Supply boosterism in Victoria now comes with strings. This is Prosper’s reading of the detail-lightVictoria’s Housing Statement – The Decade Ahead 2024-2034:

The Victorian Government has promised:

  • Yes, we will fast-track your development, but only if you include 10% affordable housing.
  • Yes, we will upzone that activity centre, but we will be considering value capture.
  • Yes, we will support your home purchase, but as shared equity, not a grant.
  • Yes, we will “unlock” and rezone surplus government land, but how do you feel about a 40-year ground lease?

Prosper Australia sees this as a welcome shift in position. Supply-side measures in years gone by rarely insisted on public benefit, at least beyond the inherent good of more (market-rate) housing supply. The result has been a parade of massive giveaways, corruption, and missed opportunities, as in Fishermans Bend.

Now, it seems the lessons are sinking in. The Affordability Partnership shows the conversation around affordable housing contributions maturing. The theme here is a quid pro quo for additional planning rights: upzoning and special planning processes in exchange for a 10% share as affordable housing, or a cash contribution of 3% of project value.

No rezoning without value capture

Upzoning land for higher density – whether delightful, soft, or otherwise – gives away property rights, a source of unearned value (windfall gain). While the Windfall Gains Tax which came into effect in July captures some of this, it has a big hole: rezoning between residential zones is out of scope, regardless of how big the boost to land values. That means the activity centres now pegged for upzoning are exempt, with no effective value capture mechanism announced.

If the housing upsides outweighed the fiscal cost of upzoning giveaways, the haste to rezone first and figure tax out later might be warranted. But the evidence for that is thin. The government can pull the planning levers, but how the market responds is about private incentives.

Developers cannot churn out more homes than builders can build, and neither will they dump ever-higher volumes of housing into a falling market.

There are thousands of potential development lots within Master planned estates as detailed in our 2022 Staged Releases Report. And as the Municipal Association of Victoria recently reported there is already a backlog of some 120,000 dwellings for which planning permits have been approved but construction has not commenced.

“In the City of Maribyrnong in Melbourne’s west, there are live approvals for 2678 dwellings not yet built. Developers have sought extensions of time on permits for more than 4700 dwellings.”

This kind of evidence suggests the planning system isn’t the binding constraint on new supply. So if we’re going to zone for density in established suburbs – and there are very good reasons to do that, not least lower infrastructure costs – then we ought to first bed in value capture rules to give developers the certainty they need and taxpayers the return they deserve.

Can we really crank up construction that far?

A separate question is whether this aspirational ‘big build’ is possible. A major reason commencements are falling away right now is that material and labour shortages are rendering projects no longer feasible. This has nothing to do with land assembly or planning hurdles.

While cost pressures are easing we can’t expect supply chain issues to be fully resolved for another two or three years.

Even setting aside sky-high construction costs, a target of 80,000 dwellings per year ought to give us pause.

Our recent Pandemic Rental Dynamics report showed that our pace of construction in recent years has been world-leading. Even with Melbourne growing as fast as anywhere in the developed world, home building kept up, pumping out an average of 40,000 new dwellings (net of demolitions) per year over the past decade, enough to house new residents without any increase in the average household size.

The Housing Statement aims to facilitate an additional 25,000 dwellings per year, but this is on top of what is already a leader-board topping performance by the construction industry. As SE QLD prepares for the Olympics, the eastern states pour vast amounts of concrete into transit upgrades, and the west eyes up another mining boom, is this really feasible?

Short-term rental levy

Of course, housing affordability isn’t just about the overall supply of dwellings. It’s about how they’re used – and by whom. The AirBnB levy is evidence the government recognises that reshaping the distribution of housing is one route to boosting the effective supply of housing for Victorians, a point we’ve hammered in our Speculative Vacancy reports over many years.

Many commentators have erred in assuming the 7.5% will be passed on to tourists, making Victoria a less attractive destination. More likely is that competition between operators (including interstate) will see the tax borne by hosts. That is the point: to reduce the profitability of short-stay hosting vis-a-vis renting to a long-term tenant. Fewer AirBnBs mean more long-term rentals.

Having said that, the flat levy is an overly blunt tool. Per Capita’s research has shown that the impacts of short-term rentals vary a lot from place to place. A gold-standard approach would be a state-supported registry coupled with differential rates on short-stay properties, as Per Capita recommend, to allow local government to determine the appropriate local tax and offset those impacts locally.

Wither tax reform?

Beyond zoning getting out of the way and short-term rentals paying their way, how can policy reform support faster development and a fairer allocation of housing stock? What is absent from the Housing Statement is any larger vision on property tax – the big lever for reform.

Replacing stamp duties with a broad-based land tax is one measure that would help. Stamp duty is a barrier to downsizing, and land tax isn’t just ‘less bad’, but can positively incentivise faster and higher density development, working hand-in-glove with upzoning. The reform model pioneered for commercial and industrial land in the May Budget might fly for residential too, but if the politics are too hard then switching out the current duty calculation for a tax based on land value growth since the last sale would be an attractive alternative, not least as a way of mainstreaming value capture for residential land.

Silence on tax settings notwithstanding, Victoria’s Housing Statement has all the right headlines. The devil, as they say, will be in the details.