Tumbling stamp duty receipts pressure state budgets
Indebted state governments are likely to be the biggest losers from the synchronised housing market correction.
RBC Capital Markets warned on Tuesday that there is more than a 50% chance that both NSW and Queensland will lose their AA+ credit ratings before Christmas, owing in part to the collapse in stamp duty revenue.
Both states have an AA+ rating, but carry a “negative outlook”. This means there is a strong chance that S&P could cut its credit score to AA, in line with Victoria.
“[The weaker housing market] could prove to be the straw that breaks the camel’s back after years of waiting for sustainable improvement in operating and fiscal balances”, Robert Thompson, head of economics and rates strategy at RBC Capital Markets, wrote in the report.
“Investors should be prepared for a downgrade of either or both states”, he said, putting the probability at more than 50% for both.
According to EY’s annual State Budget Monitor, the eastern state governments are especially reliant on stamp duty receipts, which comprise 17% of revenue in Victoria, 16% in NSW, 15% in Queensland, and 15% in Tasmania:
To date, the decline in dwelling values nationally has been driven by NSW and Victoria, which have each recorded declines from their peaks of more than 5%.
The bigger worry for these jurisdictions is the sharp slowing in turnover.
As illustrated below by Alex Joiner from IFM Investors, sales volumes have collapsed to cyclical lows last seen during the height of the pandemic:
Melbourne’s sale volumes have also fallen sharply, albeit not as severely as Sydney’s:
The other capital cities have recorded more moderate declines in sales volumes:
The impact of the decline in sales and prices on the NSW budget is illustrated below by Justin Fabo from Antipodean Macro:
Clearly, NSW and Victoria, in particular, are facing multi-billion write-downs in revenue from the sharp decline in property transactions and prices.
Next up are credit rating downgrades and higher interest repayment costs.
