Prosper Australia

Canberra Times

The ACT Opposition would have us believe that land tax reduces the supply of rental housing. How so? The tax is on the land, not the housing.

The land can’t run away to escape the tax. The owners can’t escape the tax except by selling the land, and the resulting pressure to sell makes land more affordable for prospective buyers.

If the buyers are owner-occupants, they divert the demand for rental accommodation. If the buyers are investors, the tax gives them an incentive to seek tenants to bring in rent and cover the tax liability. To this end, the buyers must build on the land if it has not already been built on.

Thus the effect of land tax is to increase the supply of rental housing and therefore make rents more affordable. And the higher the tax, the greater the effect.

Dr Gavin R. Putland (Research Officer, Prosper Australia), West End, Qld

The real issue forcing land prices up are the huge economic rents available to land speculators. With Jeff Kennett’s move away from Site Value rating to Capital Improved Value (CIV) rating, land speculators can purchase land, sit on it and wait for the property to grow in value. The constant attack on State Land Taxes ensures a continuing trend for them to be weakened, sending the signal to the marketplace that hoarding land is appropriate.

On a Local level, the combination of these 2 factors has seen a growth of vacant land in inner urban areas in Melbourne. We believe the reduced supply of land from this speculative trend has applied greater pressure on land prices than Melbourne’s 2030 boundary. The huge upward trend in land prices happened well before the 2002 announcement of 2030.

The problem with land supply therefore comes from the private supply of land, dominated by speculators, rather than the public supply of land.

A decade on from Jeff Kennett’s reforms and the results are mounting. The practical evidence abounds us. Cycle through Richmond (Melbourne) and rafts of vacant land can be seen. One 700m stretch of Elizabeth St sees 9 blocks of vacant land and another 4 vacancies in commercial property. However, the official REIV vacancy rates continuously quote at or about 2.1%. Efforts to find a qualitative definition on what constitutes a ‘vacancy’ have so far been fruitless.

At the State level, the recent Bracks Govt reforms to State Land Tax have reduced the rates for upper to medium valued houses. Whilst cuts to stamp duties are appreciated, the overall message gives the go-ahead to speculators to invest in property. Is this why prices in wealthy suburbs such as Hawthorn have increased by 42% in a single year? How long will it be until housing prices in suburbs such as Preston, currently growing at 12%, take them into these top brackets?

On a Federal level, the upward trend in land prices was assisted by the 1996 Negative Gearing reforms. This was enhanced by the halving of Capital Gains (2000) and the raft of loopholes the fine print revealed.ie holding a property for 12 months as your ‘primary residence’ exempts one from any capital gains. This leads to the weekend warrior effect of part time renovators being rewarded. In the meantime the extra supply of land and housing this removes from the market helps their fellow land speculators manufacture higher capital gains. Great for those in the know!

A recent report by the UN Special Rapporteur on Adequate Housing, Miloon Kothari, said

“According to official figures, out of the 943,877 low-income persons receiving rent assistance, 35% (330,360) were spending more than 30% of their income on rent, and 9% (85,000 peoples) more than 50%.

With Australia’s negative gearing policy, perhaps the most generous of all developed countries (emphasis added), and the tax benefit from capital gains, a subsidy of $21 billion is given to the high end market.” (Aug 06)

As we can see, a combination of these policy changes have given speculators free reign around Australia. A decent holding charge on land is needed, as Julian Disney commented on Lateline (21st August, 2006).

Why should investors be encouraged to make ‘unearned’ speculative gains rather than profits from productive activity? A recent ANU paper by Atkinson & Leigh entitled The Distribution of Top Incomes in Australia revealed that just 20% of the income earnt by the top 0.01% of the population comes from productive activity.

Do we really want to continue this trend?

Share the rent with all and remove the unnecessary burdens of taxation, we say! Then local land supply will be used efficiently, reducing the need for urban sprawl through the encouragement of infill development. This has a cascading effect that soon reduces the cost of housing. It should be remembered that high housing prices are dominated by the cost of land. Land now represents about 70% of property sales prices, rather than the 30% it was in the 70’s when the tax system encouraged production over speculation.

