29 August 2022

Government rejects analysis that land supply, land tax behind high housing and rental costs

| Lottie Twyford
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housing from above

An independent analysis of the Territory Budget has declared the ACT Government’s tax settings and land supply are contributing to higher prices. Photo: Michelle Kroll.

The Territory Government denies its tax settings and land release schedule have led to an increase in housing costs, despite that assertion being made in an independent analysis of the budget.

It defended its commitment to affordable housing, its capacity to service debt and its population forecasts in its response to the Pegasus Review of the 2022-23 ACT Budget, completed as part of the estimates process.

The review stated budget and land supply settings have contributed to people in the ACT experiencing difficulties accessing housing.

It also argued land tax was being passed on to prospective renters in the form of higher rental prices.

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“Distortions in the income tax system have contributed to increased prices for houses and units across most of Australia,” the Pegasus report said.

“There is also evidence to suggest that demand for land in the ACT vastly exceeds supply, adding to the pressure on prices arising from the income tax system.

“If the supply of residential land is constrained, resulting in relative scarcity, this, in turn, will put upward price pressure on residential land.

“As a major input into the price of residential property, relative scarcity in the supply of residential land can also be expected to feed into higher residential property prices.”

Industry stakeholders have previously agreed with this analysis, accusing the government of “drip-feeding” land to the market.

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The ACT Government was extremely critical of this analysis, arguing the report had provided “limited evidence” to support that last claim.

Instead, it argued strong house price growth in the Territory and across the country had been driven by “supportive fiscal policies and unprecedented expansionary monetary policy, including record low interest rates”.

It added that land release was a small part of the total volume of all property transactions.

“The number of properties being sold in 2021-22 was under 9 per cent of the total dwelling stock. The number of dwellings increased by around 3 per cent from new constructions.”

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The Canberra Liberals have repeatedly called on the government to drastically increase the supply of land to the ACT housing market, using examples of heavily oversubscribed land ballots to illustrate their points.

But the government hits back at this, saying “simple solutions” to the housing crisis don’t exist and increasing land supply now would mean the construction industry would not be able to keep up with demand.

Its response to Pegasus also argued there were significant costs associated with developing new land.

The government also hit back at arguments in the Pegasus report that its land tax regime was making renting unaffordable in the ACT.

“The key reason for increases in rental prices is a function of low rental vacancy rates, due to strong population growth,” its response said.

“Rents are now rising in many states across Australia, where many areas are now also experiencing vacancy rates of just above zero.”

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The ACT’s vacancy rate hit extreme lows of 0.5 per cent in March this year. Canberra is consistently among the most expensive cities in the country to rent.

In budget estimates on Monday (29 August), Mr Barr was pressed on the impact of land tax on renters.

He flatly rejected the assertions the land tax regime was resulting in higher rents.

In the ACT, land tax applies to properties that are not a person’s primary place of residence.

Mr Barr argued because the Territory government’s land tax was tax-deductible, part of it was being offset immediately.

“A wider range of factors influence rental prices [including] vacancy levels, demand, housing stock, the average income of residents and costs associated with providing a rental,” he said.

Mr Barr went on to say the government was working to address supply through major build-to-rent projects which would deliver hundreds of properties at once.

He said supply could not be substantially increased if only approached from the level of household or ‘mum and dad’ investors.

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Incidental Tourist9:28 am 03 Sep 22

Of course ACT tax settings, land tax and the tax reform 2012 result in exorbitant rents. No matter the narrative – the sober reality is that rents in ACT remain highest in Australia.

ACT policy settings (both tax and legislation) become increasingly hostile to small investors. Here I do agree with Barr saying that “mum and dad” landlords are no longer willing to bear the burden of rental supply in ACT under current policy settings. They keep leaving the rental market. Many new rental apartments remain unsold while tenants compete for less housing stock every year.

Barr argues that “build to rent” projects is a solution to rental crisis. Well, small private investors make up some 80% to 75% of rental market – some 70,000 rental properties in ACT. We hear time to time about projects to deliver some 300-400 rental apartments in few years. Despite loud fanfares we are yet to see these long promised “build to rent” projects to eventuate. But even if one or two projects are delivered a few years later, considering the scale of rental market it will be too little too late.

Despite all of this let’s imagine that “build to rent” becomes a reality. What is this reality? Well, for a start institutional investors want 10% – 15% rental yield for these projects to brake even. “Mum and dad” investors typically operate at 5-6% yield. Why? Because mums and dads work in their main jobs and they can negatively gear rental properties against their main income. Institutional investors do not have “main income” other than rents and hence they need much higher yield to survive. So “build to rent” is far more expensive solution. Being more expensive “build to rent” accommodations are tiny – many would be under 50 square meters. Also these cramped apartments aggregate many people of low social economic class in one location amplifying social issues. So be careful of what you wish for.

