Henry Review's land tax reforms could reduce prices by up to 10%

Scraping stamp duties in favour of a broad-based land tax—as recommended by the Henry Review of tax—could reduce land prices by up to 10 per cent, new research shows.

Prices in the inner city would drop the most, with properties further out seeing a smaller reduction. The cost of a $335,000 plot of land in Melbourne (the average price in 2006) would decline by $21,000, or roughly 6 per cent.

The findings are taken from forthcoming research by the Australian Housing and Urban Research Institute (AHURI) modelling the effect of recommendations in the Henry Review. They show the abolition of stamp duties and its replacement with a broad-based land tax would put downward pressure on land prices, improving affordability and increasing housing market efficiency by lowering the costs of moving.

Senior AHURI researcher, Professor Gavin Wood will present the findings at the Improving housing affordability through tax reform seminar tomorrow in Sydney.

'Downward pressure comes from the fact an annually levied land tax is hard to avoid', Professor Wood said. Land is immobile and fixed in supply. So when a broad-based land tax is introduced, potential buyers reduce how much they are willing to pay by the expected value of the land tax liabilities. The price of land is thus reduced to the point where the after-tax return is equal to the return on other investments.

'Whereas stamp duty is only payable when a property is purchased, the land tax would make holding on to unused property an expensive exercise. This would encourage development of greyfield sites in inner areas were housing pressures are most acute.'

The modelling drew on 2006 property valuations and sales data in metropolitan Melbourne to map the effects of the recommendations. Rates and thresholds were set to match the revenue lost from abolishing stamp duty, ensuring the reform would be a cost neutral exercise for State governments.

Other countries are considering similar tax reforms to address housing market volatility. Professor Mark Stephens from the Joseph Rowntree Foundation will offer a comparison at tomorrow's event with the current situation in the United Kingdom. Professor Stephens led a task force charged with finding long term solutions to house price volatility in the UK.

According to Dr Ian Winter, AHURI's Executive Director, the reforms are one step toward restoring some balance and fairness in Australian housing markets.

'22 per cent of Australians own 55 per cent of the homes across our capital cities," Dr Winter said. "Making us not so much a nation of homeowners but rather, a nation of landowners and renters. There is a very real danger the great Australian dream of home ownership is beyond the means of the the current generation'.

AHURI research (Yates 2009) shows median house prices are outstripping borrowing capacity of average workers by more than $250,0000. Those who can enter the market are forced to city fringes, far from employment centres, increasing the strain on transport and other infrastructure.

'Our current tax settings have rewarded speculative property investment and provided tax shelters at the expense of home ownership', Dr Winter said. 'This is not a sustainable path. These tax reforms alone will not solve all the problems around our housing affordability and cities, but they are an important first step'.


Present land tax arrangements

• Land tax is currently only levied on private rental housing and commercial or industrial use property
• Owner occupied housing and primary production are exempt from the land tax
• Land tax applies to the cumulative unimproved value of land:
• Single property owners typically have a small or more often zero tax liability, while multiple property owners have relatively high tax burdens
• This results in a contraction in the supply of rental housing
• The current setting place a barrier to the attraction of private finance (superannuation funds, for instance)

Recommended land tax arrangements

• Tax applied to all land uses except primary production
• Tax levied on a per-square-metre basis
• Tax calculated per land holding