Further understanding

Recent economic policies hindering Affordability

Land Supply and Housing Affordability: Where do the Homeless fit in?

Prosper Australia forum, Fri 13 October 2006

Ken Fernandes (Stop Evictions) & Bryan Kavanagh (Land Values Research Group) provided a cosy audience with a number of insights.

Amongst many interesting facts, Ken gave us some startling evidence from Karachi, Pakistan:

• Since Jan 2006, 3,490 houses have been demolished
• 40% had no opportunity to take their belongings out of the house.

The number of people evicted:

• Jan to June 2004 - approximately 334,593
• Jan to June 2005 - approximately 2,084,388

Ken informed the audience that this is a common trend throughout much of South-East Asia.

Bryan Kavanagh kindly provided his speakers notes

The evidence on housing evictions just given by Ken Fernandes shows that the dispossessed don’t fit in. The poor have no political clout, so they don’t really matter. It’s that simple. Homelessness is evidence of a corrupt system in any country, whether it be in countries of the first, second or third world.

As for housing affordability, the movie “Thank you for smoking” has more than a hint of an effective response to homelessness when Nick Naylor, successful anti-hero lobbyist for the tobacco industry justifies what he does for a living:-

• I’ve got a mortgage
• “99% of people do what they do because of the mortgage”
• “We’d all be better off if we rented” [!]

Provided it didn’t mean ‘from landlords’, Hollywood has never spoken truer words!

Unfortunately, few people understand land price. It’s simply the private expropriation and capitalisation of uncollected, community-generated rent.

This example may assist to explain:-

If a residential site sells for $200,000, and residential property yields are showing 4% gross, the annual site rent is $8000. [ie. 4% of $200,000]

So, if we took even half this publicly-created rent for public finance, the price of the site would fall to $100,000! [ie. $4000 pa capitalised at 4% = $4000 x 100/4] This would make land affordable!

If we didn’t capture the site’s existing $1000 in rates, the price of the site would actually increase to $225,000 [ie. $9000 pa x 100/4]

So, public charges on land actually lower land prices!

• And, if we took the whole $9000 pa each year, the site’s price would drop to zero!
• The homeless can afford zero land price. Landlords can’t – and landlords do have clout!
• [And, of course, landlords do not 'supply' land – it's a natural resource! ]

We used to capture more publicly-generated rent before Gough Whitlam at the outset of the 1970s decided to halve council rates and fund this reduction from federal revenues. A gigantic land bubble had burst during Whitlam’s Prime Ministership, creating a recession. “It was caused by property taxes and succession duties!” cried the landlord lobby.

So, State probate tax (led by Joh Bjelke Petersen in Queensland) and Federal estate duty were duly abolished during what remained of the 1970s.

With these incentives–coupled to those of negative gearing–the green light was given to rampant speculation. [And this, of course, has impacted negatively on land 'supply' and affordability.] Much the same process which inflated land prices was legislated by most of the western world, exemplified by California’s ‘Proposition 13′ which put a ceiling on the property tax in 1978.

Of course, the availability, or so-called ’supply’, of suitably zoned residential land has some affect on price, but I find myself at odds with the Institute for Public Affairs’ Alan Moran, whose “No opportunities on the property ladder”(23 August 2006 - please read comments section), argues simply that greater land release by Australian State governments, as is done in the US cities of Houston, Dallas and Atlanta is the necessary public policy response. [It is not coincidental that those three cities have experienced far greater than average US crime rates, due in no small part to their soulless, unplanned expansion.]

Inside a bubble, things have a habit of getting distorted. You even start to believe governments when they say ‘The economy is in great shape!’ The ‘wealth effect’ of a bubble has a powerful influence. People don’t bother to save. “We are asset rich and can borrow more”. [Up go land prices!] Housing equity withdrawal, or re-financing, went berserk in Australia, then in US, between 2000-2004 as the bubble in land prices was used to purchase even more residential real estate. Even people on modest means believed they, too, could become landlords. [Pity about productivity!]

Thus, a credit spree has funded history’s greatest bubble in land prices – whilst the gap between rich and poor, and dispossession and homelessness, grew.

As they say in the classics: “It’s pathological tax systems - not land supply, stupid!”

Land Supply issue in further detail