A large range of factors do influence rental prices, but it cannot be denied that the high costs of owning rental property such as exorbitant rates and land tax are a big part of this. Owners have to cover these costs and this is fed into rental prices. You can’t reduce the rental prices without reducing these owner costs.

The only reason more rental properties are not being sold off is because demand is so high that rental properties can be rented at a price that covers these costs. If demand falls, we’ll see more sales of rental properties as they’ll begin to cost owners too much to keep them.

With new laws restricting landlord rights to determine who lives in their properties, what pets they bring and how they can stay in the property despite damaging it, many owners are on the cusp of deciding to sell already, as they know the costs of maintaining properties will increase. The higher the standard required for these properties, the greater the cost of maintenance. Once the costs can’t be covered, the properties will be sold so there will be less rentals available.

What you’re ignoring is that if investing in property is “too expensive”, investors would sell to other people who then become owners instead of renters.

This would place downward pressure on property prices and rents.

If landlords could arbitrarily increase rents, they already would be doing so, the claim that they can simply pass through increased holding costs is simplistic and doesn’t hold up to analysis.

Clearly you don’t own a rental property, else you’d have a better understanding of the practical economics of the situation. Landlords can increase rents each time there’s a new lease, or new tenant and they do so each time there’s an increase in their costs, which is why the rental prices have consistently increased in ACT after increases in rates and land taxes, so they’re now higher than most other places.

Also they often sell their properties to other investors and less often to home-buyers. This does not reduce renters, nor does it place downward pressure on property prices or rents as each time a property is sold it is sold at a higher price, so the next owner has greater costs, perhaps including a mortgage with even higher interest rates and they have to recover those costs by pricing their rental accordingly. The cycle continues.

‘There is no such thing as a market.’
— Economics by psycho.

It is low vacancy rates (currently prevalent around the country) and Canberra’s high median earnings which sustain high rental prices here. Landlords are squeezed by land tax (rates apply to everyone so no difference there) which reduces their margins in the face of market price limits, as much as they might have liked to raise rents arbitrarily to sustain profits. On a continuing lease one cannot raise rents beyond inflation * 1.1 which with legislation against arbitrary ejection will lead to quite a bit of reappraisal by landlords of the value of their investment.

For now, given some landlords are willing to make a tax-advantaged operating loss (“negatively gear”) for the ultimate prize of discounted tax on capital gains, I suggest that those complaining most are either sailing too close to the financial wind or suffer a surfeit of greed.

The main people complaining are renters (and rightly so).

Too much of their weekly rent is going to landlords.

Too much of their weekly rent is going to the ACT government

bj_ACT, I recall reading, do not have a reference to hand, that the ABS (? ACCC?, RBA?) has opined that rents provide a better estimate of the housing market than do any of the house price indices.
Obviously demand over supply is high at present, which pushes tenants. Landlords gain from that. The government’s take is static in that it relies on averaged rateable value, not rents.

Reducing taxes on landlords in the vain hope this would benefit tenants is to run against all price stickiness when costs reduce. Landlords would profit yet more, given they price up to market. It is not a costs-plus operation.
It would also leave the government with less money for any of the zillion things Riotact commenters assure us is the highest priority today.

HiddenDragon8:09 pm 31 Aug 22

Over the last year, the net worth of the ACT government (estimated value of assets minus known/estimated value of liabilities) improved by about $1.5bn “mainly due to the upward revaluation of Housing ACT’s assets associated with strong growth in property prices” (p.286 of the 2022-23 ACT Budget Outlook document refers).

That improvement happened in spite of a large ACT budget deficit for the year, which was earlier (i.e. prior to the revaluations) expected to see the ACT government’s net worth fall by $600m.

Add to that reassuring (particularly for twitchy ratings agencies and foreign lenders) detail the powerful incentive of maximising the revenue to be gained by an eternally cash-strapped government from future land releases and the idea that the ACT government is not eking out land releases with deliberate intent is utterly implausible.

Capital Retro3:02 pm 31 Aug 22

The government gives little or no incentive for retired empty nesters (AKA evil conservative voting Baby Boomers) to downsize.

