Housing is one of the biggest worries for Australians, especially renters and new buyers. Yet any policy that significantly reduces the market price of housing—rents or prices—will wipe billions in revenue from landlords and trillions in asset value from all homeowners (currently 65% of Australian households).
Australian homeownership rates declined from 2006 to 2016 (though may have risen recently). This headline figure hides a disproportionate decline in homeownership for younger and poorer households. Households headed by a person aged 25-34 saw homeownership decline from 60% in 1981 to 45% in 2016, while for the households aged 35-44, homeownership declined from 71% to 62% over that period. Households aged over 65 had no declines. The bottom 20% of households by income are spending more on housing rents than ever.
Young Australian adults, especially parents, face the uncertainty and rising cost of renting that undermines quality of life. Homeownership early in life provides security and stability, which is why it has traditionally been a public policy goal.
Glaeser and Gyourko (2003) (G&G) famously argued that if the marginal cost of a square metre of housing lot land is less than the average cost, this is evidence of a price effect from “artificial” supply constraints. They call this price gap a “regulatory tax”, but it is also known as a “zoning effect” or “zoning tax”.
Their logic has been relied upon by hundreds of other studies and in numerous replications of their approach, including by economists from the Reserve Bank of Australia, whose results were widely publicised (Kendall and Tulip, 2018). However, the economic assumptions behind G&G’s approach are implausible. Although popular, their method should not be relied upon to infer anything about the nature of housing supply. This note explains why.
In its 2021 budget, the Victorian government announced a new tax on windfall land value gains from rezoning (also known as a betterment tax)
This note explains the economic principles behind such a tax, the benefits of applying such a tax, implementation issues that need to be considered, and lessons from the operation of similar taxes elsewhere.
Property is, conceptually, a finite bundle of rights. Rezoning grants additional property rights to owners of an existing set of property rights. Those new rights could instead be sold at a market price. A tax on the value gain from rezoning at anything less than 100% is equivalent to selling the new property rights from the community to the current property owner at a discount. Just like selling other property rights from the public to the private sector does not add to market prices in property markets, nor does selling rezoning rights.
Housing industry lobbyists in Australia and abroad often claim that property-related taxes comprise a large and growing share of the price of new housing and are hence pushing up the market price of new and existing dwellings.
Land taxes, stamp duties on property transactions, GST on value-added investments, and other fees and charges are generally included in this analysis, as are many inferred price effects that are assumed to be due to regulations.
This note explains four reasons why the claims of this tax summation approach are not valid.
Many of the included costs are not taxes on new housing.
Adding indirect taxes double counts.
Assumed price effects are implausible.
Taxes on property assets reduce market prices, not add to them.
Densification of established suburbs is often a desirable planning outcome, providing benefits in terms of the efficiency of transport networks, land use, and provision of public services. However, planning for density will not entice private landowners to redevelop to higher density unless it is also economically advantageous to do so.
"There are economic limits to density as well as regulatory ones"
This guide is designed to help planners incorporate considerations of the economic limits to, and benefits of, density in the creation of planning instruments to ensure that their objectives align with those that are also economically viable.
We first describe the residual land value model that forms the basis for understanding the economic effects of planning on land values and development feasibility. We then outline the three key economic conditions that exist for development to be viable.
Total market price must exceed total development cost
The marginal cost of additional density equals the market price at the optimal density
Land value at the optimal density use must exceed the value for current uses
These conditions need to be considered in the development of planning policies if they are to achieve their objectives.