First home buyers in NSW will be exempted from stamp duty for 12 months. Here’s how it will affect the market.

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via Business Insider

Australia’s biggest property market is stripping back stamp duty in one of the largest reforms in years.

Eligible homebuyers in New South Wales will be able to avoid paying tax when they purchase a property up to $800,000 until August 1, 2021.

Stamp duty has more than doubled in cities like Sydney over the last 15 years. As a result, homebuyers have been paying out tens of thousands of dollars more to the government at the same time property prices kept creeping higher.

As a result, Sydneysiders last year could expect to shell out more than $40,000 in stamp duty on the median house price. With much of the market above the $800,000 mark – often substantially – they will still need to.

However, for first home buyers looking at a lower price point, the tax exemption will no doubt provide some small relief.

Here’s what else it might mean for the market.

First home buyers will rush into the market again

The most obvious ramification is that the discount will drive more buyers into the softening market.

However, with a 12-month window, the measure might will likely create a “large but temporary spike” in demand, according to CoreLogic head of research Australia Eliza Owen.

“The increase in first home buyer participation over a limited time window may actually lead to an increase in values up to the cut off values for stamp duty concessions,” Owen said.

“This is because buyer competition could be increased in this segment while added incentives are on offer. Furthermore, the reduced transaction costs associated with stamp duty exemptions mean borrowers have higher purchasing capacity, which may just be added onto the purchase price while first home buyer demand is elevated.”

In other words, the $20,000-$30,000 a homebuyer saves on the tax is simply extra money they can splash on a property, driving prices higher.

Sydney buyers, scrambling to lockup what few properties go for under $800,000 in 2020, could soon find themselves locked into a bidding war.

Properties could be increasingly priced near the $800,000 cutoff

It’s not just buyers who will respond to the incentive either.

“Research of sales volumes by price suggests that sales volumes tend to ‘cluster’ just under the cut-off point for complete stamp duty exemptions, so that first home buyers can avoid paying the tax,” Owen said.

This is exactly what happened when the stamp duty cutoff was $650,000, with the number of sales between $640,000 and $650,000 32% higher than the band below, and 49% higher than the band above.

It could actually slow down the market in years to come

Once the initial spike in demand passes however, there’s a risk the incentive could backfire.

While buyers under $800,000 can be exempt, stamp duty discounts are also available on purchases up to $1 million.

Most first home buyers are hardly going to be in the market in that range outside of Sydney, those that do might feel disinclined to move again.

“By incentivising first home buyers into a more expensive, and presumably larger home earlier in life, first home buyers may stay put for longer, in order to avoid paying stamp duty on upsizing down the line,” Owen said.

“This could extend hold periods, thus potentially reducing the amount of turnover that takes place in future.”

The policy should put some wind in the economy’s sails

Like federal schemes before it, one of the objectives of the exemption is to generate more work as the economy slows.

“[It’s] good news for those in the construction industry, and, considering the broad range of industry sectors involved in residential construction, there should be a positive flow through to economic activity,” Owen said.

As Australia lumbers through a recession, it’s certainly not before time.

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