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Property industry calls on Government to delay massive LVC hike

By Glynis Quinlan - 15 June 2017 14

Bricks and mortar

The Canberra property industry is calling on the ACT Government to delay introducing a 300 per cent increase to lease variation charges (LVCs) on July 1 amid concerns it will reduce development in the Inner North and Inner South and make housing less affordable.

The recent 2017-18 ACT Budget announced an increase in LVCs required to enable unit titling on certain residential leases from $7,500 to $30,000 per dwelling – or four times the amount.

In effect, this means that a small developer building six townhouses in a rezoned area of the Inner North would pay $180,000 in LVCs on top of normal costs and this could make the whole project uneconomic – spelling an end to these developments.

In turn, this would reduce the range of housing options available and could increase the number of developers competing for greenfield sites – potentially driving up prices.

ACT Executive Director of The Property Council of Australia, Adina Cirson, has called on the ACT Government to put the LVC increases on hold to enable constructive debate about the changes and find out their likely impact.

“We would urge the Government to hold off commencement of it so we can look at the impact across the city particularly in urban infill sites where we need renewal,” Ms Cirson said.

Developments won’t be ‘bankable’

Managing Director of Vantage Strata, Chris Miller, said that ultimately developers are required to have a bankable development and there is a threshold below which it can’t be funded.

He said the sort of scenario where neighbours in an older residential area like Ainslie or O’Connor might get together to sell their properties to be redeveloped as six townhouses would probably no longer be viable because of the increased LVC.

“It won’t be bankable unless the sellers of those homes are prepared to take a hit on the sale price or there are extra costs for the purchasers. The more likely outcome is that those developments won’t be funded,” Mr Miller said.

“There’s very little to spur on activity in older areas like the Inner North and Inner South where you have smaller, boutique developments.

“It creates a vacuum for a certain type of stock. It ultimately will impact on the range of property options available in the market.”

Mr Miller said that this is also detrimental to housing affordability.

“It also creates a vacuum of developer land and makes them have to compete with others for greenfield sites that have already reached the apex of their value,” he said.

Impact on affordable housing

Peter Blackshaw Manuka Director, Andrew Chamberlain, said that developers do their numbers very carefully and that when there is an additional cost it can stifle the development.

“It will affect the developers because there will be fewer opportunities for development that are economic,” Mr Chamberlain said.

“Come the 1st of July, unless there is a movement in the prices many of those opportunities will no longer be viable.

“Whilst in essence the tax is levied on the developer, in reality it is the homeowner who will be out of pocket – by hundreds of thousands of dollars in some cases.”

Mr Chamberlain said that every house in a redevelopment zone has a specific point of value as a going concern.

“Under the changes that value might drop down and its highest use is its standard residential value,” he said.

“The other consideration is that it’s counter to efforts to produce affordable housing.”

Mr Chamberlain said that usually there is a limit on the number of square metres that can be built on a site and the developer can then choose to build a smaller number of more expensive properties or a larger number of cheaper properties.

Given the $30,000 LVC is per dwelling, it then makes better economic sense for “these projects to default to bigger townhouses”, he said.

Selling the family home

A property industry source also told The RiotACT that the 300 per cent increase in LVC would have an impact on home owners looking to sell the family home to escape redevelopment in their area but wishing to make enough money to buy in another part of the locality.

“As an example, if a resident owner in Dickson chooses to sell their home, let’s assume at $750,000 with development potential for six units, the LVC payable today is $45,000, which is five per cent of the value of that home,” the source said.

“However on the 1st July this year, the LVC will increase to $180,000, or close to 25 per cent of the value of a typical $750,000 house in Dickson.”

The property industry source said that the extra funds need to come from somewhere, and the only place they can come from is the value of the site, which in turn “takes a nosedive”.

Increased housing costs

ACT Opposition Leader and Shadow Treasurer, Alistair Coe, said that the LVC changes will increase the cost of housing in Canberra.

“For a Government that claims to want more density and redevelopment, the lease variation charge is a major impediment to this,” Mr Coe said.

“The lease variation charge, like other construction costs and taxes, will get passed on to home buyers and renters and drive up the cost of housing.”

Community benefit

The 2017-18 ACT Budget Papers state that the change to the LVC to a flat fee of $30,000 per dwelling has occurred because: “The Government is maintaining the progressivity of the Territory’s revenue base and ensuring that the community shares in the benefits of decisions around zoning and development.”

According to a spokesperson for the ACT Chief Minister: “LVC is a measure that ensures that the broader community gets a benefit from a variation of a lease where a developer receives a substantial windfall”.

