Housing shortage questioned again

Karl FitzgeraldCampaigns, CommentaryLeave a Comment

With recent doubts on Census data winding in the mainstream opinion on housing shortages (down from 228,000 to now just 23,000) we were pleased to have our 5th Speculative Vacancies report written up by Chris Vedelago on Fairfax’s Domain blog:

A study by Earthsharing Australia estimates there are 90,730 vacant properties around the city, enough homes to provide housing for 35,000 families.

It amounts to a vacancy rate of nearly 6 per cent, challenging industry claims the city is facing a housing shortage.

It must be noted the report did not include land banks that have unmetered water mains. 47,000 hectares have been re-zoned to residential here in Melbourne but yet some such developments have an unemployment rate for land of 99.94% ie Lend Lease’s Atherstone development.

So why is it happening?

Earthsharing Australia, which is affiliated with tax reform group Prosper Australia, believe it’s the direct result favourable tax and incentive-driven housing policies that encourage speculation, land banking and drive up house prices.

”The rapid run-up in housing prices has provided a lucrative torrent of windfall gains via capital appreciation for investors while rents have not kept pace,” Soos writes.

”Faced with this set of circumstances, investors may conclude that renting properties make for dubious investments when factoring in the wide array of costs associated, including time and effort.”

In other words, it’s a better deal to turn a viable home into a lock-up-and-leave investment.

This is exactly the outcome our tax system is designed to encourage.

Why bother working on a 45% income tax rate when you can adopt a Self Managed Super Fund and pay ZERO capital gains tax? The incentives for hoarding over housing are extortionate at all levels of housing policy. For some reason few dare talk about the role of speculation on affordability.

Vacant land is another matter. Some councils already charge a premium to rates for residential land left fallow.

Others do not, meaning owners are able to reap a windfall in rising land prices while paying less than others to hold their property.

In one case, a vacant 167-square-metre block was charged $991 for the year, while the liveable house next door on a 158-square-metre allotment paid $1540.

Valuers will also tell you that vacant blocks and derelict homes can hurt the values of other property holders in the street, especially direct neighbours.

For their part, Earthsharing Australia and Prosper Australia argue that a ”substantial” land value tax would help ”blunt” capital growth and encourage owners of unused homes to put them on to the rental market.

We do not support differential rates on vacant land. It leads us down the dangerous wealth-envy path of politicking as Wayne Swan and K-Rudd know so well post the mining tax bash. Victoria should return to a flat but higher rate on land value alone – Site Value Rating.

The Vedelago reference of higher council rating on the family home than the larger block of neighbouring vacant land is due to Capital Improved Valuations. This sees the family home paying about 30% more in council rates than a land banking speculator. This distortion actually provides a motivation for investors to smash down what could be affordable rental housing. With no improvements, the land banker gets a tax discount under CIV/ NAV.

So called ‘progressive’ politicians have decided that anyone with a large home is wealthy. They should be penalised. Anyone with solar panels or a water tank faces the same maddening fate. No wonder people don’t like the rating system. KISS.

This goes against the grain of decades of research showing that municipalities that actually encourage improvements to a house or shop encourage higher employment and economic activity. Location as represented by land value is a better indicator of ‘capacity to pay’. This is our timeless reminder to municipalities like Ararat, where moves are afoot to remove council rates. Perversely, it is the poor utility of the council rating system that sees local ratepayers wanting the regressive GST to replace the subversive CIV/ NAV system.

The core issue is that land in prime locations benefits from improved community services. A new community library or a redeveloped train station can add tens of thousands to a property owner’s land value. Those who benefit by living closer should pay for that improvement by the increased windfall gain they did comparatively little to receive. The rating system naturally does this over time – not in one hit.Can one argue with these principles? Instead, we are seeing a growing move to replace beneficiary pays with a regressive user pays system. When the windfall gains to land owners is significant, it is within their interest to squash chances of a more equitable system of public finance. For this reason we see fraudulent economic analysis published as mainstream news.

The fact is a land banker pays about $450 in Land Tax and about $1,000 in rates on an average location in Melbourne. When the windfall gains have been over $30,000 per annum for most of the last decade, we have to ask who are rising property prices good for? Banks and speculators win, whilst the community struggles to pay for services.

Earthsharing’s Speculative Vacancies report finds that 19 of the 20 highest vacant suburbs were in Melbourne’s west. As economists of note could tell you, the price has followed the change in the Land Tax threshold, having increased from $85,000 – $250,000 over the last decade. This western trend has grown because land is barely $250,000 in value. Thus investors pay next to no Land Tax.

The usual argument for investment is that when price goes up, supply will follow. Investment in land, no matter by how much, cannot produce any more land. It is as if neo-classical economists believe in flat-earth economics.

There are 842 vacant properties in Footscray. 860 in Essendon. 90,700 in total – about a year’s auctionable supply of property. But yet we sprawl further. With a higher holding charge on land holdings (Land Tax and Site Value Rating), these properties would put significant pressure on prices. However, with the Real Estate 4 Ransom mantra we live under, ‘developers’ can simply remove stock off the market to choke price falls.

The most affordable land was in Mitchell at $171,500 and a median lot size of 512sqm. Mitchell recorded the largest shift in supply, dropping from a 20-month supply in the March quarter to 8.5 months in the June quarter. However this was due to stock being withdrawn from the market, rather than sales.

With that in mind, we hope this report helps raise the importance of penalising lazy land use so that land is used for housing not hocking.

Read past reports.

Listen to Karl Fitzgerald on the weekly Renegade Economists podcast

photo by: Bilal Kamoon

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