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Feb 3, 2010

State governments get a handle on housing boom addiction

The adoption of commercial incentive tactics has lead to state governments in Australia becoming addicted to property taxes, collecting big on stamp duty and offering very little in return.

Early last century, a salesman by the name of King Camp Gillette came up with a game-changing sales pitch. Not only did Gillette revolutionise the disposable razor blade but he struck an even better idea — give away razor handle and sell the blade. Gillette’s “loss-leader” concept has been often copied ever since. The pitch is simple, get the customer hooked on something by offering a free incentive. Gillette’s free handles would only fit Gillette’s blades, forcing consumers to pay a greater margin so they could use their otherwise useless handle. The tactic is regularly used by the likes of mobile phone companies (who give away handsets) to ink-jet printers to drug dealers — get the user hooked on a product through a clever incentive.

It appears that King Camp Gillette’s tactics have been adopted by an even stranger source in Australia — state governments — who themselves appear to have become addicted to property taxes, largely in the form of stamp duty. Stamp duty is paid on most property sales and is collected by various state governments, which provide virtually no service in exchange for the collection of the duty. Rather, it is a tax on property (be it real or financial) transactions.

State governments appear to have taken the loss-leader approach from Gillette seriously. How are they doing this? Simple: give people a small incentive to buy property (in the form of first-home-owner’s grants) and then charge them a substantially greater sum in the form of stamp duty and other property taxes at the time of purchase.

In 2000, to overcome the GST-imposed slump in housing, the Howard Government created the first-home-owners boost in a bid to encourage construction (and win votes from the mortgage belt). The plan was such a political success that the Rudd Government in October 2008 boosted the size of the grant from $7000 to $14,000 (for existing homes) and to $21,000 for new homes. Like many quickly conceived policies, the grant was a political dream but an economic nightmare, leading to property prices rising as swathes of young home buyers used the grant (plus leverage of up to 90%) to “bid-up” the price of housing.

Amid growing criticism, the Rudd Government started phasing out the boosted grant last September — but various state governments, themselves addicted to property taxes, have introduced grants of their own — much like King Camp Gillette, state governments are giving away the handle and selling the blade. The loss-leader approach is slightly less direct though. The Victorian state government provides a $2000 grant for established homes (in addition to the federal Government’s $7000 grant) but a larger $11,000 grant for newly constructed homes. For established homes, the grant is an immediate money spinner — the $2000 cost is quickly repaid through stamp duty, which is $2870 plus 5-6% of any amount above $130,000. (New South Wales provides a $3000 supplement for new homes only). For purchases of new properties, much of the benefit, which is in the form of higher profit margins for developers, is reaped by the federal Government’s collection of income tax. However, state governments benefit from the continued flow of property taxes while, local governments receive council rates (purchasers of new homes do not usually pay stamp duty).

ABS figures show just how reliant state and local governments have become on property taxes and duties. In 1998, before the current property boom got under way, the total value of property taxes collected by Australian state and locals governments was $4.6 billion, or about 11.1% of total state and local taxes collected. By 2007/08 that figure had skyrocketed to $14.3 billion and had grown to represent 22.8% of all non-federal taxes collected (as a comparison, in 2007/08, the total tax take of the federal Government was $285 billion).

While many commentators are quick to point to the Victorian Government’s dependence on gambling taxes, those revenues are dwarfed by property income. In 2007/08, the Victorian Government reaped $1 billion from poker machines, $117 million from Crown Casino and $124 million in race betting taxes — meanwhile the state government collected $3.7 billion from stamp duty on conveyances alone and a further $865 million in land tax. In the past decade, revenues from gambling have increased by only 10.2%, compared with a 185% rise in property-related tax revenue.

State governments are addicted to the property boom. Even over-priced housing transaction reaps more benefit to the governments, otherwise largely reliant on federal handouts.

The pitch is especially devious because many property buyers forget that they are even paying the stamp duty – for most, it is added to the cost of the property and results in them merely taking a larger loan (which is paid back over a long period, often 25 years).

