Auckland Mayor Phil Goff has welcomed the Tax Workings Group’s (TWG) call for a tax on vacant residential land.
In its final report the working group is recommending the new tax in a bid to crack down on land banking. And it says would be best levied by councils as a local tax.
The report recommends the Productivity Commission, which has been carrying out an inquiry into the financing and funding of local government, considers the feasibility of the proposal. The commission is expected to release its findings in November.
“I have long supported any measure that removes incentives for land banking and encourages the development of land for housing,” Goff says.
“We have a housing supply issue in Auckland, which has contributed to unaffordability and people being locked out of home ownership. If we want to fix that, we need to encourage the development of land zoned for housing, not for holding onto for future speculative purposes.”
When the TWG released it interim report in September last year it said it was evident that New Zealanders were deeply concerned about the high cost of housing, and its impact on wealth inequality, social cohesion, and social capital. As a result it had been directed to give special regard to housing affordability in its work.
It said while tax reform was unlikely to be the dominant driver of the housing market, it had identified some options to increase supply. This included the introduction of a tax on vacant residential land in a bid to intensify the use of existing urban areas.
The Government is expected to release its full response to the TWG report in April. It says it intends to pass any legislation resulting from the TWG recommendations before the end of the parliamentary term. No tax changes would come into force until April 1, 2021. This will give people a chance to vote on any decisions made by the Government. Below are the recommendations on housing in the final TWG report.
Housing
The Group:
96. recommends that the Productivity Commission inquiry into local government financing considers a tax on vacant residential land.
97. considers that residential vacant land taxes would be best levied as local taxes rather than a national tax.
98. recommends that the ‘ten-year rule' which taxes a gain from the sale of property where the property has increased in value due to changes in land use regulation be repealed.
99. recommends that disclosure of the purchaser's IRD number on the Land Transfer Tax Statement should be required when purchasing a main home.
63 Comments
Let's have no more comment about the 'free market'.
It clearly didn't work.
Nor will this - because this isn't the real limit to growth. The other question to ask, is how much of the populace is reliant on 'land scarcity' to guarantee their perceived 'wealth'? Most are a knock-on effect fro the peripheral 'bankers'.
But in percentage/physical terms, this won't change anything.
Sorry but this isn't a free market. The real reason land prices rise so much in New Zealand is attributable to the NZ Govt. By running a large welfare state and running surpluses, they increase private sector reliance on debt, which pushes up land prices in nominal terms due to creation of money as debt is issued.
Rubbish, there has never been a free market when it comes to housing or land.
We have free markets for shoes, tvs, cars etc. etc. Don't see the prices of those getting out of hand do you?
But we have eternal meddling and restriction on housing development and land rezoning by councils. And whaddya know?
No. What you do is define in regulation, a ratio between land value (LV) and value of improvements (VI) - so that the shed would not count as a dwelling (i.e., highest/optimal use of the resource, in economic terms), and hence the tax would be due given the VI is so low-value in respect of the overall capital value (CV).
I have always promoted this as a means to address the land banking issue.
Councils have always had two tools in the box: method of rating, and differential rating. So an Annual Value-based rate, differentially applied to properties having land-banked characteristics, has been available for decades,
What's missing are Council vertebrae...and that's an eternal problem. (I was gonna add cojones, but did not want the inevitable gendered responses.) Oh, what the hell....
That's exactly right! And given they keep going cap in hand to central government for handouts/subsidies/new revenue sources, you've got to wonder why they just don't help themselves by making use of the existing tools in that way. Do ya' think it might have something to do with them being quite happy for land prices to be inflated within their confines?
Do ya' think it might have something to do with them being quite happy for land prices to be inflated within their confines?
Of course they are. Bubble conditions are usually positive for local economies in that people are self satisfied. That also filters down to the have nots as usually consumer spending is bouyant.
The tax would only apply to land designated as residential. And if it is residential zoned then a dwelling on it has been determined to be it highest value use - and hence, yes, it should be put to that use, particularly where these is a scarcity of supply. So, sprawl would only occur to the extent that it had already been planned/zoned for residential.