What do you think about the 300 per cent increase in LVCs? Are the property industry’s concerns justified or are the increases fair? Do you think there should have been more consultation about the changes and their effect?

What’s Your opinion?


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14 Responses to
Property industry calls on Government to delay massive LVC hike
devils_advocate 12:51 pm 19 Jun 17

This is a retrospective tax. People that have already committed tens of thousands of dollars to redevelopment projects (in addition to the land itself) are now being slugged with a massive tax increase that they had no advance warning of.
Most governments understand the inherent unfairness of changing tax arrangements for large assets and put in place ‘grandfathering’ arrangements so that people who made (significant) investment decisions in good faith based on regulation at the time are punished unfairly. Guess not this “government” though.

chewy14 2:07 pm 17 Jun 17

chilli said :

chewy14 says that current owners are “doing nothing” to get a “windfall profit” and implying the whole redevelopment thing is upside for us. I strongly dispute that. I’ve been in a redevelopment area for 20 years now, and my rates have been strongly escalating – around $5k this year, I’ve paid back alot more than my original stamp duty I can tell you – there’s been no increase in services.

And as far as an ‘increase’ in value goes, I can also tell you that developers are happy to buy unrenovated, run down properties for a comparative song – look at what they pay per sqm compared to the per sqm price for new land in Gungahlin and it might give you a shock to see that it’s often less – but they don’t want to pay the true value for really good houses in redevelopment areas, i.e. new houses or those that have had extensive renovations. Those houses, I would say, are definitely NOT those that chewy14 characterises as ones whose increase in value happened ‘effortlessly’. Money was spent, investment decisions made. Yet these are precisely the properties being de-valued by poor quality development erected alongside. Developers will only pay up to the price where they can make a high % profit, and private house buyers largely prefer not to live next to higher density development. Owners who have made investments over the years see the value of those investments diminished.

So why should these property owners, already affected by over-looking properties, increased traffic and crowded street parking, be further disadvantaged by high levies to transform their now relatively de-valued properties into the same higher density housing already surrounding them?

Wait, from your own post, your land value in a redevelopment area must be somewhere near $750k, how exactly do you think it got that high? Hint, it’s not because of the owners brilliant investment strategy.

As for extensive renovations or knockdown rebuilds being “investments”, since when has investing heavily in a depreciating asset ever been a smart move?

And you’re actually agreeing with me, if developers can’t make a high % profit, they won’t redevelop. Why should that occur solely because land that was zoned lower density has been rezoned by planning authorities?

david shearer 8:32 am 17 Jun 17

I have worked within development feasibility and design in Canberra for over 20 years. Reading through various comments it is obvious that our goverment has done a stellar job of selling LVC as a developers tax, when it was designed to tax the “windfall gain” that the existent owner supposedly makes when they sell.

LVC was designed from day 1 to tax the family home.

That “windfall gain” has evaporated ( totally) as unit prices of apartments have flattened – a direct result of the much increased supply of land for apartments by the governments’ in house land agency. Prices in the inner north for apartments will continue to be subject to downward pressure as a huge supply of land along the tram corridor is developed. The simple reality is that development of smaller sites in the RZ2, RZ3, & RZ4 areas will come to a halt with these 300% or higher increased charges, and live in buyers will continue to outbid builders as they already do for over 50% of the sales of RZ2 or higher zoned sites.

The 2 big issues with this tax change of $22500+ per unit.

(1) it arrived without detail and with absolutely no warning ( what happened to consultation? ) This is effectively entrapment – and will cause huge financial distress to the small builders who recently purchased land and who are now designing and creating innovative, much needed townhouse type product. These builders have absolutely no chance of meeting the 1st July deadline to lodge a DA.

(2) This tax will not actually achieve any increase in LVC income for the government! – it will just stop development of much needed townhouses.. and in doing so is in direct conflict with the governments own policies for urban infill redevelopment

chilli 8:00 pm 16 Jun 17

chewy14 says that current owners are “doing nothing” to get a “windfall profit” and implying the whole redevelopment thing is upside for us. I strongly dispute that. I’ve been in a redevelopment area for 20 years now, and my rates have been strongly escalating – around $5k this year, I’ve paid back alot more than my original stamp duty I can tell you – there’s been no increase in services.

