Housing affordability modelling informs debate on housing tax reform

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25/03/2024 | Faculty of Business, Government and Law, Policy

Housing affordability modelling informs debate on housing tax reform

Modelling of the impact of the ACT Government's tax reform program informs the continued political debate of housing affordability in the ACT. Research into tax reform outcomes uncovers the successes of government decisions, ensuring continued accountability.

In 2012, the ACT Government began a 20-year program to modernise the Territory’s taxation system. This reform program has broadened the tax base by moving towards replacing inefficient taxes, such as stamp duty and insurance duty, with a broad-based land tax through the general rates system. Importantly, the program was designed not to raise the overall tax burden on the ACT community, with the forgone revenues resulting from reductions in stamp duty being replaced by an efficient and more equitable rates system.

Since 2012, the ACT Government has significantly cut conveyance duties, commonly known as stamp duty. Decreases in stamp duty every year have led the ACT to be among states with the lowest stamp duty rates in Australia. The first stage of this reform program includes:

abolishing duty on insurance policies over five years;
phasing out conveyance duty over 20 years;
abolishing commercial land tax, with a portion of the commercial general rate settings providing revenue replacement for commercial land tax;
increasing the tax-free threshold for payroll tax; and
making residential land tax and the general rate system more progressive.

With the cost of living and housing affordability at the top of political debates, in 2020 UC researchers undertook modelling to examine the distributional, economic and affordability impacts of the tax reform. They set out to answers the following questions:

What has been the impact of tax reform on different household types and cohorts, considering available concessions and deferral programs?
What has been the impact of tax reform on the progressivity and equity of the ACT tax system, considering the incidence of property purchases by households at different income and wealth?
How has tax reform affected the alignment of residential property taxation with ability to pay, taking account relevant related factors including changes in land values and land use by household income level and household wealth level?
Is there any evidence that higher annual general rates (in place of higher stamp duty) have impacted welfare or behaviour?

The study paid particular attention to households with different income:

First home buyers
Low-income homeowner
Low-income renter
Middle-income homeowner
Middle-income renter
Pensioner homeowner
Pensioner renter
Female-head homeowner
Female head renter

The result of the modelling suggests housing tax changes in the ACT have allowed more disadvantaged people to buy homes, increased the turnover in the housing market, and increased the number of first-home buyers.

The modelling showed:

After taking into account all concessions and deferral programs available, and not taking into account the estimated price increase due to the reform, tax reform has increased property turnover; and reduced the amounts paid for stamp duty and rates for most groups of vulnerable families in the ACT. Both the rates and stamp duty have been shown to be more progressive under the new tax system, in that low-income families are paying slightly less of the total rates and stamp duty; and high-income families are paying slightly more. In terms of income groups, before the modelled house price increase is incorporated, low-income families are paying slightly more of their incomes on rates and stamp duty, while middle income groups are paying less, possibly because these groups are benefitting from the lower stamp duty which the lower income groups aren’t. Similarly, low wealth families experience slightly lower incomes under the new tax system, possibly because they aren’t benefitting from the lower stamp duty, while middle wealth families benefit from it. Once the modelled house price increase is incorporated into the model, first home buyers and renters still benefit from the new tax system, but homeowners lose due to the higher rates paid on higher value houses. The progressivity of the new rates and stamp duty is still apparent with the house price increase.
Looking at the results by income quintiles, we show that both the rates and stamp duty in the new tax system are more progressive, with lower-income families paying less of the tax take under the new system compared to the old. This was the same before and after the house price increase was incorporated. In terms of access to housing, the best-case scenario is that the new tax system has meant greater access and increased sales for low to middle income and mid wealth families, although it hasn’t had an impact on low wealth families getting into housing. However, the worst-case scenario is that the price increase modelled under the new tax system has meant that there has been inequitable access to housing for first home buyers, and middle-income earners (Q2 – Q3) and middle wealth (Q2 – Q3) families.
The overall results suggest that tax reform has improved ability to pay for a house for low income and mid wealth families, as a greater number of them have been modelled as being able to buy. Low wealth families are still not buying, due to the deposit requirement to buy a house. Having said this, the modelled increase in house values changes this story, with a large reduction in the number of houses purchased by low income and mid wealth families.
When considering welfare, the impact of rates on the incomes of low-income families has reduced under the new tax system, suggesting an increase in welfare of these families. This impact was greater than the impact of stamp duty on low-income families. Reducing stamp duty under the new tax policy has meant that some of the stamp duty paid under the original tax system can now be used for a deposit. Our modelling showed that this has had a positive impact on purchasing ability, particularly for first home buyers. This was before the house price increase was incorporated. It is difficult to identify an impact on behavior, and our model does not include behavioural effects, but we can say that the house price increase led to a large change in our model, as a large number of families could no longer purchase a higher priced house due to the income and deposit requirements. So the income and deposit rules applied by banks to provide loans are highly sensitive to house prices, and this may impact behavior in terms of families not purchasing or purchasing elsewhere. We would suggest that while the lower stamp duty has increased the number of houses purchased by 2,263 houses, so has influenced behavior, a much greater impact was seen by increasing the house prices – a reduction of 10,647 houses – so the main factor affecting behavior is house prices, and higher house prices can wipe out the benefit of lower stamp duty in terms of the number of houses sold.

UC researchers believe that the policy has increased residential mobility (housing turnover), especially downsizing, helping with housing availability. It has made some area of Canberra increase in density which results in people having more connection. The increased density allows some changes in the public services such as transport and other amenities.

The study, once again, opened the discussion of homeownership in Australia and the ACT, especially prevalent in the 2024 ACT election campaigns.

Partners

Robert Breunig and Ralf Steinhauser, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University and
Chief Minister, Treasury and Economic Development Directorate, ACT Government