A budget for the people by the people may well see some of the following policy reforms announced at tomorrow night’s State budget:

Reiterate Local Council financial independence
The Labor Parties naivete in announcing a proposed cap on local council rates must be denounced. The State Govt should encourage such financial independence (especially in light of the trends announced in the Commission of Audit) by providing incentives for a return to site value rating. This would do more to assist long term affordability and council efficiency than the rating cap that has severely limited NSW councils. Why should families pay more in council rates than the neighboring land banker? We should not be penalised for improving our homes via renovation (or installation of solar, water tanks) which under CIV (or NAV) result in a higher rating burden.

Reduce the Land Tax threshold
From 2001 – 2008, the State Government increased the Land Tax (LT) threshold from $85,000 – $250,000. This curtailed its effectiveness as a counterweight on land prices. On top of the 50% capital gains discount implemented at the Federal level, raising the threshold predictably encouraged an increase in land prices.

A $330,000 block of land pays $435 in LT compared to some $30,000 in capital gains per annum. There is no incentive to put that land to productive use. It is more profitable to hoard it. Reducing the Land Tax threshold to zero would increase that cost to (a still) low $660. This charge would come off the capitalisation rate, placing some downward pressure on land prices.

Whilst minimal, the narrative must change and lazy land use penalised. An effective Land Tax policy is most important to enable First Home Owners (FHO) to enter the market.

More of the yearly capital gain must be taxed away to have a significant effect on behaviour. Economic modelling is needed. Land Taxes are more effective than the lumpy capital gains tax (which delays turnover).

Flatten the Land Tax rate
The current progressive Land Tax regime is rife for critique. Land in Toorak is more valuable than Melton. Land Tax is a percentage charge on the land value. The higher land values in Toorak ensure the landowner naturally pays more. A progressive rate only opens the agenda for ‘wealth envy’ critiques. If the State Government was to undertake such a reform, it would also address the concerns raised by the Henry Review on agglomeration. The strength of the Georgist remedy is that all land owners pay the same percentage. Locational values account for the varying privilege accorded by nature, infrastructure and culture.

Broaden Land Tax to replace Stamp Duty
Stamp Duty (SD) is one of the most inefficient taxes in the nation. A broad based Land Tax (on residential and investment properties) could be set at a low rate of .0055 in the dollar to cover the $4.64bn raised by Victoria’s LT & SD (on $840bn in residential land values). This would be a nation leading reform and result in a number of spinoffs:

• Cheaper housing
• Lower debts
• Improved efficiencies (lower deadweight costs)
• Better for the local economy – more money spent locally
• Improved turnover in housing
• Less congestion due to more moving closer to work.

A number of implementation strategies can be workshopped.

Remove Stamp Duty discount to First Home Owners
As economic theory would suggest, such discounts have had no discernible effect on housing prices. Investors have dominated the market, bidding prices up. The saving in First Home Owner SD discounts has been bid away in higher house (read land) prices. This has  seen a loss in government revenue transferred into bank profits. Any of the Land Tax reforms mentioned above would have a greater affect. The abolition of the FHO SD discount will return $70m to the budget.

First Home Owners Grant (FHOG)
The $10,000 FHOG on new homes is a good application of a bad principle. The State Govt should act forthright in its ability to educate on effective housing policy. If every FHO gets $10,000, it becomes in effect a seller’s subsidy. The removal of the Federal FHOG came at the same time land prices started to take off again, discouraging the young from buying. High land prices rather than the lack of a FHOG needs be addressed.

Developer Charges
These are an impediment to affordability. The lump sum amount of $86,580 per hectare is split amongst say 16 homeowners. This adds $4,000 in interest over a 25 year mortgage. By itself this doesn’t sound much, but on top of the stamp duty costs and the extra land price pressure enforced by drip feeding, this has seen FHOs plummet to a record low.

A more effective method of funding infrastructure is for the State Government to sell bonds to the market and for ratepayers (or land owners under a revised Land Tax policy) to pay off the infrastructure costs over the lifecycle of their operation (20 years). This ensures the cheapest borrowing costs (state govt can borrow some 2% lower than developers and 3%+ lower than FHO’s) and that all beneficiaries pay a fair share of the infrastructure according to utility. The current system ensures one generation of FHO’s is slugged the entire cost of infrastructure.

Change the narrative
State government has bent over backwards to address land supply concerns. Land prices have not reverted to affordable levels. As many have shown, smaller blocks and smaller houses have been ‘sold’ to the market, which in affect sees a higher price per square metre.

Compounding the focus on land supply issues have been recent state government zoning trends, with the ‘demand assessed’ Precinct Structure Plans in effect locking up great swathes of land inside the Urban Growth Boundary. Land supply improvements are limited by infrastructure financing in the municipalities. Further impinging upon supply has been the further regulation of supply by the state govt with the controversial Neighborhood Residential Zonings. 

High land prices, enforced by the speculative drip feeding of properties to the market, must be addressed. This locks up the remaining supply. Richard Pratt was fined for rigging the price of cardboard boxes, but it is perfectly legal for ‘staged releases’ to occur in housing estates. This must change. A number of examples of land banking and drip feeding are given in point 4 of my Senate submission into Affordable Housing.

Currently, investors are riding at a near record high 50% of all housing loans, up from 12% in the mid 80’s. But there is no talk of investors crowding out FHO’s.

The demand side of the market must be given more attention. The power of demand over supply is exemplified by the flatlined price of 2 bedroom apartments in Melbourne over the last 5 years . With record apartment supplies coming through, there has still been no significant dent in affordability pressures as shown by SQM Research.

Our yearly Speculative Vacancies report continually reveals high vacancy rates in Southbank, Docklands and the CBD. However, this hoarded supply is ignored in the Housing Supply Crisis meme.

Investors and developers have both sides of the market stitched up. Until the now record numbers of locked out generations start applying political pressure, they will continue to be dudded by a political and economic process destined to disadvantage them.

Reader Michael Fracis summed up the untapped political power in this Negative Gearing related comment:

If 1.2 million voters are advantaged by NG then how many are disadvantaged?

Those disadvantaged are FHB’s and what are their numbers?

Assuming the average age entry point into the ‘property ladder’ is 25 years of age and there are 250,000 turning 25 each year then it would take 5 years for those disadvantaged by NG to outnumber those advantaged.

Assuming those 25 year olds have been locked out for the last 4 years since the end of the FHBG I think the Government better do its number crunching again when it comes to NG for the next election.

Tap that out to a decade and the forces for change must be building. Premier Napthine, show your economic integrity.