What happens when a state government charges homeowners $50,000 to move? They stop doing it.
The now unmanageable stamp duty charged in Australia's biggest cities is warping the economy's flow by anchoring homeowners to their current house - limiting people's options to move for better work opportunities or to suit their family's needs.
Stamp duty has been widely criticised for some time, but now the effects of this outdated and short-sighted tax are becoming more clearly visible.
Simply put: the current system discourages moving and instead funnels homeowners towards extensions and alterations. Those homeowners are doing what they're told.
Westpac research carried out last month showed a 14 per cent rise in the number of Australian homeowners who plan to renovate in the next five years since 2015, while the number of people planning to buy or sell their property noticeably dropped.
And it's no wonder when looking at stamp duty, which has gone from a financial sting to a significant and economically damaging barrier.
This is because the rates structure dictating how much stamp duty is to be paid in Sydney has remained unchanged since at least 1997, when the median house price was $234,361.
In Melbourne, meanwhile, stamp duty rates have been superficially tweaked several times in the past 20 years but the overall trend hasn't changed.
Since then, house prices have skyrocketed, so that an increasing majority of properties find themselves in the top stamp duty brackets.
What this means is that if an Australian bought a median-priced Sydney house today, he or she would be paying $50,302 in stamp duty, whereas if that person's parents had bought the exact same house 20 years ago, they would have paid the current-day equivalent of $10,916.
Meanwhile stamp duty paid on a median-priced house in Melbourne will now hit $47,506 while the exact same house two decades ago would have made for a stamp duty bill of $7,680 when converted to present-day cash.
"We talk about bracket creep with income tax but this is the biggest bracket creep you could ever see," BDO National Tax Director Lance Cunningham told Domain.
"The state governments have just been sitting there watching the house prices [and stamp duty] go up."
The tax doesn't pass the "fairness test", according to Mr Cunningham, who adds there's "no real economic rationale as to why you would have a stamp duty just on the basis of somebody moving".
So, what does all this mean for average Australians?
Let's say a couple who live and work in Sydney find out their family is about to grow - all of a sudden, their home is looking a bit small and they decide they need another bedroom and bathroom.
The bank would have no concern lending to an upgrading owner-occupier couple like this, but if the house they wanted was worth $2 million - pretty standard for a family home within an hour of Sydney - the stamp duty would land at $105,490.
And if a family has done very well for themselves? A house worth $3.5 million in Sydney comes with a $185,490 stamp duty tax.
What does a family do with that information? Reject it and start looking for renovation and extension quotes.
Renovations are set to skyrocket
The Housing Industry Association now expects national year-on-year renovations growth to accelerate to 5.7 per cent in 2020, with another 0.9 percentage points in 2021.
And the most common price bracket for a renovations job, accounting for around one in five, is between $12,000 and $40,000 - well below the stamp duty payable on a median-priced house in both Sydney and Melbourne.
ME Bank head of loans Patrick Nolan said the trend was unfolding before our eyes.
"We've seen a substantial increase in renovation loan applications in 2017, a trend that we're likely to see well into 2018, as households chose to renovate over moving," Mr Nolan said. "Upgraders are avoiding costly moving costs such as stamp duty.
"We're also seeing some more top-ups as people take advantage of lower interest rates and leverage the extra equity in their property in order to finance renovations."
So what happens to the state government's golden goose of stamp duty, which accounts for around a third of overall state revenue? It gets sick.
If homeowners decide to avoid moving, then a third of state government revenue becomes vulnerable. That is the factor likely to spur changes to stamp duty, rather than talk of "fairness" or a lack of mobility in the labour force.
In the meantime, expect Australians to stick with what they have, and remember the days when stamp duty was 20 per cent of what it is now.