The key here is "Vacant land".
It doesn't matter where of what the land is zoned as. If it is vacant, it will incur a tax.
There will be some asymmetries owing to demo costs, etc, but these would be offset by the costs of greenfield development.
So. Again. No. The tax doesn't favor one development over another, ceterus paribus.
Again. You are missing the point.
It doesn't matter where the majority of the vacant land is. It is taxed at the same rate - therefore there is no distortion between fringe and central city vacant land.
I could understand if they said all land will be taxed at $100 per square meter - then greenfields development at the fringe would be more incentivised due to the effective cost of holding being higher (lower land value, same tax).
That is not how they are going to tax it, though - it will be a flat marginal tax rate. In simple terms; you have a vacant lot, you pay x% on the value of that land.
Is the math too hard?
Greenfield area, where there is very little housing = 99% vacant land. Brownfield area, where there is lots of housing = 1% vacant land. We are applying an incentive to develop vacant land = x.
Which of the two areas will be most incentivised?
What math?
That isn't a proof of what you think it is.
THE TAX IS AGAINST THE MARGINAL UNIT OF LAND.
It doesn't matter where it is located or what surrounds it - it is based on a % of the value of the land, itself, and therefore it does not cause a development distortion, all else equal.
Simple answer. No.
The expected response from the individual is the same because they are indifferent in relative terms.
You are confusing what you think 'statistics' implies.
The 99% of the population is going to be no more likely to act than the 1% were before the tax because there is no distortion between them.
Thus, your argument reduces down to this:
More land will be developed (in nominal/aggregate, not relative) on the fringe than in the center in aggregate terms (a natural collorary of land supply distribution). However the likelihood of this occuring is the same pre and post tax - there is not distortionary effects of the tax, here.
You are falsely implying that development only occurs on vacant land. This is a complete nonsense and all of the brownfield land owners have potential to develop, they do so in 99% of cases by removing an existing structure and building a new one. Therefore the supply distribution of vacant land is not a natural collorary to overall land supply distribution. The distribution of vacant land is highly skewed in favour of greenfield, therefore an incentive to develop vacant land is highly skewed in favour of sprawl.
It is arbitrary because the tax applies to the marginal unit of land.
Thus it doesn't matter if there is 50,000 hectares of land or 500m2. All else held equal, the tax does not incentivise development of greenfields vacant land over brownfields.
I am getting sick of repeating myself in the face of these stupid hypotheticals you keep putting forward that miss the point.
I've been thinking. Perhaps a thought experiment would help highlight why you are wrong.
There are two plots of vacant land, adjacent to one another. One is greenfields and the other brownfields. The greenfields borders an infinite supply of other greenfields land.
For all intents and purposes they are completely homogenous, owned by the same developer, and all costs are sunk. Said developer is indifferent between developing either as their land value is exactly the same and the vacancy tax treats them equally.
These parcels of land can be located anywhere, it doesn't matter - the cost of holding is the same. There is no incentive to develop one over the other.
However. The tax could have some distortions in terms of nominal costs. And this is bad for your premise that fringe greenfields will be developed due to the tax.
Assume the developer has two parcels of vacant land, again identical, and again all costs sunk. Say the greenfields is on the fringe and the brownfields in Parnell. (or vice versa; it doesn't matter)
The developer faces a hugely higher nominal cost of holding the land in Parnell due to it's high value. In the case he/she runs a business contingent on cashflow, they are going to redevelop the central city land before the fringe land.
I understand what you are saying nymad, but there are more than 2 plots of vacant land and it is not difficult to do the math on the basis of that reality. I will try and talk you through it, without using numbers to represent the probabilities. There are lots of plots of vacant land and we know where that vacant land is. A vast majority of land is vacant in greenfield areas and the vast majority of land is not vacant in brownfield areas (by definition). By applying an incentive to develop vacant land, we are therefore applying a preference for greenfield development.