Have the grants and other so-called benefits actually helped first home buyers? Unlikely. Not only have the grants resulted in prices being bid-up, but affordability difficulties are becoming more widespread. According to a survey conducted by Fujitsu Consulting, almost half of the first home owners who entered the housing marked in the past 18 months (since the first-home-owner’s grant was boosted) are now experiencing “mortgage stress” or “severe mortgage stress”. State governments, by contrast, are enjoying the fruits of Australia’s induced housing boom.

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8 thoughts on “State governments get a handle on housing boom addiction

  1. abarker

    For once Adam I will totally agree with you. The FHOG and various bonuses available in different states were the catalyst for the property boom, and, they are quickly gobbled up in taxes by the various state governments.

    What I’d like to know is, where is this increased income being spent? Our hospitals and roads are still in shambles. Public Transport is sorely lacking.

  2. Gary Johnson

    Is that you AB?…cheer-leading Adam Schwab? Well I’ll be darned.

    I wish Adam would put every bit of research he has done on the Australian Housing Market over the last 5 years..into a book.

    Web-sites are good, but a book written for the right reasons can be better marketed and promoted and can have the desired impact.

    It could be sold on-line or through a distributor…or both.

    Come on Adam!!! throw caution to the wind!!!…I can just see you on one of those talk shows.

  3. achimova1

    Terrific article Adam. I am appalled at the way the state and federal governments have lured young people into buying houses which are so expensive they will be wage-slaves all their lives.( The banks are crying their way to the …bank) It is ominous that so much government revenue rests on an essential item such as housing. Meanwhile, housing availability for the less wealthy is almost non-existent, even for the sick or mentally ill. Gone are the days when a couple would get engaged, pay off a block in two years, get married and then pay off the house on one income. A book would be great – if it covered the changes in policy, housing market and financial and social stress over the last fifty years

  4. abarker

    Cheerleading in a zealous manner and agreeing are different. And while this is one reason prices have increased, it is also a reason they will not fall, as governments have a vested interest in keeping them high.

  5. abarker

    And I have to disagree with Adam Schwab writing a book – I’m pretty sure it will get knocked back after fact checking as Adam’s numbers can be quite incorrect at times – for example a $25,000 deposit in SA last year, plus $25,000 in grants, would not have allowed a first home buyer to leverage into a million dollar property.

    Stamp duty is one of the reasons.

  6. Kaz

    hurro hurro it’s Sukio Somora from ja Pan here

    i rike Adam to do book as well. i think it sell verwy well in ja pan and can become good concience of aussie people

    want yen mr poe to book me good talk me rike good thing for it’s own sake

    talk me

    i lost my job in q ueens land tourist job and i now rerk in gold coast pizza shop. but business vewry slow and i say to boss how can he keep me on such good wage when business so bad. he say oh don’t worry Sukio we can sort it. what he mean by that? i kunnono!!!

    sayonara from Sukio i off to rerk now and boss want me to rerk late again

  7. Gary Johnson


    (((I’m pretty sure it will get knocked back after fact checking )))

    I could say never ruin that good story with those facts…but I won’t.

    Instead, I would say his stats and research will stack up no problem because there would be no interpretational agenda.

    Besides, it’s emotion that sells…not statistics, and a book like this may influence govts to change policy, and accordingly, the hearts and minds of people to change their life-styles and attitudes.

    Is n’t that what good journalists do?..and is n’t that what responsible govts should be doing?….instead of those cheer-leading realestate industry prophets of Baal who bend over backwards to interpret data on behalf of their masters of spin.

  8. abarker

    Nothing will make people change their lifestyles short of the collapse of civilization as we know it. Let’s face it, unless you switch off the lights, people won’t stop driving their cars, watching their TV, surfing their web and consuming the food and drink they do.

    Pol Pot tried, and, well, we all saw what happened then.

    Yeah it’s unfair Gary but then again life isn’t fair.