Council Rating Subsidies

Council Rates: Who Pays More?
The land speculator or family home?

Under Capital Improved Valuation (CIV)/ Net Annual Value (NAV) the land speculator typically gets a 30% discount in rates over the family home.

Capital Improved Valuation penalises homeowners for improvements to their house.

Look at your rating notice to see what percentage your improvements account for. That is the subsidy you are giving your neighbouring land banker – making it cheaper for them to sit and wait for easy profits. See how many empty properties are in your suburb (PDF) – you’d be surprised!

Land speculation pushes up the price of living and leads to sprawl, putting pressure on council rates to build more infrastructure.

No wonder people are mad – CIV/ NAV penalises home owners for putting in a new kitchen or water tank.

A return to Site Value Rating (SVR) would see both blocks of land (the family home and idle land) paying the same amount in rates (for a given land size).

The property lobby want to remove this tax they can’t avoid and replace it with a higher GST. GST is regressive – a person on $20,000 pays the same as someone on $20 million. Don’t fall for it! The same principle applies to flat garbage fees and the growth of ‘user pays’.

SVR is fairer because those who live in better locations pay a little more than those living next to the freeway. Prime locations sell for a higher capital gain. Those closest to a new playground will benefit in rising land values. It makes sense they pay a little more of this windfall back to the community over 20 years via SVR than making those next to the freeway pay the same amount.

The centuries old Site Value Rating rating system is based on common sense. Yearly land valuations are needed to curtail property valuation surprises.

Instead, there is a dangerous trend towards user pays. User pays is a sneaky way for the wealthy to pass the buck. We all benefit – just some more than others according to their location. Is that a skill or a privilege?

This document is part of a Council candidate survey we are conducting to assist voters in their decision making. Which candidate reflects your values? Results to be published mid-October.

Further Reading:

Feel free to ask any questions via our survey email or call 03 9670 2754.

7 Comments

  1. Brian Fankhauser12-10-2012

    My personal opinion is all blocks of land should be rated at the same price. Dependant on land use. If its residential, whether improved or not, the basic rate remains. Additional services ie: garbage collection, bi-annual hard rubbish, should be paid by the user. All charges should be further broken down and transparency put in place, with residents either opting in or out.

    Likewise, property owners that cannot subdivide their land due to planning restrictions and for the betterment of the municipality, should not be required to pay additional charges.

    If somone buys a block of land beside a rail station, or beside a park, the SALE price should reflect its location. A rate is a rate, divided over the amount of people living in a given area, in regards to the municipalities fixed costs.

    The issue is the Municipalities fixed costs, and the lack of anyone saying, enough is enough. Improved services and a rate freeze, is Very possible.

  2. Chris Polis15-10-2012

    There are two simple problems with SVR. One is that the basis is poor; it should be calculated as a proportion of the Site Value multiplied by the current home loan rate.

    The second is that it does not provide credit for works that improve the land itself. It falls in a complete heap with agricultural land, as the benefit of improving the land is absorbed by increase in rates; same issue as CIV with respect to capital improvements.

    Neither is insurmountable, but both need to be addressed.

  3. David Collyer16-10-2012

    @ Brian: You are almost right. All land should be rated on the same base. But land close to civic amenities (rail stations, libraries, commercial activity) benefits from that investment by others and its relative attractiveness is reflected in both rents and market capitalization. To charge poorly located sites the same is a subsidy to that advantage. See: Wikipedia David Ricardo’s Law of Rent.

    Garbage is a huge cost and a worry for council. This important civic service should be funded from the land – the benefit it confers is already capitalized into its price. So separate charges mean users pay twice – once for the land’s imputed rent, inflated by the lack of a charge and again for the rubbish. Opting out of garbage services is an invitation to disease. And the truck must pass vacant sites, even if it picks up nothing.

    On the issue of the cost of local government, unstinting citizen scrutiny of spending is our best protection.

    @ Chris. I reject the argument the base of SVR is poor. It is the market value of the land and I cannot see where interest rates have a role in calculation, although they do affect land prices on the margin. Capital works that increase the value of land (drainage, filling quarries) do in time become embedded in prices.

  4. Chris Polis16-10-2012

    Rejection is never a good first response. Always good to stop and wonder first.

    Site value rating is based upon capturing a portion of the land rent that would otherwise accrue to the landowner. The ‘full rent’ would be the value of rent at any point that would result in a zero cost transfer of the land. Basic HG stuff.

    Now what do we have in practice that best approximates this ongoing payment? The best approximation we have is the current cost of a home loan taken out for the full value over the normal loan expectancy. Pick 25 or 30 years these days. There’s your monthly cost, and while the loan is fresh it is going to be damnably close to the full rent.

    Now if the load rate changes, the inevitable result – given a market that purchases property primarily on the basis of the amount they can afford to / are willing to pay regularly, currently on a loan – will be for the price to increase.

