspective of promoting better outcomes in the local housing market. It also has the important benefit of insulating the ACT government s revenue streams from unfavourable changes in housing market conditions locally. 35% 30% 28.1% 30.0% 25% 20% 15% 18.1% 22.3% 19.1% 23.9% 19.6% 17.7% 18.8% 19.4% 15.3% 20.2% 23.1% 20.2% 18.8% 18.2% 10% 5% 0% Source: ABS NSW VIC QLD SA WA TAS NT ACT 2011/ /16 The next chart illustrates how stamp duty dependence is generally higher in markets that have seen larger gains in dwelling prices since May 2012, when prices were at a low point. It is noted above how stamp duty dependence is heaviest in NSW and Victoria, the two markets which have experienced the largest gains in dwelling price over recent years. By the same token, dwelling price levels in WA and the NT are lower than they were in mid the portion of their tax revenues accounted for by stamp duty is smaller than in most other places. Despite this general pattern, it is worth noting that stamp duty dependence is lowest of all in the ACT where dwelling prices have actually increased by 15.1 per cent since mid HIA STAMP DUTY WATCH P6

7 Growth in Dwelling Prices since May 2012 Stamp Duty Dependence and Dwelling Price Growth by State 70% 60% 50% NSW VIC 40% 30% 20% ACT TAS QLD 10% SA 0% 15% 17% 19% 21% 23% 25% 27% 29% 31% WA -10% Stamp Duty as % of State Tax Revenue (2015/16) NT -20% Source: ABS Bracket Creep and Stamp Duty Stamp duty regimes are designed to ensure that state government revenue escalates disproportionally faster than house prices. Without substantial reform, state governments will continue to receive even greater revenue returns from stamp duty, further ensuring their dependence on house price growth for future revenue growth. The tax s sliding structure involves heavier stamp duty rates in higher dwelling price brackets. The problem of stamp duty bracket creep arises because dwelling price changes occur continuously while tax brackets are usually adjusted only very infrequently. In the case of NSW, stamp duty brackets were last changed back in As dwelling prices tend to rise over the long term, bracket creep causes the weight of stamp duty bills to grow heavier with time. The two charts below illustrate the effect of stamp duty creep and how it has forced the burden of stamp duty higher over time. Where possible, we have gone back as far back as Constraints around dwelling price data mean that this has not been done for all states and territories. In NSW, the typical stamp duty bill was equivalent to 1.6 per cent of the median dwelling price in In cash terms, this has involved the typical stamp duty bill in NSW rising from $1,050 in 1982 to $25,685 in The stamp duty bill should only have increased to about $3,600 if the tax had kept pace with general inflation over the 35-year period since In Victoria, the stamp duty burden increased from 1.9 per cent to 5.2 per cent between 1982 and 2017 with homebuyers in the state seeing typical bills rise from $779 to $31,370 over the same period. Only allowing stamp duty to increase in line with inflation would has produced a typical bill of $2,700 in HIA STAMP DUTY WATCH P7

8 Stamp Duty as a Proportion of Median Dwelling Price, 1982 to % 5.0% 5.2% 4.0% 3.0% 2.0% 1.0% 4.0% 4.1% 3.8% 3.5% 3.0% 2.4% 2.4% 1.9% 1.6% 1.6% 1.2% 1.0% 1.0% 1.0% 3.2% 3.3% 2.4% 2.3% 0.0% NSW VIC QLD TAS Source: CoreLogic, Office of State Revenue Nov 1982 Nov 1992 Nov 2002 Nov 2012 Nov 2017 Commendably, Queensland s government did reconfigure its stamp duty tax brackets in the late 2000s to the benefit of homebuyers and this halted the increase in the state s stamp duty burden for a time. Similarly, the ACT government s consistent attempts to progressively reduce stamp duty rates caused the burden of the tax to fall from 3.8 per cent to 2.9 per cent over the past decade. These reform states are in the minority. Most states have left stamp duty rates unreformed and forced up the cost of home ownership. Stamp Duty as a Proportion of Median Dwelling Price, 1992 to % 4.5% 4.0% 3.5% 3.0% 2.5% 4.1% 4.0% 3.4% 3.4% 3.3% 2.8% 2.3% 3.8% 4.5% 2.5% 3.1% 3.6% 2.9% 2.0% 1.8% 1.5% 1.0% 0.5% 0.0% SA WA NT ACT Source: CoreLogic, Office of State Revenue Nov 1992 Nov 2002 Nov 2012 Nov 2017 In a number of markets, median dwelling prices have entered higher stamp duty brackets in recent times. Sydney s median house price broke $1m for the first time during December 2016, bringing the marginal rate of stamp duty from 3.5 per cent to 4.5 per cent for the typical transaction Since November 2016, the median house price in Hobart has been above the $375,000 mark, lifting the marginal rate of stamp duty from 4.00 per cent to 4.25 per cent. In other places, dwelling prices are close to breaking into higher stamp duty thresholds. During November 2017, the median house price in Brisbane was $522,500 which is close to the $540,000 mark above which the marginal stamp duty rate rises from 3.5 per cent to 4.5 per cent HIA STAMP DUTY WATCH P8

