Melbourne’s growing stamp duty headache

Victoria should phase out stamp duty and replace it with a new residential land tax, Infrastructure Victoria says, arguing the costly upfront tax on home purchases encourages urban sprawl and penalises people who want to change homes to be closer to work or family.

Scrapping stamp duty and replacing it with a land tax regime would be one of the most effective things the Victorian government could do to spur housing growth in Melbourne’s inner and middle suburbs, the independent advisory body argues in a new report.

Stamp duty increases taxpayer costs for roads, schools and hospitals on the urban fringe, Infrastructure Victoria says. Credit: Peter Rae

It says stamp duty increases the burden on taxpayers to fund infrastructure such as roads, schools and hospitals for the urban fringe, and that it forces first home buyers to live in new, poorly serviced suburbs on the edge of the city, far from employment, while making it less affordable to move house when life circumstances change.

“Stamp duty pushes people to live in new suburbs, creating higher infrastructure costs to government,” Infrastructure Victoria argues in its draft 30-year strategy, published on Tuesday.

“It discourages people from moving into different homes as their lives change. Instead, stamp duty encourages home buyers to look for a larger ‘forever home’. It is a penalty for moving house to be close to family or a new job.”

Costs for a slew of major projects including the Suburban Rail Loop and the North East Link have blown out to a combined total of $145.55 billion, straining the state’s financial position, Victoria’s auditor-general found last month. Yet the city’s fastest-growing suburbs, in the outer west, north and south-east, do not have access to metropolitan trains, increasing car reliance in Melbourne’s most affordable suburbs, the Infrastructure Victoria report found.

The report argues that, by pushing people to buy large new homes on the urban fringe, stamp duty also increases transport congestion.

“It may prevent some people from moving, which means they need to travel further than they otherwise would. This creates more congestion and crowding on the transport network which is costly for the government to address.”

The body has recommended that Victoria phase out stamp duty in the next 30 years, recognising that the tax is a crucial source of state revenue that cannot be simply unwound.

Infrastructure Victoria chief executive Jonathan Spear said the availability of stamp duty exemptions to first home buyers purchasing homes under $600,000, and concessions for properties under $750,000, also pushed people into fringe suburbs.

“There’s very few homes available for first home buyers at that price point except in the greenfields,” Spear said.

These tax incentives undercut the government’s plan to build 70 per cent of new homes in established suburbs, he said.

“It [stamp duty] really does serve as a structural impediment to people choosing the right home at the right stage of their lives, and that is an impediment to people living in the middle suburbs of Melbourne, and in our regional cities.”

Victoria has already begun to phase out stamp duty on commercial and industrial properties and replace it with an annual land tax set at 1 per cent of the property’s unimproved land value. The change is expected to save businesses $266 million in the next four years, according to the 2023-24 budget papers.

Real estate agent Gaurika Kohli said most buyers she dealt with were keen to take advantage of stamp duty discounts.Credit: Luis Enrique Ascui

Stamp duty is the state government’s largest source of revenue from property. It raised $8.3 billion in 2023-24.

Spear said the government should consider following the ACT, which is gradually reducing stamp duty rates while increasing land tax over 20 years.

Real estate agent Gaurika Kohli operates in Melbourne’s outer north, selling houses in some of the city’s newest housing estates in suburbs such as Donnybrook, Kalkallo, Mickleham and Beveridge.

Kohli said most of the buyers she dealt with were anxious to take advantage of stamp duty discounts.

“These are affordable suburbs. The median sale price is about $650,000,” she said.

“The area is predominantly inviting first home buyers, and that’s where the struggle is; they are short-funded and so every $10,000 saved is a big saving for them.”

Leading property and development groups said stamp duty was a bad tax ripe for being phased out but that any change must be gradual and well considered.

Linda Allison, the Urban Development Institute’s Victorian chief executive, said stamp duty should be replaced with a land tax regime, but that it would be a complex and politically contentious task for any state government.

“We don’t think that’s likely to happen in the foreseeable future. However, there is some fine-tuning that could be done to stamp duty at the moment, which wouldn’t necessarily cost the government significant amounts of money,” Allison said.

She said the government could raise the threshold for stamp duty concessions above $750,000, which is less than the median value of a house, and introduce stamp duty exemptions for property downsizers.

The Property Council’s Victorian executive director, Cath Evans, said stamp duty “does everything a tax should not do. It is a handbrake on people’s mobility, slows housing construction and reduces affordability,” Evans said.

But she did not endorse replacing stamp duty with a broad-based land tax, cautioning that any change to property taxes should be made “carefully and with wide consultation”.

A Victorian government spokesperson said: “We’re always looking at ways to make the housing market fairer, whether that’s concessions and exemptions on stamp duty for first home buyers, changing the planning rules to get more homes built or abolishing the upfront cost of stamp duty on commercial and industrial buildings.”

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