And as far as an ‘increase’ in value goes, I can also tell you that developers are happy to buy unrenovated, run down properties for a comparative song – look at what they pay per sqm compared to the per sqm price for new land in Gungahlin and it might give you a shock to see that it’s often less – but they don’t want to pay the true value for really good houses in redevelopment areas, i.e. new houses or those that have had extensive renovations. Those houses, I would say, are definitely NOT those that chewy14 characterises as ones whose increase in value happened ‘effortlessly’. Money was spent, investment decisions made. Yet these are precisely the properties being de-valued by poor quality development erected alongside. Developers will only pay up to the price where they can make a high % profit, and private house buyers largely prefer not to live next to higher density development. Owners who have made investments over the years see the value of those investments diminished.

So why should these property owners, already affected by over-looking properties, increased traffic and crowded street parking, be further disadvantaged by high levies to transform their now relatively de-valued properties into the same higher density housing already surrounding them?

HiddenDragon 5:47 pm 16 Jun 17

A 300% increase in these charges is doubtless affecting calculations about what might be viable (or at least worth the trouble), but no one should be greatly surprised by what has happened here.

From the May 2012 Review of ACT Taxation we have the following, which makes intent, if not quantum, fairly clear:

“The value from higher use of individual parcels of land is captured through Lease Variation Charge (LVC). These charges have been codified and provides an efficient tax tool to capture value from public investment in infrastructure and densification.” (p.4)

Even with those words of warning, in the early days after that Review was released, it looked as if the greatest impact of “tax reform” would be felt by owner-occupiers (compared to landlords and developers) – which might explain why, aside from occasional hedging, the local property sector largely cheered on the changes which followed the Review, and dismissed critics and sceptics of those changes as backward-looking, selfish, anti-progress etc. etc.

Unfortunately though, there never is, and never quite will be, enough government revenue to pay for all the lovely, shiny things which people expect, and which politicians promise, and which directly, or indirectly, add to the appeal (and price) of Canberra real estate – so there will be many more unpleasant surprises of this sort in the years to come.

chewy14 10:43 am 16 Jun 17

max88 said :

Chewy, who do you think pays when the government increases a tax by over $20000 per unit? ? It can only be the seller or the buyer. It’s funny that this LVC tax gets promoted by the media as a “developers” tax or a “property industry ” tax. Our experience is it’s a tax the property owner who is selling pays by default just by being unlucky enough to be in an area rezoned for unit development. We have new 3 storey developments over the back fence and one about to start next door. After 15 years in a quiet street it’s now totally changed. We just had our house valued by 2 agents, one of them was interviewed in this story, the other has sold by signs up everywhere in Dickson and Ainslie. Both advised this increased tax will make a big ( negative) difference when we sell, compared to if we had sold just weeks ago. We only are considering selling to get away from all the construction activity, but if we can’t sell for enough to buy nearby that just means we stay. Our neighbours sold a few months ago and the couple who bought their place outbidded the developers anyway, but the price still seemed low to live so close to the city. I guess the tax will just stop the area getting further developed, which seems counterproductive in a redevelopment zoned area, I don’t remember seeing any consultation or notice of this either. Surely a big tax change gets notified?

Who pays is actually irrelevant because the issue you’re missing is that this charge is supposed to reflect the government capturing some of the windfall gains that occur because of rezoned land. These people aren’t “paying” anything, they are simply getting slightly less windfall benefit that they’ve done nothing for.

You say that the buyer or seller are “unlucky” enough to be in an area slated for development, when from a financial perspective they are the exact opposite. They have received a massive windfall gain in their property prices because when they bought, land was zoned for lower density and priced accordingly. Such as areas like the inner north where the government has announced a $1B light rail system and large scale redevelopment that has increased their property prices by hundreds of thousands of dollars.

My heart most definitely doesn’t bleed for those people who might have to take their windfall gain and move slightly further away from these redevelopment areas. They can cry themselves to sleep with their profits.

If you want to see how it usually works in other areas of Australia, this article below gives you a good perspective of how the richest people in Australia make their money from political decisions and connections rather than being smarter or better than their competition.

http://www.smh.com.au/comment/game-of-mates-how-billionaires-get-rich-at-our-expense-20170526-gwe0dp.html

Why shouldn’t the community benefit through taxation such as this rather than private companies such as property developers or investors getting windfall gains for doing nothing other than being in the right place at the right time or knowing the right people?

Russ 10:00 am 16 Jun 17

max88 said :

Russ, the ACTEPD website has a link to the LVC tables. an increase from $7,500 per unit to $30,000 is a 4 x increase.

No it is not. The *increase* above the existing fee is $30,000 – $7,500 = $22,500 or 3 times the original fee, hence an *increase* of 300%.

I’m not suggesting the increase isn’t substantial, only that people who should know better are bandying about a patently incorrect figure, either because they don’t understand numbers and maths, or it suits them to use a bigger figure.