9 Dollars Adelaide s median house price stood at $460,000 during November 2017 above $500,000, the marginal rate of stamp duty rises from 5.0 per cent to 5.5 per cent. As these cases show, the escalating nature of the stamp duty burden is ever present under its current design. The policy of not adjusting stamp duty rate bands in line with dwelling price movements means that homebuyers face ever increasing barriers to market participation and home ownership. Surcharges on Foreign Investors In July 2015, Victoria became the first state to apply a stamp duty surcharge to foreign buyers of residential property. Similar interventions (officially known as Additional foreign acquirer duty or AFAD) have since been announced in four more states. These charges are on top of the stamp duty that would normally be paid by domestic investors. In addition, foreign residential investors are required to pay an application fee of at least $5,000 to the Foreign Investment Review Board (FIRB). The largest stamp duty surcharge on foreign buyers applies at 8 per cent in NSW Victoria s foreign buyer surcharge is currently 7 per cent In Queensland, a foreign buyer stamp duty surcharge of 3 per cent applies. There is a proposal to increase this to 7 per cent. On 1st January 2018, a 7 per cent surcharge took effect in South Australia A 4 per cent stamp duty surcharge will apply in Western Australia from January Comparison of Transaction Taxes for Investors in Dwelling Units - December ,000 90,000 91,115 In cash terms, the new surcharges on foreign investors are very expensive. The chart below contrasts the positions of domestic and foreign residential investors in the five capital cities where surcharges have been announced. These calculations also take into account the FIRB application fee and are based on the purchase of a median price unit at December 2017 prices. The foreign purchaser of the typical Sydney unit is required to pay $91,115 in transaction taxes alone (stamp duty plus FIRB application fee) in addition to other purchase fees. In Melbourne, foreign investors face $74,524 in transaction taxes with the cost next highest in Adelaide ($42,130) and Brisbane ($28,385). When the surcharge takes effect in WA at the beginning of next year, the tax cost to foreign investors in Perth units is likely to rise to around $35, ,000 74,524 70,000 60,000 50,000 40,000 30,000 28,115 28,220 28,385 42,130 34,890 20,000 10,000 11,865 13,330 13,490 0 Sydney Melbourne Brisbane Adelaide Perth* Source: State Budgets; CoreLogic, HIA Domestic Investor Foreign Investor *Foreign Inv estor surcharge scheduled to take effect in January 2019 Foreign investor surcharges add considerably to the tax burden for market participants. The figure below expresses total transaction taxes as a proportion of median unit prices in the five capital cities where foreign investor surcharges apply. Proportionately, the stamp duty burden on foreign investors is heaviest in Melbourne (13.5 per cent), followed by Sydney (12.6 per cent) and Adelaide (12.4 per cent). The additional cost of foreign investor transaction taxes is also substantial in Perth (8.5 per cent) and Brisbane (7.4 per cent). HIA STAMP DUTY WATCH P9

10 Dollars Investor Transaction Taxes as a Proportion of Median Price Dwelling Unit - December % 14% 12% 12.6% 13.5% 12.4% 10% 8% 7.4% 8.5% 6% 4% 3.9% 5.1% 3.1% 3.9% 3.3% 2% 0% Sydney Melbourne Brisbane Adelaide Perth* Source: State Budgets; CoreLogic, HIA *Foreign Inv estor surcharge scheduled to take effect in January 2019 Domestic Investor Foreign Investor In the ultimate, greater restrictions on foreign investor participation in Australia s housing markets means that fewer new homes get built each year. This has serious ramifications for the likelihood of our long term housing needs being met as Australia requires around 185,000 new homes each year and this volume of yearly output has been achieved on only a handful of occasions in the past. Most foreign-owned dwellings end up being made available to rental markets around the country. This is an important function at a time when vacancy rates are so low in major cities like Sydney and Melbourne punitive rates of stamp duty for foreign investors risk undermining the effective functioning of rental markets. In the case of Sydney and Melbourne, the existence of an adequate supply of rental stock has allowed both cities to meet the demand for significant increases in their migrant populations over the last few years, making a crucial contribution to economic growth. Stamp Duty Surcharges on Purchase of Residential Land by Foreign Buyers: Summary of Key Definitions and Concessions, January 2018 Definition of Residential Land Does not include primary New South Wales production land. Excludes commercial Victoria residential premises (as defined for GST purposes). Queensland South Australia Western Australia Does not matter if the land is also used for another purpose. Source: Stamp duty-related legislation in each of the states Definition of Foreign Persons/Corporations Substantial interest of 20% or 40% for two or more persons (same as FIRB's definition) More than 50% capital. At least 50% of voting rights and/or issued shares. Corporations not incorporated in Australia. 50% or more shares or voting rights held by foreign person. Specific Concessions Australian-based developers who are also Australian corporations may be entitled to refunds on the surcharge in certain situations. Treasurer has powers to grant exemptions to a company incorporated in Australia or a trust on several grounds including economic impact, competition and community benefits. Relief may be granted for "significant developments" of over 50 residential lots. Surcharge excludes residential developments of ten or more properties. Surcharge excludes commercial residential property such as hotels, student accommodation and retirement villages. Surcharge excludes mixed use properties that primarly for commercial purposes. Relevant State Legislation Duties Act 1997 Duties Act 2000 Duties Act 2001 Stamp Duties Act 1923 Duties Act 2008 Other Notes Surcharge due to take effect in WA on 1st January HIA STAMP DUTY WATCH P10

11 Disclaimer: This publication is produced by HIA Economics based on information available at the time of publishing. All opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. Neither HIA nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report. HIA STAMP DUTY WATCH P11