The real issue forcing land prices up are the huge economic rents available to land speculators. With Jeff Kennett’s move away from Site Value rating to Capital Improved Value (CIV) rating, land speculators can purchase land, sit on it and wait for the property to grow in value. The constant attack on State Land Taxes ensures a continuing trend for them to be weakened, sending the signal to the marketplace that hoarding land is appropriate.
On a local level, the combination of these 2 factors has seen a growth of vacant land in inner urban areas in Melbourne. We believe the reduced supply of land from this speculative trend has applied greater pressure on land prices than Melbourne’s 2030 boundary. The huge upward trend in land prices happened well before the 2002 announcement of 2030.
The problem with land supply therefore comes from the private supply of land, dominated by speculators, rather than the public supply of land. What a good diversion plan by conservative forces!
A decade on from Jeff Kennett’s reforms and the results are mounting. The practical evidence abounds us. Cycle through Richmond (Melbourne) and rafts of vacant land can be seen. One 700m stretch of Elizabeth St sees 9 blocks of vacant land and another 4 vacancies in commercial property. However, the official REIV vacancy rates continuously quote at or about 2.1%. Efforts to find a qualitative definition on what constitutes a ‘vacancy’ have so far been fruitless.
On a Federal level, the upward trend in land prices was assisted by the 1996 Negative Gearing reforms. This was enhanced by the halving of Capital Gains (2000). A recent report by the UN Special Rapporteur on Adequate Housing, Miloon Kothari, said
“According to official figures, out of the 943,877 low-income persons receiving rent assistance, 35% (330,360) were spending more than 30% of their income on rent, and 9% (85,000 peoples) more than 50%.
With Australia’s negative gearing policy, perhaps the most generous of all developed countries (emphasis added), and the tax benefit from capital gains, a subsidy of $21 billion is given to the high end market. (Aug 06)”
As we can see, a combination of these policy changes have given speculators free reign around Australia. A decent holding charge on land is needed, as Julian Disney commented on Lateline (21st August, 2006).
Why should investors be encouraged to make ‘unearned’ speculative gains rather than profits from productive activity? A recent ANU paper by Atkinson & Leigh entitled The Distribution of Top Incomes in Australia revealed that just 20% of the income earnt by the top 0.01% of the population comes from productive activity.
Do we really want to continue this trend?
Share the rent with all and remove the unnecessary burdens of taxation, we say! Then local land supply will be used efficiently, reducing the need for urban sprawl through the encouragement of infill development. This has a cascading effect that soon reduces the cost of housing. It should be remembered that high housing prices are dominated by the cost of land. Land now represents about 70% of property sales prices, rather than the 30% it was in the 70’s when the tax system encouraged production over speculation.