I was once told by a senior industry practitioner in a post-graduate property lecture: “The best way to make money in this game is to buy a piece of farm land on the urban fringe and lobby to have it rezoned.”
Totally rational approach given the pot of honey in the Planning Ministers tick.
The ‘rezoning honeypot’ has led to some very poor planning outcomes and shady dealings. For example Fishermans Bend 1.0 and the John Woodman/City of Casey debacle. Prosper has urged action on rezoning giveaways for many years.
We are chuffed that Victoria will be introducing a rezoning windfall gains tax!
The total value uplift from a rezoning decision will be taxed at 50 per cent for windfalls above $500,000, with the tax phasing in from $100,000.
The Property Council has come out swinging with CEO Danni Hunter writing in the AFR: “The new so-called “windfall gain” is a different name for “tax on investment.”
Does “investment” mean holding land out of the market in the hope of a favourable zoning decision? No, investment is when developers gather capital and expertise together, assemble a site in an area zoned for development, and turn sod.
When a site is rezoned the value uplift comes from the new land-use permissions. It is a pure economic rent. No effort necessary on the part of the landholder (except perhaps intense lobbying). In the A.C.T, the rezoning windfall gains tax is 75% and there’s little evidence that it discourages or increases the cost of development
Here’s some perspective: the former Rootes (Chrysler) factory on Plummer Street, Port Melbourne was rezoned as part of the Fishermans Bend precinct. Using repeat sales data, we calculated a $7.7m rezoning uplift on that site. Egregiously, the site was ‘flipped’ after receiving a permit for 443 apartments. Under the proposed rezoning tax, the ‘flipper’ would have contributed $3.85m toward public transport, schools, and parks, making the neighbourhood a better investment for the genuine developer.
Rezoning windfall gains can be ploughed back into public infrastructure. When rezoning revenue is used to fund transport, schools and parks near newly rezoned land it enables liveable, higher density neighbourhoods. By doing this, the government feeds a virtuous cycle of investment and land rent collection.
State Land Tax (SLT) will also increase at the beginning of next year. Pallas is raising the top rates. The Real Estate Institute of Victoria have called this a “planned assault on property owners,“ but of course it hits only residential landlords and commercial property holders with a portfolio valued over $1.8m.
The Urban Development Institute of Australia says: “these increases show a fundamental lack of understanding. Where they don’t hit home buyers directly, they will need to be passed through and will only increase the cost of housing.” We say: the UDIA shows a fundamental mis-understanding of tax incidence and the nature of market competition.
For starters, the rezoning windfall gains tax is borne only once by the seller of a development site. It is passed back, not through. If anything, it throws a bucket of cold water on the run-up-to-rezone speculative frenzy, and may dampen prices for development sites.
Higher land tax does not empower landowners to demand higher rents. In a competitive rental market, market demand determines rents. If a landowner could demand more in rent, they would probably already be doing so. Jesse has written about this at length here.
Prosper has long advocated for the progressive rates of SLT to be flattened and broadened. We would have preferred to see the bottom rates lifted. However with the property market roaring, maybe bracket creep will make this less significant.