Homebuyers might be wary of taxing rezoning windfalls, because they worry it will increase the sticker price of housing. The property industry says that taxing rezoning windfalls will increase the cost of housing because the tax will be passed on. They also say that in response to the new tax developers will shut up shop, reducing the number of new lots and houses that are available to buy. We unpack some of the frequently asked questions below.

Will a rezoning windfall gains tax deter development?

Sharing the windfall gains from rezonings is not a radical new policy. A rezoning windfall gains tax has existed in the ACT since 1971 and Canberra continues to flourish.

Victoria’s Growth Area Infrastructure Contribution is a form of rezoning windfall gains tax – they just don’t call it that. The GAIC falls on landholders who made a windfall when their properties were brought inside the urban growth boundary; that’s why these areas are excluded from the new rezoning windfalls tax. Anyone who’s been out to Wyndham lately can attest, development has proceeded unhindered.

Moreover, the GAIC is a critical source of infrastructure funding in these rapidly growing suburbs, enabling these council areas to provide recreation and sporting grounds, community facilities etc.

Will a rezoning windfall gains tax decrease the supply of housing?

Rezoning occurs as a result of strategic planning. Local councils and other state planning authorities prepare strategic plans to guide development and coordinate infrastructure delivery. Part of this planning effort involves ensuring a pipeline of land that is zoned for appropriate development.

Broadacre land supply 2019

This graph from the Victorian Department of Environment, Water, Land and Planning’s Urban Development Program looks at lots available compared to lots released to the market.There is no shortage of zoned housing land in Victoria. As the following graph reflects, in the late 2000s the government ensured some 150,000 lots in the development pipeline. For nearly a decade, this pipeline has been more than doubled to ensure some 350,000 lots are available for development. The imposition of the GAIC (2010-11) made little impact on supply levels as seen above.

As the graph above illustrates, just because the land is zoned for housing development, there is no guarantee that it will be available to buy or build on. If zoned supply does not translate into retail lots, the problem resides with private land bankers. A rezoning windfall gains tax can actually reduce the incentive for leapfrog development.

Will rezoning windfall gains tax make housing more expensive?

It is naive to assume that rezoning windfalls are passed through as cheaper housing. For starters, the rezoning windfall goes to whoever owns the land at the time of rezoning. The landholder may or may not be a developer. Sellers and developers do not pass rezoning windfalls through to homebuyers when they receive them, and even if they did, the home buyer could simply take their ‘discount’ and on-sell at market rates. In this case, the home buyer would be the beneficiary of the windfall.

The key thing to remember is that developers and sellers are already charging the maximum the market will bear. Developers and sellers operate in a competitive market. They sell housing at the highest price home buyers are willing/able to pay.

A rezoning windfall gains tax is similar to the sale of public land to private developers. If the government sells public land for housing development, charging the developer the market price for the land does not “make housing more expensive”. If public land was given to private developers for free (like we currently do with rezonings), they would not reduce the price they sell housing for unless legally required to. Instead they would pocket the value of the free public land (or rezoning) they received, possibly without even developing the land and instead sell it to another developer.

In the ACT, where rezoning windfalls have been taxed since 1971, there is no difference in prices between properties which have been developed with or without a rezoning windfall (called a “Lease Variation” in the ACT).

Is the windfall gains tax unfair to some developers?

Some developers claim that they have paid good money in good faith for sites that have been earmarked by councils or state governments for rezoning. In this case there is no windfall gain. The developer has in effect already paid it off to the original land holder. They purchased at an inflated price expecting the rezoning to occur and have valued the land on that basis.

This might be true, in some cases. However, there are important mitigating factors.

First, the government is only claiming a portion of the unearned windfall gain, precisely because they want to leave a bit on the table as an incentive to develop land into better uses. Providing a modest return to drive more productive development is beneficial and necessary. Most businesses could only dream of a 50% return. In fact, a rezoning windfall has more in common with a lottery win than a return on investment.

Secondly, even if the project becomes unviable, a rational developer will on-sell the site to another developer to cut their losses. The project itself will still proceed and the community will still get the housing and other development in question. Sure, a small number of players might lose, but that’s the price of playing the land speculation game. It was never certain in the first place and there are always winners and losers in policy.

Notably, Victorian land prices have averaged a 10.8% growth rate over the last 20 years. This year, government fiscal measures such as HomeBuilder, along with the record-low interest rates have contributed to the fastest house price growth since 2009. The median house price in Melbourne has just passed the $1 million mark for the first time.

Arguably, now is a very good time to introduce a new rezoning windfalls tax. As land prices continue to surge forward after a downturn, the value of rezoning increases, making it easier for landholders to absorb any losses.

Finally, good transition design can ensure that markets have time to adjust to the new tax.

Why is the property industry so against taxing windfall gains?

The rezoning windfall gains tax is shaking up the land game. That’s exactly what it’s intended to do. The rules of the game have been unfair, so we’re changing them.

Sophisticated players have quietly enjoyed rezoning giveaways for many years. Prosper calculated that on 2018-19 land rezoning, some $5.7 billion in rezoning windfalls was handed out in the state of Victoria alone. This is a lucrative source of profit for those working the interface between public decision making and private landholdings. To put it in perspective, that is just over one quarter of national banking profits.

Removing half the honeypot will affect some of the wealthiest players in the industry – those that simply buy land ‘in the path of development’ and wait. They wait for earnest developers to come knocking at their door wanting land at an affordable price. This kind of activity doesn’t add any value to the development process and it should be discouraged.

We should not be surprised if property lobby groups fight hard to avoid such a loss. We’ve seen this pattern many times in Australia: small groups organising to protect their private interests against a reform that benefits many. It is totally predictable.

Why do economists support rezoning windfall gains taxes?

The taxation of windfall gains has long been supported by economists because it not only raises revenue, but encourages better economic outcomes.

Not all taxes are made equal. Different taxes have different economic effects at the ‘whole of economy’ level. Marginal excess burden measures the “economic cost” of a tax for every dollar of revenue. Taxes on economic rents, like rezoning windfalls, have the lowest marginal excess burden. In terms of budget repair, increasing taxes on rezoning windfalls is smarter than say, increasing payroll taxes.

A rezoning windfalls tax cannot be avoided, is transparent and can be administered relatively easily. Prices will not be impacted if implemented effectively. Importantly, taxing rezonings can build trust in the planning process and curtail corruption.