Targetted stimulus delivers targeted results…
It shouldn’t come as a surprise to anyone, but we’re seeing more and more crisis response measures directed at the housing market.
The housing market is always a popular target for stimulus support. It has broad political backing and it’s an easy way to deliver broad support across the country and across the social spectrum.
Last week, the NSW Government upped the ante, announcing that eligible first home buyers could access stamp duty exemptions on new home purchases worth up to $800,000.
New home builds will also see stamp duty discounts available for purchases between $800,000 and $1 million, where the discount reduces with a higher purchasing price.
This is a temporary, 12-month extension of existing stamp duty concessions from the 1st of August 2020.
All good stuff.
Now, there’s an interesting phenomenon with targeted support measures like this. Eliza Owen, head of research at CoreLogic, argues that it can create “price point clustering.”
… The increase in first home buyer participation over a limited time window may actually lead to an increase in values up to the cut off values for stamp duty concessions. This is because buyer competition could be increased in this segment while added incentives are on offer. Furthermore, the reduced transaction costs associated with stamp duty exemptions mean borrowers have higher purchasing capacity, which may just be added onto the purchase price while first home buyer demand is elevated.
Price ‘clustering’ could move up to the $800,000 mark.
Research of sales volumes by price suggests that sales volumes tend to ‘cluster’ just under the cut-off point for complete stamp duty exemptions, so that first home buyers can avoid paying the tax.
CoreLogic sales volume data across NSW shows that there is a bunching of sales between the $640,000 and $650,000 price point between July 2017 and June 2020. $650,000 was the cut off point for stamp duty exemption for first home buyers in this period.
This is demonstrated in the charts below, which show the volume of sales across NSW by value range for the two years before and after the introduction of stamp duty discounts for sales up to $650,000.
While the $650,000 price point seemed to be an anchoring point for buyers before the introduction of stamp duty exemptions, the difference in sales volumes is exacerbated after exemptions are introduced. The number of sales at $640-650,000 was 32% higher than the band below, and is 49% higher than sales in the value band above. This is a greater divergence than was observed between these value bands in the two years before the introduction of stamp duty exemptions.
As the stamp duty exemption increases to $800,000, this could see a broader range of properties increase in value up to this level.
The logic of this has never really been in doubt, but it’s interesting to see it reflected in the data.
The implications for investors are interesting too. It’s worth keeping in mind where these price point clusters might emerge.
If you’re doing a new build development or even a substantial reno, it’s might be interesting to think about where you’re projected sales price sits in relation to the cluster, and how much you’re willing to spend.
The challenging thing though, is that with more and more stimulus packages coming online, we could see the emergence of multiple clusters.
Take the federal government’s First Home Buyer Deposit Scheme – a scheme that the government is now flagging will be extended.
This scheme has maximum purchase price cut-offs that apply at different price points, depending on where you are.
So, it’s $700,000 for metro NSW.
That might mean we end up with a cluster around $700,000 and cluster around $800,000.
With more clusters potentially emerging as we go.
Anyway, something to watch out for.