In January this year, I published the below HIA chart and accused Australia’s governments of being ponzi merchants for attempting to keep the Great Australian Housing Bubble alive by pumping demand and restricting supply in order to preserve government finances.
Now RP Data has confirmed my suspicions with a fantastic piece of research entitled Property taxes at record levels. Here is an extract from RP Data’s Property Pulse report [my emphasis].
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Property taxes at record levels
Property related taxes are, by far, the largest source of tax revenue for the state and local governments. With buoyant housing market conditions over the 2009/10 financial year, property related tax income for the state and local government sector rose to new highs, however Governments should be budgeting from much lower property related taxes over the current financial year.
During the 2009-10 financial year, state and local governments raked in almost $32 billion in taxes from property – the highest amount on record. Over the financial year, total property related tax revenue increased by 14.3% following a -10.5% fall in property tax revenue during the softer housing market conditions of 2008-09. Last year’s increase was the largest of any financial year since 2000-01…
Property related taxes are the biggest cash cow for state and local governments, accounting for more than 48% of total tax revenue during 2009-10…This result highlights just how important property taxes are to state and local governments and why they are so reluctant to remove taxes such as stamp duty.
The data broadly breaks property taxes into two types: taxes on immovable property which includes rates and land tax and taxes on financial and capital transactions which include stamp duties. Taxes on immovable property accounted for 58.5% of property tax revenue and taxes on financial and capital transactions accounted for the remaining 41.5%. Stamp duties on conveyances were the largest single contributor to revenue ($12.294m) followed by municipal rates ($11.645m).
During the financial year, the total tax revenue on stamp duties on conveyances increased by 29.1% and municipal rates increased by 6.5%. Interestingly, this growth in stamp duty was greater than the 20.3% increase in the total value of residential property transactions…
The improvement in taxation revenue from property transactions is reflective of the improved market conditions during last financial year where we saw improvements in dwelling values and an increase in sales volumes. When the residential property market is performing well with values growing and a large volume of transactions it is certainly also beneficial for state and local governments as the amount of tax revenue grows in periods of a strong market.
In what is sure to be unwelcome news for state and local governments, the 2010-11 financial year looks set to see a drop in property related taxation revenues. Between May 2010 and February 2011 capital city dwelling values have fallen by -1.6% and sales volumes during 2010 were their lowest on an annual basis since 1996. For the remainder of the financial year sales volumes are unlikely to record a significant rebound and value growth looks unlikely to return.
As a result of these current soft conditions we expect that state and local governments will experience a budgetary hole at the end of this financial year due to fewer transactions within the sector which accounts for their greatest source of taxation revenue.
Over the past decade, Australia’s state and local governments have rode on the back of skyrocketing property prices. The revenues received have funded all kinds of expenditure – from public servants’ salaries to health care, schools and infrastructure.
The story is similar at the federal level, where tax collections have surged on the back of growing property values and rising debt levels, which have boosted consumer spending, employment and the economy more generally.
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Should Australia’s housing market encounter a significant correction, rather than the price stagnation and falling volumes experienced currently, then government finances will likely take a hammering as consumer spending dries-up, unemployment rises, tax collections haemorrhage, and welfare payments rise. And the impact will be a whole lot worse should Australia’s other economic pillar – mining – experience a sharp contraction of demand and falling commodity prices.
Think about these motives the next time a government representative announces a new measure under the guise of improving housing affordability, which is really aimed at underpinning housing values.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