Ideally, this demographic need a separate title, single level, stand-alone 3 bedroom house or villa with at least one lock-up garage in walking distance to shops and health facilities. The only things like this are on dual occupancy blocks and they are scarce as hens’ teeth and because of this they are selling for about $1.00m plus. To make it worthwhile, the retirees have to sell their existing house above this price and there is stamp duty of over $30K to pay yet first home buyers generally pay no stamp duty. This is so unfair.

I’m sorry Mr Barr but we don’t want to live in those urban renewal shoebox size units you see as the answer to everyone’s problems.

Why 3 bedroom, instead of 1 bedroom with study? After all, they are empty nesters.

Capital Retro3:47 pm 31 Aug 22

One extra bedroom for the “study” and one for the guests. Your out of town children or family may not want to visit you DJA but mine do.

Oh won’t someone think of the downtrodden, rich, inner city, empty nesters who want to downsize into a cheap property (of a particular type) in the same inner city areas.

But you’re wrong on one point CR, their tax reform package moving from stamp duty to rates provides a perfect incentive to move and removes the stamp duty hurdle you even mention.

Good to see you’re on board with making the change as quickly as possible to help incentivise those people even further.

Capital Retro5:17 pm 31 Aug 22

Point one chewy is that I don’t live in an “inner city area”. Only the very wealthy can afford that.

Point two is you are wrong again as most stamp duty is still payable. An example is the stamp duty on a $900K house is $31,050 but there is a concession for an owner occupier of $2,160 if the buyer isn’t eligible for the Home Buyer Concession Scheme or the Pensioner Duty Concession Scheme. Whoopee.

Capital Retro,
If you’re looking at $1million dollar + 3 bedroom houses then you aren’t out in the suburban fringes. You’re talking about smaller properties that are more expensive than the Canberra median.

Point 2 is exactly what I said, you’ve agreed with me. The government’s tax reform is reducing and removing stamp duty and so you should be fully supportive of the change happening even more quickly to better incentivise downsizers.

That stamp duty you mention would be far more expensive if they hadn’t begun the transition, so you’re clearly on board with replacing it with a broad based land tax.

Capital Retro8:08 pm 31 Aug 22

No, I am not agreeing with their policy of reducing stamp duty. I’m disagreeing with their policy of discrimination against downsizers.

Capital Retro,
There is no discrimination and I’ve outlined how their policy actually incentivise downsizers which is something you claim to want.

It seems what you really want to see is objectively rich people being provided even more ways to avoid ever having to pay tax, whilst poorer people have to pay more.

I don’t know how you could possibly think that is reasonable or fair.

Capital Retro10:00 am 01 Sep 22

I’m not “rich”, chewy. The $2,160 “incentive” I have quoted is all that they can manage and how long has this policy been in place? Let me guess, 12 years? I would have to wait another 20 years to get a total exemption.

First home buyers have jobs, most retired people like me don’t yet they are somehow poorer than me? Have you seen superannuation returns lately? They are generally negative – even Peter Costello’s management of the Future Fund had a 1.2% loss (negative return if you like that sort of speak).

And the government and their developer mates constantly bang on about retired empty nesters needing to “move on” and liberate their mythical huge single house block in inner Canberra areas.

You are just as bad as they are.

See this is the actual problem.

You talk about expecting to buy million dollar plus homes of a specific type, in a specific location but still don’t understand that this makes you rich by definition.

You simply don’t understand the reality that being able to afford that type of asset is something most people can’t. If you have that type of asset wealth, you ARE rich.

And if you want to play the “Super” game, average returns for 2020-21 were 15%+. 10 year averages for even relatively conservative funds are a healthy 7%+.

And that’s not even starting on the property prices, which have increased more than 50% in the last few years in the ACT.

Once again as I said, you don’t want to pay any tax even though you’re objectively wealthy and you think it’s unfair that the government doesn’t tip the scales even more in your favour.

It’s truly strange to see such a lack of perception on reality.

Capital Retro12:05 pm 01 Sep 22

Do you breed unicorns by any chance?

Unicorns don’t exist CR, just like your logical and well thought out arguments.

Capital Retro9:03 am 02 Sep 22

Tell me why it is right to subsidise (by full stamp duty concession) first home buyers, chewy?

Tell me where I said it was CR?

Although from an equity perspective, subsidising younger poorer people to enter the housing market is far more reasonable than subsidising already wealthy people.

Particularly so when you consider the overall state of government policy and taxation on housing which is heavily weighted in favour of existing owners and investors, who have done extremely well because of it.

As I’ve already said, you can be further incentivised to downsize by the completion of the government’s tax reform. You should be fully supportive.

Capital Retro1:30 pm 02 Sep 22

It’s not that you said it it’s the fact that you didn’t and now that I have asked you, predictably you defend them.

