Australian House with for sale sign

Australia’s runaway land prices are akin to a national emergency. An increase of $4 trillion in just the next five years is highly likely.

While meeting the weekly housing payment is our most essential financial commitment, why isn’t housing affordability the most pressing policy issue?

Land price inflation of $600 billion this year will equate to 30 times the size of total banking profits. But our politicians barely raise a sweat over it. One could joke that the only time we hear of a land price crisis is when a wealthy campaign contributor wants their land rezoned.

Political intervention in the land and housing market via the use of first home buyers grants or stamp duty discounts have only seen first home buyer mortgages increase. Too much time has been spent on improving buyer deposits to “get into the game”, rather than confronting the land price spiral.

With every increase in mortgage or rental payments, there is less to spend into the local economy. This has a detrimental effect on small business resilience and jobs.

Policy makers should not be surprised when growth is limited.  

Without immigration driving the eastern states, the reliance on the big housing, big debt growth model has its limitations. Low growth will be compounded by a tax system awash in deadweight costs – taxes that hurt economic activity.

Runaway land prices

One could claim the 2000s really were called the “noughties” because land prices flew along at 12.6 per cent per annum. The 1999 halving of the capital gains tax dramatically changed the treatment of housing. The government gave the green light for a place to call home to become an investment vehicle, forever changing the culture of keeping a roof over our head.

As wage stagnation kicked in alongside the four year GFC moderation, land values increased by a more moderate 4.9 per cent over the 2010-20 decade.  

The combined 20 year growth average of 8.7 per cent is more than six times greater than today’s 1.4 per cent wage growth.

With governments going all out to support the property market, growth of 8.7 per cent may not be far off the mark, adding some $500 billion to land values annually. This would see land prices rising to more than $10.2 trillion, a 65 per cent increase in the next five years.

In just three years, such increases alone would be greater than the entire ASX valuation.

This rate of growth is unprecedented and when it comes in the trillions, the limp money thrown at rent and mortgages is likely to slow our economy for decades.

Natural disasters reveal the inflexibility high land prices place on communities. Our banks will become even bigger, requiring further support. And, of course, we will be praying for soundproof walls as our kids live longer at home.

The potential for Japan-like 120-year mortgages appears more likely without concerted action now. 

Governments must engage in the political signposting needed to address this key issue, to enact on what the multitude of tax inquiries have advised.

The calls to move towards higher land value taxes have been front and centre to every inquiry. With capital gains in housing (read: land) set to continue their meteoric rise, the importance of moving our tax base away from productive activities and towards passive incomes is crucial.

The NSW government has provided the required leadership by engaging in extensive stakeholder engagement to design such a transition forward. But few other state governments have made the most of this situation, particularly those with weak oppositions.

With property now able to be purchased from a smartphone from the other side of the world, by a team of buyers’ advocates armed with algorithms or by a political insider privy to new infrastructure plans, the way we treat housing has changed forever. It is time our elected representatives got serious and sculpted our tax system to suit.

Karl Fitzgerald is director of advocacy at Prosper Australia.

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  1. We forget that taxes and charges amount to over 60 % of the cost of a house and land in NSW and and its over 40% in WA . To reduce prices all we need to do is reduce this impost ,

    1. Ian I beg to differ. This is the standard line property investors roll out to deflect attention from the incredible windfalls listed in this article. 40-60%? Check your rates bill and you will see that about 60% of the cost is the land value alone. That price has increased by the rise in investor influence in the market up from 12% in the 80s to 35-50% in recent times.

      Stamp duty has risen but the NSW govt is looking to replace it with a land tax. Purchasers will have to factor in the ongoing annual cost and deduct that from their bid, putting some downward pressure on prices.

      Sure developer charges should be better targeted but such taxes are not the primary driver of record land price inflation.