One for the tax and economy gurus

[cube]

Hi,

I have been thinking about a way that a future property 'bubble' could be self-popping, to prevent run-away prices that eventually impact on pretty much everyone, and lead to the situation that we find ourselves in now (and have done in the past).

In the past, there have been calls for capital gains taxes, stamp duties, income tax changes to try and stop the property market in its tracks, but where these have been tried, the market seems to simply re-adjust and carry on its merry way.

I propose a type of variable stamp duty, payable on purchase and being a % of the purchase price. This tax would not be able to be financed as part of the mortgage, so would have to be 'cash up front' (although I'm sure that the financiers would find a way around that).

The trick would be that the percentage would be based on the current temperature of the market. Lets say we use 1/10th of the annual increase in the QV house price index.

So, if the market is flat (0% year on year), no stamp duty would be payable.

If the market is average (5% year on year), 0.5% stamp duty would be payable.

If the market is hot (15% year on year), 1.5% stamp duty would be payable.

Basically, the hotter the market, the higher the cost of purchase.

Obviously the actual fraction of the increase would be legislated - 1/10th is just an easy example, and it may be that 0% is payable if the market is 'luke warm'

The level of tax would be re-set every 6 months, to provide some certainty.

First home buyers could be exempt from the tax.

The Govt of the day would have the ability to alter the stamp duty %, giving them further control over the housing market, independent of the reserve bank interest rate which affects the wider economy.

Would something like this work, or would it distort the market (especially around the rate re-set time)

What pros and cons are there to this system?

cube

[CJ]

I dont really see any equality in the scheme.

There are many ways to skin a cat, I dont see this as being the best way.

[Green Fish]

I think that it's very good idea. The GST regime could achieve a similar effect, but it's not really set up for property transactions - whereas the old stamp duty regime was: LINZ could not register a transfer unless it was imprinted with a stamp duty receipt, so everyone had to pay.

I think that a stamp duty would have more impact on purchasers than letting the Reserve Bank try to influence interest rates. If Dr Bollard could simply say that every purchase will incur a fixed stamp duty of x%, then purchasers might be a little bit more reflective. Also, the stamp duty would go into the consolidated fund, so the general public will get some compensation for the bad effects of these property bubbles.

The stamp duty could also be applied to assignments of agreements, which would end them overnight, and slow down turnover in an overcooked market.

[whitt]

Not as bad idea Cube. A variable stamp duty linked to growth rates.

It woul help in a quiet markt also.
Have you spoken to John Keys dept?

[RentMaster]

Just a thought. If prices were going down, can we get a negative stamp duty?

The main problem I see is they would probably have to legislate each time the rate needs changing, and you know how fast polititians are at doing that sort of thing. Although the rate might end up being lower than normal in an election year.

[Green Fish]

The problem the IRD currently has is that there is already a "negative stamp duty" situation. If a property is sold at a loss, and if the seller is a trader or someone who purchased with the intention of selling, then the loss would appear to be deductable.

Adjustments to the rate of stamp duty woul probably end up in the hands of the Reserve Bank, rather than the politicians. After all, Dr Bollard's primary role is to keep inflation under control, so he should he should be allowed the use of any new toys.

[Tucker]

The problem with this idea is you are really only trying to stop the traders which is only a small amount of people but it effects everyone. Some people may have to move/purchase a home in a peak time due to job or personal issues (they are not traders) hence get punished for doing so when they couldn't buy in the flat time when there was no stamp duty.

Also stamp duty hasn't stopped the Australian market from having big growth and they have stamp duty all year round.

[cube]

Just a thought. If prices were going down, can we get a negative stamp duty?

No, I think the stamp duty would bottom out at $0, or maybe even $500 - someones still got to administer it.

The main problem I see is they would probably have to legislate each time the rate needs changing, and you know how fast polititians are at doing that sort of thing. Although the rate might end up being lower than normal in an election year.

The would only have to be legislation if the fraction figure (1/10th in examples) needed to change - hopefully that would only be needed in very occasionally, because the effect of the variable duty would dampen the market, preventing huge bubbles that need a bigger prick to burst them.