“younger, poorer people”?
The average annual wage in Canberra is now about $95K. Yeah, right, they are poor.

I was one of those many years ago and I never got a discount, rebate or incentive on the taxes payable on the 5 houses where I have lived and I repeat, I am not wealthy and I have never owned an investment property. Getting my first house meant saving the regulated one third deposit and I worked at three jobs for three years to save the deposit. No social life, no car. That commitment would be an alien concept for a young person these days.

My self-funded pension is about $50K a year. You must be one of those people who claims Australia is a wealthy country, oblivious to the fact that we owe over $1 trillion which can never be repaid (unless Labor plunders private superannuation).

And you ask me to be supportive? Give me a break!

“It’s not that you said it it’s the fact that you didn’t and now that I have asked you, predictably you defend them.”

I didn’t defend them, I explained them. I would be perfectly happy if they didn’t exist but they are chicken feed compared to the benefits given to existing owners through generous taxation treatment.

 “I am not wealthy”

Once again, if you can afford to purchase outright a property of over a million dollars, you are, by definition, wealthy.

“The average annual wage in Canberra is now about $95K. Yeah, right, they are poor.”

What does the average wage have to do with anything? The first home buyers scheme is capped at a maximum income of $170k for a household, so less than 2 people earning an average wage.

It also has a capped value of stamp duty savings.

“That commitment would be an alien concept for a young person these days.”

Bahahaha, did you really just go full Boomer with a “back in my day” rant? A young person in your days also had property values that were only a few multiples of an average wage, compared to the vastly inflated values these days that make it significantly more difficult for them. Increased value that has enriched the people of your generation at future generations expense.

“You must be one of those people who claims Australia is a wealthy country, oblivious to the fact that we owe over $1 trillion which can never be repaid (unless Labor plunders private superannuation).”

Yes, a debt that has been racked up mainly to once again benefit people of your generation but will be expected to be paid back by younger people.

It’s nice of you to provide even more evidence for my argument, well done.

Capital Retro6:10 pm 19 Sep 22

Who is ranting now?

I did own a house worth over a million dollars – most Canberrans do with the median dwelling house price being just under one million.

I was able to buy something smaller and more suitable for my remaining years under the median price but I still have to pay about $30k in stamp duty which, according to you is “generous tax treatment”.

You must have few friends chewy because you say you don’t want any people (young or old) to receive subsidies and I don’t recall receiving any benefits that were allegedly attributed to the national debt. I do recall paying heaps of contributions taxes on my self-funded superannuation though. I am not one of those wealthy retired public servants who receive a defined benefit taxpayer-funded pension that they contributed nothing towards but then have the temerity to complain that they have to accept what they receive as taxable income.

Did you study Marxism at primary school?

Navaratnam Muralitharan8:28 am 31 Aug 22

Only solution is to vote Labour/Green Government out in the next ACT election

Incidental Tourist10:15 pm 30 Aug 22

In ACT Land Tax is Rent Tax.

Linda Seaniger3:21 pm 30 Aug 22

I find it offensive that there is no land tax on commercial land and yet Residential land is so highly taxed in the ACT. Also lets not forget the discounted stamp duty for commercial investors. Home Rentals rates will continue to rise because of the discrimination shown to small residential investors. Residential landlord will also have additional costs to comply with the new energy efficiency rating and tenant non eviction arrangements imposed recently. New residential builds will also become more expensive having to comply with the 7 star energy rating. Its a shame because in most incidences new build will comply on paper but the final product is never tested and 99% of all homes would fail there rating.
In Coombs we have shopping centre with only about 10% occupancy, there does not appear to be a lack of tenants just a landlord who does not have to pay land tax if his property is empty and yet Home owners paid land Tax on their own home even if it is vacant for even a short period.

If it doesn’t stack up then sell?

I think you need to do some fact checking. Commercial has very high land tax, more significant than residential. What basis are you making the assumption that no land tax is claimed? The rates and stamp duty on commercial has been more significant and has not been phased out even with the “scrapping of stamp duty”. I think you might find that the low occupancy on Coombs is that many small commercial investors find it hard to stack up with the smaller tenancies.

“ACT Government rejects independent advice around land, housing and property tax”.

I remember the ACT government also rejecting independent advice around the 2019 bus network redesign and rejecting advice on the likely issues of putting super schools into lower socioeconomic suburbs Kambah and Holt.

We now know how bad the new bus network went and how badly super schools have performed. If only the ACT government had taken the independent feedback on board and tweaked things to reflect the advice.

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