Stamp Duty and the Housing Market

I have a new paper out, looking at the impact of stamp duty on the housing market. Methodologically, the question turns out to be slightly tricky – because stamp duty is a mechanical function of house prices, a regression of turnover or prices on average stamp duty in a neighbourhood would return a positive coefficient. To get the behavioural impact, it’s necessary to form a measure of the predicted stamp duty in an area, and run this either as a reduced-form or instrumental variables regression. When you do this, the standard predictions of economic theory are borne out: places with higher predicted stamp duty rates tend to have lower housing turnover and lower house prices. Abstract below (click on the title for the full paper).

How Do Stamp Duties Affect the Housing Market?
Land transfer taxes are a substantial portion of the cost of moving house in many developed countries. However, little is known about the effect of such taxes on the housing market. Since stamp duties are endogenous with respect to the house price, I create an instrumental variable that is the stamp duty on a property, given that postcode’s starting house price and the national house price trend. In a specification with postcode and year fixed effects, this instrument effectively captures policy changes and nonlinearities in the stamp duty schedule. I find that the impact of an increase in the tax rate is to lower house prices, with the magnitude of the effect rising slightly over the medium run. I also observe impacts of stamp duty on housing turnover. A 10 percent increase in stamp duty lowers turnover by 1-2 percent in the first year, and by 4-5 percent if sustained over a 3 year period.

Of course, just because stamp duties affect the housing market, it doesn’t automatically follow that we should scrap them. My quick rundown of that issue here:

Against stamp duties:

  1. Internationally, Australia’s current rates are pretty high (an easy way to think about it is that stamp duty on a given house is about the new price of the car in the driveway).
  2. Higher mobility taxes mean that you get more mismatch between families and the housing stock (too little upsizing by young families, too little downsizing by empty-nesters).
  3. Higher mobility taxes mean that people may not take a job in another city (leading to lower productivity, or lower employment). Or it could mean that they live in the ‘wrong’ part of town, and waste too much time and petrol commuting.

In favour of stamp duties:

  1. All taxes have their distortions, and we’d want to weigh up the those imposed by stamp duty against the distortions that are a byproduct of sales, corporate or personal income taxes. Land taxes are regarded by economists as pretty efficient, and some experts argue that if large land taxes are politically infeasible, land transfer taxes are  a good second-best.
  2. Residential stability leads to higher social capital in neighbourhoods. People ignore the negative externality that moving imposes on their neighbourhood’s social fabric, and should therefore be taxed for moving.
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6 Responses to Stamp Duty and the Housing Market

  1. David says:

    Hi Andrew, I found your paper very interesting, especially the finding that the effect was larger closer to state boundaries.

    I have always thought that an interesting exercise would be to look at the effect of stamp duties in Albury-Wodonga; two towns that are right next to each other but are in different states and hence different tax regimes. Their close proximity might allow you to separate out the effects of policy changes across state juristictions.

  2. Andrew,

    In your conclusion of the paper (p16 2nd para) you state that the tax incidence in entirely on the buyer. They way I see it, if the price decline is greater than the tax burden, then the tax incidence is on the seller?

    Thoughts?

  3. On a more theoretical note, doesn’t this analysis show that the typical supply and demand sword fight is a terrible representation of the property market?

    Doesn’t seem like a result that can be explained with a downward sloping demand curve.

  4. peter fraser says:

    Andrew,

    I see that you deleted my earlier questions.

    Nevertheless, if your research provides evidence that “Close to state boundaries, the incidence of stamp duty is mostly on the seller, while further away from the boundary, the incidence of stamp duty is mostly on the buyer” would that not indicate that in the majority of transactions, the stamp duty cost is added to the buyers costs, and is not borne by the seller.

    The proportion of homes for instance on the NSW/Vic border is low in comparison to the proportion of homes in more densley populated regions in the south, well away from the influences that you described.

  5. Greg Pekk says:

    While property stamp duty is quite a regressive tax it is not as bad as the GST on new property which is not much written about. GST + stamp duty + other taxes constitute about 60-70% of the gross apartment developer’s margin on arm length development thus inhibiting supply of dwellings and contributing to the price bubbles.

  6. Andrew Leigh says:

    Cameron, you’re quite right, thanks (hopefully the rest of the paragraph made the meaning clear). Sentence now reads: “these results imply that the economic incidence of the tax is entirely on the seller; that is, prices fall by the full amount of the tax.”

    Peter, the only one deleting comments on this site is my spam-filter. I’ll check now and see if I can rescue your words of wisdom from its evil clutches.

    (Update: Nothing of yours in this week’s spam cache.)

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