    So the best basis for the current price of land is the monthly payment to be made for its purchase. Which is based on the land price multiplied by the interest rate.

    If you base on the value alone, you end up with significant distortions over time as a result of pulling different proportions of the value out.

    It is quite conceivable that in places with negligible interest rates that a fixed percentage SVR could exceed the full land rent.

    Even given the normative practice of calculating the percentage based upon other budgetary demands, you end up with the situation where government is not appropriately restrained by the increase or decrease in full rent.

    Capital works that increase the value of land also increase the SVR due; exactly the effect SVR works to avoid. It’s a hole in the system, relatively easily fixed, but one that needs to be recognised.

  5. Chris Polis16-10-2012

    “Garbage is a huge cost and a worry for council. This important civic service should be funded from the land – the benefit it confers is already capitalized into its price. So separate charges mean users pay twice – once for the land’s imputed rent, inflated by the lack of a charge and again for the rubbish. Opting out of garbage services is an invitation to disease. And the truck must pass vacant sites, even if it picks up nothing.”

    The payment twice is actually a furphy. If the cost is expected to continue to be removed as a fee payment, it will not become embedded in the land price. The better question is which costs are better captured as part of land price, and which as fee for service. The fairly obvious answer is that infrastructure benefits should be captured through rent payments, and variable costs should be captured as fee for service.

    Now a ‘variable cost’ that is fixed irrespective of the owner of the property is a grey area and can be collected either way. In no case is there double dipping, except where there is an unexpected change.

  6. Pragmatist17-10-2012

    Garbage collection is an interesting one. Like many utilities, there is a proportion of the cost and value that is based on the availability of the service.

    From the cost side, the truck must drive past the vacant property and the system must have enough capacity to handle a full bin from every property. This is a real cost, even if a specific block never needs a garbage collection.

    From a value side, there is also value in having access to garbage collection and this increases the price of land in serviced areas. If a council stopped collecting garbage at all then the price of land in that council area would drop compared to equivalent serviced areas.

    Secondary to this is the incremental cost of processing the garbage collected. This element is the only part for which it makes sense to charge the user rather than the land owner. From an environmental point of view, I’d support charging residents based on the weight/volume of garbage that they produce as this drives rates of landfill consumption.

  7. Gavin R. Putland08-11-2012

    Brian Fankhauser wrote: “Likewise, property owners that cannot subdivide their land due to planning restrictions and for the betterment of the municipality, should not be required to pay additional charges.”

    Such restrictions depress the market price of the land and should therefore be automatically compensated in a site-value system, provided of course that the valuation is done correctly.

    Brian continued: “If somone buys a block of land beside a rail station, or beside a park, the SALE price should reflect its location.”

    But it doesn’t reflect future changes in locational value due to unexpected events, whereas annual rates DO reflect those changes. Moreover, the sale price reflects not only the known locational benefits but also the rating system: the more the market must pay annually, the less it will pay up-front. So the existence of a sale price AND a rating system does NOT mean that owners are paying twice for the land.

    Chris Polis clearly understands that point. I shall answer his other points in reverse order.

    “If you base on the value alone, you end up with significant distortions over time as a result of pulling different proportions of the value out. It is quite conceivable that in places with negligible interest rates that a fixed percentage SVR could exceed the full land rent.”

    If the rates bill exceeded the rent, the NET rent would be negative; hence the sale price would be negative; hence the rates bill would be negative, which is a contradiction. Unless you are suggesting that the rates bill exceeds the rent for only a small part of the economic cycle. But in that case you also need to consider the effect of the rating system on the cycle. Rating on the land price applies negative feedback to the price, smoothing out variations in the price, including those caused by decoupling between prices and rents. Rating on some annualized measure of value is less effective in countering that decoupling.

    The practice of working backwards from a total budget to a rate in the dollar — instead of letting the rate in the dollar determine the total revenue — reduces the negative feedback (making it local instead of global). But it also tends to reduce the variation in the fraction of the rent taken in rates: If prices rise faster than rents, then the rate in the dollar (on the price) falls to compensate.

    “…it does not provide credit for works that improve the land itself. It falls in a complete heap with agricultural land, as the benefit of improving the land is absorbed by increase in rates…”

    Rating on the UNIMPROVED value avoids penalizing such improvements. Rating on the SITE value recognizes two facts: (i) over time, certain improvements become hard to distinguish from the natural state of the land; and (ii) the inclusion of such improvements in the rating base after a certain time will not deter the improvements if the time is sufficiently long. Such “merged improvements” are included in the site value but excluded (if that were possible) from the unimproved value.

    But the difficulty of recognizing old merged improvements is no excuse for refusing to recognize recent improvements whose costs are clearly documented. If the rating system doesn’t recognize recent improvement costs, then indeed that issue needs attention; but the argument lacks specifics.

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https://prosper.org.au/2012/10/02/council-rating-subsidies/