Suppose we put a tax on tampons, will this impact men or women more? Now obviously we can do your thought experiment - there is a man and a woman who have their periods so therefore both need to purchase, so as you state above there will be no disadvantage for either. Now at this point you would consider the problem solved and walk away?! But I want to perform a statistical analysis and determine if men are more or less likely to menstruate than women.
You do not understand. That is obvious.
It doesn't matter the amount of land available - it is taxed at the same rate on a marginal basis. Therefore, there cannot be an incentive on the basis of the tax. Which is what you are arguing.
The probability of development doesn't factor in at all because it is unaffected by the tax (all else equal) - again; IT IS A TAX ON THE VALUE OF THE MARGINAL UNIT OF LAND. The landowner's choice to redevelop fringe of central vacant land (green or brownfields) land is unaffected by the tax in relative terms.
As I state, he may be impacted by the nominal cost - however, in which case your idea that fringe land will be developed first is completely incorrect due to cashflow pressure.
If for every one of your land owner type (type B) that owns one plot of vacant brownfield and one plot of vacant greenfield; there are 99 (type A) landowners who own one plot of non-vacant brownfield and one plot of vacant greenfield. Type A owners will be incentivised to develop their vacant plot in preference to their non-vacant plot. In this much more realistic modelling the modal land owners choice is highly impacted by the tax (whilst the statistically irrelevant minority case land owner will be unaffected just like you predict).
That point is still arbitrary - Compare like with like on a normalised basis when talking about the distortionary effects of policy.
See my comment above.
In your case, Type A owners are always going to be more likely to develop the greenfields (non vacant) site regardless of the tax imposed.
But, also, thanks for proving my point below about regarding the redevelopment premium incentivising development on greenfields land versus brownfield land.
I'm trying to compare a representative area of brownfield with a representative area of greenfield, as like to
In fact, in most of the world development growth runs at about 70:30 in favour of brownfield development. In most of the world the land owner gets more profit developing brown field. In Auckland it is more 45:55, because a silly RUB inflates land costs high enough to induce massive sprawl (not redevelopment premium).
Again. That's arbitrary. It is not a distortion.
The tax does not tip the scales in favor of developing one type of marginal unit of vacant land over another.
Out of curiosity do you have any training in planning/urban economics?
Because your ideas are just so at odds with the conventional wisdom of urban environments.
We always talk passed each other on these things, don't we?
I'm not suggesting difference of developing one type of marginal unit of vacant land over another unit of vacant land. I contend that favouring the development of vacant land is favouring sprawl over non-sprawl. 99% of the non-sprawl land, where I would prefer to see development occur, is not vacant. And here is a tax that specifically advantages development on vacant land. Therefore this is a tax that disadvantages non-sprawl development.
If I was involved in the sector, I would probably not be on a public forum about it. And this pseudonym is not that hard to crack. It is an interest of mine, plus slight Asperger's or whatever that part of the spectrum is nowadays. I think I adhere to mostly SMART growth which is pretty conventional and quite diametrically opposed to Dale Smith.
But we already know that greenfields development (nil improvements / vacant) will occur over brownfields (non nil improvements), anyway - due to the redevelopment premium.
So again, the effect is already there. The tax isn't introducing it. Arguably it is expediting the development, but it is development that, at least in theory, would have occurred anyway so net long run effect is neutral.
Another thought experiment;
The developer owns two blocks of land - one greenfields and one brownfields. They are adjacent and homogenous except for the fact that the brownfields has an existing structure which is capitalised into the value. He is always incentivised to develop the greenfields first because he foregoes no opportunity cost associated with decommissioning the brownfields site (rent, demolishing costs, etc). Introducing the tax doesn't change this reality. It may induce him to expedite the development schedule, but in the long run, that property was going to be developed regardless.
You presume to think that, I vehemently disagree. In the vast majority of the world there is a strong preference to redevelop brownfield. A significant price differential normally exists between housing units in central locations and in remote sprawl locations, so (excluding costs) development of central brownfield is strongly preferred.