The problem with this idea is you are really only trying to stop the traders which is only a small amount of people but it effects everyone. Some people may have to move/purchase a home in a peak time due to job or personal issues (they are not traders) hence get punished for doing so when they couldn't buy in the flat time when there was no stamp duty.

Also stamp duty hasn't stopped the Australian market from having big growth and they have stamp duty all year round.

So are traders a small part of the market, and so don't influence it but they get caught up in the hype like everyone else, or do they have a large impact on the market, and so would be affected in proportion to their participation in the market.

I agree that people move when it suits them and their circumstances, and so may get caught by a high stamp duty, but those same people are currently being caught by high prices. A stamp duty would mean that they would have less to spend on a new place, reducing either their offers or their expectations. Also, the idea of the variable stamp duty is that it evens out the bubbles and troughs.

The stamp duty in Aus is not variable (AFAIK) based on market conditions, so it's impact (like that of the first home buyers grant) is to simply change the price and let the market carry on.

Have you spoken to John Keys dept?

No, but if you see a scheme like this come up, remember where you heard about it first!

Now would actually be a good time to introduce the scheme, because the duty would be pretty much at its bottom rate, having little effect on the already depressed market.

cube

[Tucker]

Stamp Duty has done little to effect the Australian market, even with stamp duty they still have higher growth than us. Possibly in the early stages of implementing it we may see a slow down and even a small drop in prices but it will lead back to what we have seen in the past with growth and maybe even slightly higher in the early stages as people get back in and shrug off the stamp duty.
People will have to have the opportunity to borrow the stamp duty otherwise it may lead to a worse case of some people not being able to afford their own home because they have to come up with a deposit as well as the stamp duty amount.

[tricky]

Hi,
I have been thinking about a way that a future property 'bubble' could be self-popping, to prevent run-away prices that eventually impact on pretty much everyone, and lead to the situation that we find ourselves in now (and have done in the past).

Are you trying to prevent run-away prices?
That's just the way the market works - key drivers etc.
It's futile and foolish to try and stop it.

In the past, there have been calls for capital gains taxes, stamp duties, income tax changes to try and stop the property market in its tracks, but where these have been tried, the market seems to simply re-adjust and carry on its merry way.

Yep - that seems to be the usual outcome.

You need to address the key drivers if you want to influence the market.
Putting a tax or a transaction cost on a house sale doesn't alter the key drivers.

[Jumpin]

Bubbles are a reality of a free market. These are sometimes exacerbated by economic conditions, ie lots of BB with good credit trying to belatedly prepare for their retirement.
Although there is some pain in a bust, booms generally work to society's advantage by providing infrastructure and excess and updated capacity which it wouldnt otherwise invest in. This provides a springboard for further growth when times are tougher.
The bust part of the phase generally just gets rid of the dross.
The good fish which get caught up when the tide goes out, generally make it back into the water stronger and wiser than before.

[mortgage broker]

I think the idea of a free market seems to work ok, interest rates seems like a good way to control inflation. Do you think a small percentage of the growth would ever slow a market down? I think people trying to make money would be happy to take of what would be a small percentage of profit right?

[Green Fish]

Probably right: Idiots and speculators will still borrow to pay the additional amount for the stamp duty, and that cannot be prevented. In the period from 1985 to 1987, interest rates, for a first mortgage, were, on average, around 20%! Yet the banks still lent, and the idiots/speculators still bought.

My solution: Make the banks pay the Cube Stamp Duty.

[CJ]

My solution: Make the banks pay the Cube Stamp Duty.

Why not restict the amount banks can lend by adjusting the capitalisation ratios.

This current boom is on the back of easy credit, aggresive lending, and increasing household incomes (dual income).

[RentMaster]

Why not restict the amount banks can lend by adjusting the capitalisation ratios.

This current boom is on the back of easy credit, aggresive lending, and increasing household incomes (dual income).

Yip. I think this is Cullens current weapon of choice. I suppose from a politicians point of view it is not a tax, and so sort of flies under the radar a bit more. Voters dont like additional taxes.