Australia is losing $11 billion to landowners capitalising on windfall gains every year, thanks to upzoning (or government funded infrastructure). We need better value capture systems, argue Tim Helm and Henry Williams in a report produced for Prosper Australia on a topic also canvassed at the recent Planning Institute of Australia Congress in Canberra.
According to a new report by economists Tim Helm and Henry Williams, even 75 per cent of the value lost to windfall gains could pay for “a truckload of stuff”, including abolishing stamp duty for first home buyers and nearly 200,000 new social housing dwellings.
New Zealand-based Helm is best known for his previous work at Prosper Australia, the Victorian Treasury and big four consultancy EY. Williams, now the director of policy at Policy Institute Australia, was senior economic advisor to two Victorian treasurers and has also served on the Victorian Productivity Commission.
According to the report, created for Prosper Australia, “the game of windfall gains is played by buying a site at a low price, pushing the envelope on the development permit, then selling it with a more valuable permit in place than an ordinary developer following the rules could achieve.”
It’s a “honeypot” that attracts “rent-seeking, cronyism, and outright political corruption and numerous cases of favours and criminality”.
In a post on social media, Helm said the Pricing Development Rights report was an attempt to answer the question: “how and why should governments capture value given away to landowners through the planning system?”
“Our answer is that they should price development rights at the point of planning permission in proportion to the uplift in land value those rights provide.”
Helm said Australia should follow the example of our neighbours in Singapore, or the Australian Capital Territory government, which uses the Lease Variation Charge (LVC) to capture the value created by the planning system. The authors said other states should implement their own version of this mechanism.
How it works
In the ACT, landowners hold a crown lease, where they are granted the right to use and own the land for 99 years. Property owners who wish to develop or modify the land need to pay a LVC after acquiring development approval. Paying for “lease variation” grants the right to develop, similar to development consent or development approval in other jurisdictions. The authors suggest there is no barrier to enacting the LVC model on freehold land.
When amending the LVC legislation in 2018, ACT Chief Minister Andrew Barr said the charge was “designed to make sure the community shares in the windfall gains developers make when the government varies a lease to allow for new development”.
Windfall gains refer to the increase in land value due to the passing of a development application or rezoning of the property.
According to the report, “rezoning generates windfall gains for landowners only because buyers of land expect to acquire development rights at a price below their market value under a system that does not, at present, charge for them.”
The LVC comes into play when increasing the maximum gross floor area (GFA) for commercial or industrial buildings or when specifying the number of dwellings on the land. Landowners are required to pay LVC in line with the number of dwellings or GFA, with charges varying by suburb. There are exemptions, such as for childcare centres, and reduced charges, such as for social and affordable housing.
According to the report, there are four key design principles when it comes to LVC:
- The charge only applies when the development right is exercised
- The developer pays the charge
- The charge captures 75 per cent of the full uplift in land value
- Chargers are specified in advance to provide certainty
The authors said it would be “a game changer” and “a way to close the schism in Australian society between the landed and the landless to the benefit of renters, aspiring home buyers and people struggling to secure housing.
“The only loser from this reform would be the housing ‘have-lots’: major landowners extracting unearned wealth from the planning system, including professional speculators banking development-ready land for capital gain.”
And taking away the “honeypot” would “clean up an industry rife with rent seeking and corruption”.
The “great giveaway”
The authors point out that the rezoning of the Fisherman’s Bend project in Melbourne was a leading example of a “great giveaway” in value.
In 2011, Victorian Planning Minister Matthew Guy used his ministerial powers to rezone the precinct from industrial to residential use, without any significant planning undertaken, and without consultation expected and generally required for a major planning scheme amendment. This allowed landowners in this designated “capital city zone” to apply for high-rise towers, which at the time lacked density controls and amenity requirements.
“At the stroke of a planner’s (or Minister’s) pen, many landowners in the area, including party donors, became instant millionaires, the ticket price merely the cost of planning paperwork.”
A former factory site was noted to have sold for $1.7 million in 2009, and sold again for $11 million in 2015, a sixfold increase over six years.
A vacant lot sold for $3.6 million in 2013 with no planning permits, was resold for $8.6 million, vacant but with approval for high rise apartments.
According to data collected by Prosper Australia, planning approvals across 33 repeat sales generated an average 368 per cent uplift in land value, from $469 to $1726 a square metre. And based on this sample, windfall gains came to more than $4 billion, which is equivalent to a year’s worth of rezoning windfalls across the state, but delivered in a single decision overnight.
Who benefits?
According to the authors, the ones benefiting from this “giveaway” are “land speculators skilled at manipulating the planning system, often using their inside knowledge or connections, to extract concessions unavailable to others”.
“In NSW alone, an estimated $4 billion is given away per year, which is around 0.5 per cent of gross state product (GSP). In Victoria, the figure is $3.6 billion per year, or 0.6 per cent of GSP.”
“For every $100 added to the economies of our two largest states… around $0.50 is siphoned off by landowners in pure extractive income, prior to and independent of any actual development of the land,” the authors said. And this “tax” on productive activity was an inefficient burden borne by the public.
Windfall gains benefit patient speculators who chase unearned gains rather than genuine developers with a business model centred on construction and fast turnover of capital, the report said. And to outbid speculators, developers are paying more for land, which heightens their financial risk, as they hold higher valued and riskier assets.
Meanwhile, planning giveaways force the state to fund public services by imposing higher taxes on workers and businesses, reducing income and economic growth.
Will this discourage development?
Helm said on his social media posts that he doesn’t believe implementing these mechanisms would discourage development, because it will price “the right to develop” rather than the act of development itself.
“The price would be set below the private value as determined by the market. If anything, this will encourage development by taking away the honeypot of windfall gains,” he said.
“We price gambling licences, water rights, spectrum and fisheries – and could do the same for development rights.
“Licence fees do not discourage these activities. Pokies are fixed in supply… like land. They attract economic rents… like land. We capture those rents… like we could for land.”
Helm points out that the ACT has built housing 50 per cent faster compared to the national average over the past 15 years. Meanwhile, Singapore has 90 per cent homeownership and raises 0.5 per cent of its GDP from this mechanism, and it has a price adjusted GDP twice as large as Australia.
“If we want more houses built in Australia, we should probably stop rewarding people for not building them.”
The report adds that the mechanism should be introduced into states over a period of five years to allow gradual changes and adjustments to reflect the land with increasing accuracy.
“It’s an open secret that ‘development’ is to a large extent rent seeking. If you bank land and chase favourable rezoning and planning permission, you can get money for free.
“That works well for the politically well-connected, the politicians they support, and all the little fish who feed off the scraps. It works poorly for the rest of us.
“Pricing development rights is how we should call time on this ridiculous rort.”
