A case for Zero Stamp Duty on Residential Real Estate

(views expressed are personal)

Policy makers, for long, have used taxation of transfer of residential property under the guise of funding local infrastructure. Post the Global Financial Crisis of 2009 and resultant quantitative easing, abundant liquidity also flowed though residential markets in gateway cities prompting political backlash forcing punitive capital control and increased transaction costs. 

The sheer deluge of financial wealth creation, plunging fixed income returns and the flight of high net worth capital to safe haven countries and from smaller cities to big urban centres has meant that the punitive transaction costs and capital controls have delivered triple benefits to governments:

a)      helped control runaway house price inflation

b)     increased proportion of local purchasers by lessening competition for affordable and middle-income housing available for purchase, and

c)      been revenue neutral. Largely, governments haven’t been penalised for imposing higher costs on the industry since a total of all stamp duty and other recoveries have been very resilient.

The conundrum of treating housing as a public good - else why intervene - and private asset class best left to market forces, from a policy making standpoint has never been starker. 

Especially when land, the predominant critical input into housing expansion, remains largely a domain of state influence especially in Asia. And one can argue and evidence sufficiently, that a significant part of the housing inflation that governments have tried to control is largely because land supply has lagged demand for housing. 

It is also worth considering the impact that local demographics play in determining local demand and sustained growth of housing markets. The correlation between population growth and increase in housing prices, given land supply almost always lags, is well established. If one were to plot population increases in major cities around Asia – Mumbai, Sydney, Singapore – against housing price increases, the correlations are highly positive. 

Consider that housing price stability and positive rental returns, deflated for inflation, is important for; household capital formation, wealth creation, creation of rental housing, improvement of local communities and other desirable socio-economic outcomes. A prolonged languishing housing market is a lead indicator and a source for political angst, depressed household consumption, deflation and banking sector malaise.

Lastly, given the backdrop of the demand and now job market destruction caused by the effect of the COVID-19 pandemic, the housing market has thrown up a plethora of challenges and opportunities for policy makers. Clearly there is no one size fits all solution and the micro-economic challenges in each country is very different. 

Let’s examine a few representative cases.

India

The housing slumps pre-dates COVID and the situation has only been exacerbated by the pandemic. Of many reasons originally including developer malpractices, economic slowdown since 2016, banking crisis, etc. none have gone away. One can argue that the acuteness of some of these underlying conditions has only gotten worse. On the flip side, long needed policy measures including protection for home buyers through RERA (Real Estate Regulatory Authority) and the resolution of non-performing capital via the IBC (Insolvency and Bankruptcy Code) is welcome relief and remains work in progress. Funding to kick start completion of over 11,000 delayed housing projects via SWAMHI investment funds is a step in the right direction and needs to be massively augmented.

The recent stamp duty cut by Maharashtra has been welcomed by industry players. Other states may follow through, after all real estate is a state subject in India. How about a national holiday from stamp duty on completed residential real estate for 12 months? India is in dire need of kickstarting housing development and growth. Linkages of housing development to labour employment, commodities such as steel and cement, housing mortgage growth and other desirable outcomes in an economy that is desperate for increase in household capital formation and consumption is a relatively easy way to kick start growth. 

India needs a zero-stamp regime on residential real estate on priority.

Singapore

The city state is one of the standout successful global case studies of capital control and punitive stamp duty measures such as SSD (Seller’s Stamp Duty) and ABSD (Additional Buyer’s Stamp Duty). Prices were successfully moderated, local purchases of housing went up and a soft landing for achieved for mortgage lenders. However, a combination of a recessionary environment, fall in net immigration and almost flat population growth has meant that inventory of homes remains relatively high and volatility in other asset classes may create a perverse incentive to invest in low yielding home assets (multiple home purchases by single households) in a deflationary environment. It is perhaps time for Singapore to consider a roll back some of the punitive capital control measures partially.

Australia

Despite the headlines of a potentially meltdown in the housing market, the evidence has been scant to support such pessimism. Pricing has corrected from decadal highs and that may be good as it encourages new buyers to enter the market. Jobs and household consumption remain under pressure and new household formation has slowed. It is important to keep the mortgage industry well supported and liquidity to remain ample. Further direct cash transfers to companies and households may be needed if the pandemic induced slowdown prolongs. In the absence of which the housing market could continue to slide. A further 5-10% drop in pricing will start to drive risk taking out of the housing market. Financial measures need to be maintained. Australia remains a favored regional housing market for Asian buyers.

A recovering housing market in most countries can be a major catalyst to kickstart economic growth.

It is urgent for policy makers to step up and ease the flow of capital to the sector and to protect the erosion of household wealth.