As for who pays the actual increased fee, that’s a matter of elasticity in demand and supply. You’d expect the original seller to get a bit less, the developer to make less profit, but it’s unclear what would happen to the sale price of units. If fewer are developed, the price may increase, lessening the impact on the developer’s profit.

wildturkeycanoe 8:21 am 16 Jun 17

I thought LVC stood for land value capture. Now I can see how it catches that value, by taxing the seller/developer/new apartment buyer. Does this only apply to Civic or all variations across Canberra? If the former, I can see people preferring to build/buy in Mitchell and Gungahlin, leaving Civic a barren zone for years to come.

max88 10:43 pm 15 Jun 17

Russ, the ACTEPD website has a link to the LVC tables. an increase from $7,500 per unit to $30,000 is a 4 x increase. Thats 400% of the current fee . For developments of 4 or more units the tax goes from $5,000 a unit to $30,000 a unit. That’s an unusually massive increase for any type of tax

Recent pre budget discussion between goverment left and right
arms…

Lefty: “we need more money for the tram workers with those lollipop stop / slow signs..,what if we increase LVC tax so it’s just totally over the top, what’s the worst that can happen?”

Righty: “no one will develop in the suburbs and we probably won’t collect much LVC tax , but by golly we just might get lots more buyers for our biggest cash cow -LDA land sales.”

Lefty; “genius!! best stick that in the budget right now”

max88 9:51 pm 15 Jun 17

Chewy, who do you think pays when the government increases a tax by over $20000 per unit? ? It can only be the seller or the buyer. It’s funny that this LVC tax gets promoted by the media as a “developers” tax or a “property industry ” tax. Our experience is it’s a tax the property owner who is selling pays by default just by being unlucky enough to be in an area rezoned for unit development. We have new 3 storey developments over the back fence and one about to start next door. After 15 years in a quiet street it’s now totally changed. We just had our house valued by 2 agents, one of them was interviewed in this story, the other has sold by signs up everywhere in Dickson and Ainslie. Both advised this increased tax will make a big ( negative) difference when we sell, compared to if we had sold just weeks ago. We only are considering selling to get away from all the construction activity, but if we can’t sell for enough to buy nearby that just means we stay. Our neighbours sold a few months ago and the couple who bought their place outbidded the developers anyway, but the price still seemed low to live so close to the city. I guess the tax will just stop the area getting further developed, which seems counterproductive in a redevelopment zoned area, I don’t remember seeing any consultation or notice of this either. Surely a big tax change gets notified?

Russ 8:41 pm 15 Jun 17

Firstly, the increase is actually 300%. If developers think it’s 400%, then their issues with basic maths are a bigger problem than government policy.

I assume the new LVC figure was arrived at by some process of analysis of what blocks were being sold for pre and then post redevelopment as well as the building costs for the project as per the respective Building Approvals, and hence it likely does capture the excess profit over what would be a reasonable market return for the category of risk.

That’s kinda thing we want governments to do.

DavieCBR 8:07 pm 15 Jun 17

chewy14 said :

It’s ridiculous for the government to not simply allow developers to do what they want, don’t they know that they have to make massive profits or the developments become unviable and the entire development industry will shrivel and die.

Chewy14 I do understand where you are coming from, but I guess my point is this is going to hit the homeowner more. There is an older couple that I know who live in one of the older areas of Canberra that have significant development going on. Everywhere they look there is a new development occurring. They want to stay in the suburb but want to move out of the redevelopment strip. They had started a conversation with a developer. I’m now assuming with this increase they will have to wear the cost. This may mean they may not be able to afford to stay in the suburb they love (as the $$ impact is significant – especially for a retired couple on a pension). Firstly they get squeezed by the apartments over their back fence and then by the LVC. I just think there needs to be a lot more thought and consultation given to this.

David C 7:46 pm 15 Jun 17

I work in the industry (I’m just a small builder, not a large developer). As it stands many DA’s are taking 12 months to be approved. My understanding is even if you have already submitted your DA come 1 July the 400% increase will be applied retrospectively. I think this is pretty poor form from the government as there has been a complete lack of consultation. There is also a lot of confusion surrounding some this and even industry bodies don’t understand the detail clearly. I know there will be a lot of people saying developers have it easy and are making lots of money, so who cares. However, in reality, the homeowner will be the one who will bear the real cost.

chewy14 6:58 pm 15 Jun 17

The property council are right, the only ones who should make windfall financial gains from the rezoning of land is developers.

It’s ridiculous for the government to not simply allow developers to do what they want, don’t they know that they have to make massive profits or the developments become unviable and the entire development industry will shrivel and die.

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