Insights on Canberra’s Land Rent Bill
The ACT’s Land Rent Act, with promised savings of 79% compared to the standard mortgage-based system of home ownership, took effect on July 1. This is an innovative housing affordability policy. Here’s what I wrote about it a week before it became law.
I make the following assumptions (which do not seem to be spelt out in the Bill):
- that the capping of increases in rent will be apportioned to some measure of the general level of wages;
- that a land rent lease will be granted without any up-front payment other than the first rent instalment;
- that if a land rent lease is transferred, the transfer price (if any) will be included in the single price of the “house” or “home”;
- that the proposed extension of the scheme to lessees on higher incomes will be accomplished by repealing or amending paragraph 5(2) of the Bill.
From my reading of the Bill, I understand as follows:
- that the capping provisions, for both the discount rent and the standard rent, will apply only while the original lessee remains in possession; after the lease is transferred, the rent will be determined by annual valuations;
- that the discount rent will be available only to the original lessee, not to anyone who subsequently acquires the lease;
- that in consequence of the above, the transfer price of a lease will be the present value of the difference, if any, between the standard rent (a percentage of the annually assessed site value) and the market rent; in particular, the transfer price will NOT be affected if the incumbent lessee changes from the discount rent to the standard rent or vice versa, and potential purchasers whose income is below the threshold will NOT offer to pay a higher purchase price in anticipation of lower rent.
Hence the transfer prices of leases will be modest, and a lessee will not be able to get instantly rich by acquiring a lease for one year’s rent and selling it for a speculatively inflated price — as happened early in the history of Canberra.
If the above understanding is correct, then I submit that the biggest problem with the Bill is the one pointed out by my colleague Lloyd Churches (cc): that the income limit for the discounted rent is an incentive trap. Lessees whose household income is just below the threshold will not be able to improve their circumstances by earning more, because their next dollar of income will cause a massive increase in rent. Their employers will not be able to incentivize them with the prospect of higher pay, because any promotion or raise will be a punishment, not a reward. I further predict that employers will deliberately offer wages and salaries just under the threshold, in a blatant attempt to subsidize their payrolls with a publicly-funded fringe benefit, namely discounted accommodation. Unemployed lessees will accept jobs paying slightly less than the threshold, or enough above the threshold to compensate for the higher rent, but will try to avoid jobs offering anything in between. Thus the Bill will be implicated in the “breaching” of welfare recipients.
That said, one should concede that if employers exploit the Bill, it will at least be operating as a subsidy for employment — whereas Newstart allowance with its income test is a subsidy for UNemployment!
Frequent (e.g. annual) valuations are of course essential, because less frequent valuations will cause rent increases to be larger and more politically damaging. But it is also essential that valuations keep pace with the market. If political sensitivities lead to low valuations, the expectation of further low valuations will be capitalized into transfer prices of leases, leading to speculation in leases, which in turn will price first home buyers out of the market and defeat the purpose of the Bill.