Land Bubble, Tax Bubble
by Bryan Kavanagh
I’m constantly told Australia’s land prices are astronomically high because of our high rate of immigration and the shortage of supply of residential allotments
So, it seems the price of a block of land has simply been reduced to an issue of supply and demand. However, in over 40 years as a real estate valuer, I’ve seen there’s much more at play than supply and demand in determining the price of a block of land. Don’t get me wrong.
The rate of immigration and the amount of available residentially-zoned land certainly do bear upon the cost of a site, but these are basically third-level issues.
There is an abundant supply of suitable land, but residential developers’ drip-feeding of allotments onto the market can create an exaggerated impression of shortage, a shortage in which we’ve seen potential purchasers willing to camp out overnight on a subdivision rather than miss out on the opportunity to buy a lot in the release of the next stage of the estate on such-and-such a date. Creating this impression of scarcity is a marketing function which should not be confused with the price of a block of land, however.
Statutory development costs, once repaid over a period in rates or taxes by the purchaser of a site, are now required by authorities to be paid upfront by the developer, and this has also added more than supply and demand considerations to the cost of allotments.
The most important factor in the price of a block of land, by far, is the extent to which governments capture the economic rent of sites via municipal rates or state land taxes.
From a valuer’s point of view, it’s arguable that if state governments were to introduce an all-in land tax struck at sufficiently high level, the price of land could actually drop towards zero, as little would remain of its annual rent to be privately capitalised into a price. One is left to wonder why this point is rarely taken into account in addressing the increasing problem of housing affordability. In whose interests but banks are constantly-inflating land prices?
Our skyrocketing land prices are exacerbated by the extent to which investment in real estate has been given favourable tax treatment – and by the banking industry’s readiness to advance any amount of credit against the “market” value of a piece of land.
I put the word market between inverted commas because land price has proven to be ephemeral, especially when the multi-facets which create land price conspire to generate a bubble, such as has been allowed to develop in Australia under the Howard, Rudd and Gillard governments since 1996. Was it also “undersupply” which created the 1973 real estate bubble? The 1981 bubble? The 1988/89 bubble? No, rather a tax system which gives the green light to investors/speculators–at the expense of our youngsters–such as to generate an over-enthusiasm for real estate which then elicits a repetitive cycle of boom and bust.
It’s entirely arguable there’s no genuine market in land unless local government rates or state land taxes are set sufficiently high to make the owners of vacant or underused land use it or else sell it. Short of this stimulus, where is the meeting of market players when such land can simply continue to be held out of supply?
In “Unlocking the Riches of Oz: a case study of the social and economic costs of real estate bubbles 1972 to 2006” I put the proposition that the current Australian real estate bubble acts as a proxy to suggest the western world was about to experience financial collapse as national land price bubbles would begin to puncture. Six years later, it’s good that Australians haven’t been panicked by the GFC, but it’s quite wrong to assume it’s all behind us simply because Wayne Swan pumped billions into the economy to obviate a sharp economic decline. Our land prices still require substantial (hopefully gradual) deflation before the Australian economy can repair.
That Southern Californians were lulled into a false sense of security by accepting the ‘undersupply’ argument for their exaggerated land prices as late as 2006 should serve as a salutary warning for Australians whose land prices have so far barely begun to correct.
It stands to reason that increasing land values should not accrue to land owners only. The whole community has an interest in recapturing part of the uplift in value generated by public infrastructure, but this seems to have escaped the notice of those policymakers who believe privatisation of our public highways is a valid way to fund them. John Goldberg has long been an opponent of the PPP model, and recent failures are proving him to have been correct. Maybe old ideas about public capture of land values for infrastructure aren’t necessarily bad ideas? May this not be the manner in whichcapital works projects could be made self-funding?
Land is different from commodities which become obsolete, decay or rust. We all need access to land to live and work, yet it is often held out of the market for the purpose of capital gain, the cumulative process adding to claims of shortage of supply.