Borrowers benefit as land tax changes slow dwelling price growth

by Phil McCarroll13 Sep 2016
An overhaul of land tax arrangements has had significant impact on the property market in the Australian Capital Territory and in turn mortgage holders.

In 2012, the ACT government embarked on a long-term program of tax reform that will eventually see stamp duty abolished in the territory, with a broad based land tax rolled out to replace the revenue stream.

The overhaul is expected to run across a 20-year period and will see the ACT’s previous land tax, which exempted owner-occupied residential land, phased out and replaced with a single general rates charge levied annually on the value of all land.

According to The First Interval: Evaluating ACT's Land Value Tax Transition report from think tank Prosper, growth rates for both home prices and the size of mortgages have slowed since the tax changes were introduced.

The report, authored by Dr Cameron Murray, claims home price growth in Canberra was tracking at around the national average before diverging when the reforms were first introduced midway through 2012.

While the median dwelling price in Canberra currently sits $535,000, Dr Murray claims it would more likely be around $642,000 had the tax changes not been introduced.

With price growth having slowed, the report shows buyers in Canberra are no longer required to borrow as much as they once were.

“Much of the anticipated future tax obligations appear to have been already capitalised into lower land prices. Additionally, the tax transition may have also deterred speculative buyers from the housing market, adding even further to the recent pattern of low and stable property prices in the Territory,” Dr Murray wrote.

“Because of the price effect of the land tax, a typical new home buyer in the Territory will save between $1,000 and $2,200 per year on mortgage repayments,” he wrote.

According to the report, the average mortgage in the ACT is currently worth $364,000 and has increased by 9% since July 2012.

Over the same period, mortgages in all other states and territories have increased by an average of 14%.

For borrowers, the slowdown in price growth also means they are benefiting when it comes to saving for a deposit.

Based on the current median dwelling price in Canberra, borrowers would need $107,000 to meet the typical 20% deposit, $21,400 less than they would need had the pre-tax change rate of growth continued.