Legislative Council Legal and Social Issues Committee
7 July 2023

Thank you for the opportunity to submit to the Legal and Social Issues Committee’s inquiry into rental and housing affordability.

Prosper Australia is an independent research institute formed over 100 years ago to further public knowledge of the teachings and principles of economist and land tax advocate Henry George.

We have a long history of research into land, housing, and taxation issues. 

We welcome the committee’s attention to rental affordability. We recognise the difficulty caused by rising rents, especially for those on fixed incomes.

We wish to make two comments, both relating to the first topic of the inquiry (“the factors leading to low availability and high costs of rental properties”).

First, the present circumstances do not seem extraordinary. To us they represent the ordinary operation of rental markets. The sharp readjustment following a period of low rents during the pandemic has restored rents to levels broadly consistent with incomes, but no higher.

From March 2020 to March 2023 median rents in metropolitan Melbourne rose by between 10.0% and 16.2% across different property types, and by 11.8% across all property types.

This growth was consistent with growth in employment, hours worked and hourly wages over the same period. The employment-to-population ratio rose by 3.1%, while hours worked per employee grew by 2.0% and hourly wages grew by 7.4%, meaning that labour income per capita – a rough indication of capacity to pay rent – grew by 12.9%.  

The fact that rent growth matched capacity to pay is consistent with findings from elsewhere that housing costs tend to consume a stable share of disposable income. 

We examined how the Melbourne rental market responded to declining rents through the COVID era in our May 2023 report Melbourne’s pandemic rental dynamics: an (un)natural experiment in excess supply, which we have attached to this submission. It explores the evidence for this type of adjustment.

In general, when rents are temporarily pushed lower, households occupy bigger and better homes, and bid up the prices of preferred locations, which raises rents again. Low rents also induce in-migration. These adjustments lead to more people competing with more money for a fixed amount of land, which increases land rents and land values, equalising quality of life across different locations.

That land rents ultimately capture the advantages of location, and that markets allocate housing according to income, not need, points towards the only durable policy solutions to unaffordable housing: redistribution of income and provision of non-market housing.

We note, as an aside, that the way land captures the fruits of progress underpins our organisation’s policy stance in favour of socialising land rents.

As far back as The Wealth of Nations philosopher Adam Smith argued that “every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord… whose revenue costs them neither labour nor care, but comes to them, as it were, of its own accord, and independent of any plan or project of their own”.

Since landowners are the ultimate beneficiaries of policies and public investments that raise productivity and incomes, we argue that public funding should generally be drawn from land taxation. 

Second, we expect the committee will hear concerns about property taxes reducing the availability of rental properties and/or being ‘passed through’ to higher rents. We have seen commentary of this type following the government’s recent Budget announcement of a lower tax-free threshold for land tax.

Such concerns are not grounded in economic theory or evidence. We have attached for the committee’s benefit a briefing note we have prepared on this topic.

We disagree strongly with claims that land tax will be passed through to higher rents.

While we agree it may prompt some investors to sell their properties, this poses no issue for rental affordability since the housing stock itself cannot disappear from the market. Such investor sales offer an opportunity for renters to become homeowners or for other investors to acquire the property.

In the context of low rental availability, taxing the value of land under rental properties may have the effect of strengthening the incentive for owners of vacant or underutilised property to put their properties into more productive use, thereby alleviating rental market pressure. 

Water usage data reported in the Pandemic rental dynamics report referred to above showed that over 100,000 homes in metropolitan Melbourne were left empty or under-used over the 2022 calendar year. Tax settings to discourage vacancy, such as broadening land tax and improving Victoria’s vacant residential land tax, could encourage these properties to be put to better use.