NSW land tax could lower serviceability, broker warns

While the policy becomes fully operational on 16 January 2023, eligible first home buyers purchasing a property from now until 15 January 2023 will be able to switch to the annual property tax and have their stamp duty refunded.

NSW Treasury analysis showed up to two-thirds of first home buyers will choose to pay a smaller annual property fee rather than forking out for stamp duty upfront, especially those spending between $800,000 and $1.5 million who sell their property within 10.5 years of purchase.

The land tax is calculated based on $400 plus 0.3 per cent of land value for properties whose owners live in them and $1,500 plus 1.1 per cent of land value for investment properties.

Just over one week since the scheme was announced, Theo Chambers, CEO at Shore Financial, said “multiple enquiries” had been flooding in. 

While he welcomed the scheme, Mr Chambers said land tax must be factored into a client’s serviceability, thus it could “affect borrowing power”.

“Some first home buyers are limited on their maximum purchase price based on their savings and deposit, whilst others are limited by income and serviceability,” Mr Chambers said.

“While this significantly assists those restricted by their savings or overall deposit, it will not be helpful for those restricted by income as this annual tax will further reduce their borrowing power.

“In saying this, most first home buyers we deal with are restricted by deposit, not income and those who have the appropriate deposit, can still opt in for paying the stamp duty upfront.”

Despite this, the land tax almost halves the minimum required amount first home buyers need to save as a deposit supporting FHBs into the market, he said. 

“The annual property tax only works out to cost more than once-off stamp duty after roughly 14 years if you assume 2.5 per cent growth on land value per year,” Mr Chambers said.

CoreLogic's head of research Eliza Owen said there were "key efficiencies" missing in the policy and sellers may benefit more than first time buyers. 

"Removing stamp duty for first home buyers saves on up-front costs of buying a home but could push up home values overall," Ms Owen said.

"This is because stamp duty is a part of what buyers are willing to pay for their home. Removing stamp duty payments means the buyer has more money to put toward the purchase price."

She explained that the "breakeven" point for expenditure on stamp duty and the property tax in this price range varies between dwelling type and purchase price.

"It is estimated to be between 36 and 63 years for units, and 21 and 29 years for houses. But any savings on property tax may be put towards the purchase price, ultimately benefitting the seller of the property.

"If the removal of stamp duty and the implementation of an ongoing property tax could push up values, why do so many economists love the idea of substituting stamp duty for land tax?"

However, one of benefits thought to come from an ongoing property or land tax is it makes housing more attractive, as it provides greater incentives to buy in the current market, she said. 

The government has allocated $728.6 million to First Home Buyer Choice over the next four years.

The First Home Buyer Choice is a key component of its $2.8 billion Housing Package announced at the 2022–23 NSW budget that “aligns with the Housing 2041 vision”, it stated.

[Related: Two-thirds FHBs will say no to stamp duty says government]