But obviously there are costs and we live in Auckland where inane planning elevates costs to eye-watering levels. And now we are introducing a new tax, which is an incentive for vacant lot development.
Agreed. Sprawl is the only 'answer' known to politicians. The fact that it runs into limits doesn't seem to get through. You can tell when there are peripheral loads - the centre goes upwards. It's actually a warning that the city is (long-term serviceably) unsustainable That's a problem not addressable by any amount of open-slather tract 'development',
That said, I've long thought that in-filling of rural land makes sense in th long-view game. There will be more people involved in food-production, and they'll be closer to the land. They'll have to be housed, presumably taking pressure off the city boundary in the process.
Phil Twyford when opposition spokesperson said they wanted to remove the Auckland RUB (residential urban boundary). It even went to a vote in Parliament but David Seymour from ACT wasn't present in the house and it was only his additional vote needed to swing the vote in favour. That opportunity missed, I'm not quite sure why since being elected they haven't pursued that action.
The thing is people are already commuting out further than the periphery to satellite towns anyway driving past hectares of green fields. Better to sprawl in a biscuit shape than a donut shape. The lank banking at the periphery is forcing population growth out further where pricing is more competitive.
They are not driving past land-banking, that intermediate distance land is governed by the Auckland RUB and housing is forbidden there. That zone is engineered by the council to force people to build more sprawled out, so they have drive further and cause more pollution (or something). That problem could be solved by Auckland Council or by Phil Twyford keeping his election promise - this tax will not do anything there.
Sometimes I can't understand whether you are a troll or for real.
I mean. The stuff you say is just bonkers.
"Every policy proposed by AC or NZ govt. is squarely aimed at incentivising sprawl in Auckland."
And then...
"The way to fix the issue of sprawl is to fulfill the election promise to remove the RUB."
Hi nymad,
How are you? I was left speechless during our last discussion when you contended reducing costs of redevelopment would increase the cost of redevelopment. I still do not know how to respond to that.
As for today, the Auckland RUB prohibits development at places like Takanini 25km from the city. The absence of any RUB constraint in places like Clarks Beach allows for the building of housing 50 km from the city. With this disparity Auckland encourages people to build further away. If we end the disparity people build closer, less sprawl. Pretty simple, but I expect you will miss the point entirely.
PS - removing the RUB is proposed government policy, aimed at reducing sprawl.
Speechless because you didn't understand the point - the discussion was based on the redevelopment premium which is inherent in any development assessment. (Kate actually inadvertently mentions it above in another comment).
I said reducing the cost of the land at the fringe wouldn't hardly affect the cost of land at the centre (they aren't necessarily substitutes and no one knows what the true value decay function is). Whatsmore, if it does, it reduces increases the redevelopment premium in the central suburbs - so, then greenfields at the fringe becomes the preferred development channel and that means sprawl.
You misunderstand what sprawl is. You assume Auckland is monocentric, which it is not. Pretty much all new zoning is for (relatively) higher density developments around independent economic hubs - Warkworth, Puke, etc. I'm not convinced about the Kumeu fiasco, but time will tell. As soon as you accept this, you see that the policy is not at all sprawl inducing. It is actually incentivising more compact development and higher density labour supply in key growth areas.
Removing the RUB cannot be considered as anything but sprawl incentive due to the fact that it is the antithesis of what I mention - it places no requirements on planning, density, infastructure, etc.
But hey. You and Dale Smith can keep up your futile arguments and argue with the experts.
When the cost of land falls, more people are willing and able to invest in that land to redevelop it - so the premium of redevelopment increases. As costs reduce and more people are willing to invest in redevelopment, we get more redevelopment and the premium increases. Having the premium increase due to a fall in costs is great news.
LA is a multi-nodal city, Auckland is being transformed into a multi-nodal city. And in few short years Auckland is starting to resemble a mini-LA. Being a multi-nodal city is a precursor to epic level sprawl.
Again. Wtf.
No. As the value of land decreases, the deadweight loss of redevelopment effectively increases. On Greenfield land there is no opportunity cost of redevelopment. On brownfields there is.
