Beware of stamp duty discounts as Victoria targets off the plan buyers

It was US President Ronald Reagan who said way back in 1986: “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’”

And while a lot of time has elapsed, his warning should very much apply to the Victorian Government’s plan to discount stamp duty costs for off the plan unit, apartment and townhouse purchases.

Under the plan, homebuyers and investors alike will now be able to purchase a property and only pay the stamp duty on the cost of the land component — with no cap on how valuable the property can be.

That translates into a $28,000 saving on a $620,000 apartment, which is not to be sneezed at.

Be careful eating a free lunch

However, there are reasons to be very cautious before tucking into this “free lunch” – not all of them linked to the fact that the government is involved.

The first reason to be cautious is that for every action, there is a reaction.

The first reaction here is that the limited stock of off the plan properties available to be offered before the temporary stamp duty cut has just been handed a significant price advantage compared to existing housing stock.

Prices could rise as a result

As in every situation in which a limited supply is met by greater demand, it would be naïve to imagine that there would not be some corresponding pricing impact that will soak up some of the “savings”.

Already there have been noises from the property industry that prices will need to rise to meet the higher building and approval costs.

Secondly, the limited timespan of the offer is also a red flag, for the very good reason that it will act to speed up decision making and reduce the amount of research that is done.

That is not a recipe for necessarily making a good decision.

All of which leads into the third reason for caution in relation to this offer, which is the very nature of off the plan developments.

Off the plan buys have a lot of risks

Usually these are among the most complex of property contracts, so they should involve more research than normal so that you absolutely understand what you are signing up for.

Among some of the issues that have arisen with off-the-plan purchases are significant building delays, changes in the size and orientation of the purchased property, disagreements about the quality of finishes and included appliances and problems with the resulting owner’s corporation.

That is far from an exhaustive list but provides an indication of the sorts of issues that can arise long after a signature has been placed on a contract in the middle of optimism about getting a rare tax break from the State Government.

Taxes will still apply

Looking at it from the Government perspective, there is a lot to be gained and not much to be lost from offering this sort of brief tax holiday.

Because off the plan developments are sold in advance of construction, they are a great way to stimulate construction activity, which keeps payroll and other taxes rolling in.

The finalised apartments and townhouses will also all be subject to full stamp duty when they are next transacted so the stock of stamp duty and land taxable properties will rise accordingly.

Victoria’s very low land tax hurdle of $50,000 has greatly broadened this tax and all investment properties purchased during the stamp duty reduction will immediately fall into the hefty ongoing land tax net.

It is also a great benefit for a state government if new housing supply can be added in areas which already have established infrastructure compared to greenfields developments on Melbourne’s fringe.

Downsizers and those already buying can benefit

So, who should be excited about the stamp duty discount window that is briefly opening up?

The first group is those already researching an off the plan purchase, who can hopefully take advantage because they are already down the track with their research.

They are also in a good position to note any last minute “changes” to prices that might eventuate in the wake of the stamp duty holiday.

The second group could be downsizers, particularly those who can wait until their new townhouse or apartment is ready before finally selling their family home.

Potentially, the sale of their property will also stimulate demand, providing an opening for a young family to break into the market or for a developer to add some extra homes.