Housing Affordability – The Other Side of the Debate
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.