Only idiots would redevelop on brownfields given this. And this is exactly why increases in land supply almost certainly result in fringe sprawl and not increased density.
I think we are talking about different things, the redevelopment premium is not the cost of redevelopment.
https://cdn.auckland.ac.nz/assets/business/about/our-research/research-…
Sorry, I have been misnomering it - the intensity ratio is what I mean. Which is generally what proxies for the redevelopment premium.
The redevelopment premium is intrinsically linked to the expected return on investment and is analogous to the relative cost of redevelopment arising from factors such as opportunity cost of foregone rent, costs of demolishing, etc.
The developer doesn't suddenly develop because nominal cost of land has decreased, he does it on the basis of his expected return.
Given homogenous land, the value is effectively the same, regardless of the improvements. That paper details the way in which relaxation of planning laws pumped up the value of low intensity land non-uniformly - i.e. properties that had low ratios of improvement to land value increased in value significantly over others with high intensity. The effect of which is to imply a larger desire for low intensely developed property.
Okay we were talking about the same thing. A ratio/percentage of total cost based on the fixed cost of removing built structures - it will increase if total costs decrease. When the land cost decreases it is fair to say that the developer's expected return increases, because total costs are reduced. Now all things being equal in terms of unit returns this will result in more sprawl, but centrally located living is commands a price premium over remote living (absent costs people prefer central living).
So if you wanted to build some the worlds leading sprawl what would you do? Would you elevate the heck out of central land cost? Incentivise vacant land usage? Open up vast swathes of land supply in adjacent towns? All of the above?
"When the land cost decreases it is fair to say that the developer's expected return increases, because total costs are reduced."
No, not at all.
That assumes the developer faces no competition.
The developer already owning land faced with decreasing land value faces an increasing opportunity cost of redevelopment should it not be bare.
Likewise, the prospective developer cannot arbitrage any declining land values because they purchase at a price commensurate with the expected return in a competitive market.
Yes there are distortions arising from centrality, etc and that implies a lack of substitutability in land which further reiterates the limited impact that releasing land at the fringe will have on prices at the center.
No, it assumes the developer will face greater competition as land prices fall. You reckon the expected returns will decrease as costs fall - interesting.
But interestingly you have proven the current council policy of massive over supply of land on the fringe is producing sprawl. Many times you have pointed out that the land being opened up in the exurban areas lacks substitutability and therefore (as your reasoning shows here) it must create sprawl.
We should therefore open up land with greater substitutability, land closer to the city.
Centralised land tax won't be efficient. Even foreign buyer ban can be easily gotten around by using companies, trusts or proxy owners. Instead they should do the Aussie thing and tax absentees, investigate ultimate holding companies and trusts, and question how a 76 year old retiree with $500 to his name came up with $1.5m to buy something in Parnell.
"local government tax on vacant residential land" Yes totally support that get on with it. Not sure if you've noticed but the empty lots of homes that have fallen in to disrepair and then had to be demolished due to being left empty by non resident buyers is growing especially here in AKL.
Having a tax like this of a 'Empty Homes tax' will help to free up these empty lots in our larger cities.
CJ099
Agreed.Measures needed to flush out land bankers.
Also measures to discourage speculators hoarding houses while waiting to flip for capital gain.In the interim they do not want the hassle of tenancies.Hence the phenomena of "ghost houses" which exacerbate shortage of rental stock
CJ agree- some focus on house - banking as well.
Empty homes set up by foreigners in the past as the new Swiss Bank account are a blot on the landscape, especially in certain areas of the N Shore. You can spot them easily - expensive homes with run down gardens, blinds drawn and messy letterboxes.
Kiwi-o
Sure you have correctly identified the limiting factor? Reminds me of a certain Demographia person - correctly identified house cost to income ratio, correctly said it was a problem, then resorted to belief when identifying the reason.
Doesn't matter what you do now with LG, their 'business model' is broken and will stay that way. Remember the word 'triage', and watch things unfold
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