What if higher, expanded land taxes helped to lower the costs of housing?

Developers and property lobbyists argue that increasing land taxes will drive up housing costs. This is a self-serving myth.

The reality is that broad-based land tax acts as a powerful lever to unlock supply and stop land banking/land hoarding.

Developers keep housing prices high in a few key ways:

Firstly, developers manipulate land supply and land release. Contrary to their public claims, developers do not release land based on how fast they can build, but on how fast they should sell to keep prices high. This has been demonstrated through a comprehensive study of nine major master-planned communities. The study found that after an average of 9.5 years, 76.2% of the land bank remained vacant.

A minute of thought makes it clear that developers would never (as they like to claim) flood the market with enough supply to lower their profits. And this is what the data demonstrates: developers “drip feed” supply of new houses to ensure that their profits remain stable or increase.

Secondly, when demand does drop, developers developers don’t lower prices to sell more; they slash supply to create a “scarcity trap”. This ensures the pricing floor and their profits remains intact. The Prosper analysis shows that during market downturns, developers slash their supply rates by nearly 50% rather than accept lower profit margins. This is how developers enforce a pricing floor, ensuring housing remains expensive even when downturns mean that housing should be getting cheaper.

Thirdly, developers have enormous, almost monopolistic pricing power. Housing is priced on what the market can borrow, not just their input costs. If they could charge more, they already would. This is because developers operate on a “residual land value” model, where they start with the maximum price a buyer can pay, and subtract their construction costs and required profit margin. Whatever is left is what they pay for the land. If this was not the case, and developers priced housing on input costs, then they would continue to build and sell during downturns, accepting lower margins to clear inventory. The evidence shows they do the exact opposite.

Finally, the current tax settings reward developers to sit on land without developing it. As a city expands, population growth and new public infrastructure, such as train stations or schools, automatically increase the value of surrounding land and often justify higher density approvals in the future. This is called the “option value” — the financial benefit that developers get from waiting rather than building immediately. Very often, developers can make more profits by not developing immediately, and artificially restricting their own developments today can also preserve the land’s potential to capture these future “infrastructure gifts” and capital growth.

The perverse incentives that exist for developers to hoard land can be countered through a broad-based land tax. This combination of land tax and value capture is something that the Victorian government announced in relation to the Suburban Rail Loop recently. It is also used in other states in Australia and around the world, e.g. in Hong Kong, London and Singapore.

Higher land taxes increase the cost of waiting. Presently, holding holding undeveloped land is cheap and incentivises developers hoarding the land to allow for the value to increase. Increasing land tax increases the “cost of waiting,” changing the math for landowners and developers, so they develop the land, and develop it faster, rather than banking it for future capital gains.

Land tax also significantly increases the fairness of land value increases. When the government builds a train line or rezones a precinct, land values skyrocket. This creates a lottery where wealth created by the community is privatised by the landowner through luck, rather than working and earning it.

Currently, we give away billions in rezoning windfalls. When a local council rezones land (e.g. from rural to residential), that massively increases the value of the land without the landowner doing anything. It is effectively free wealth solely created by the public.

The ACT is one of the few jurisdictions that captures this through their Lease Variation Charge — a policy I regularly defended when I led UnionsACT.

Pricing these rezoning decisions properly increases the fairness by ensuring the public benefits from the wealth created by the rezoning decision, rather than all that wealth going to the lucky developer or landowner.

Australia’s tax system is currently upside down. We heavily tax productive behaviour, like working, while barely taxing land wealth or rentierism. This is reinforced by the culture-industry, shows like The Block, that turn housing and shelter into speculative commodities. The consequence is the creation of a “false need” — the desire to own an asset for speculation rather than for living. Under Thatcher (and Howard), this was the express ideological goal: integrate working people into the capitalist system of speculation and financialisation, and tying their wealth to the endless unearned capital gains increases.

An argument from developers and their friends that I’ve personally witnessed (read the comments!) is the “pass-through” myth. This is the false idea that if land tax goes up, then developers will pass the costs through to home-buyers or renters.

This is a fallacy. Property development does not operate with a “costs plus” model (i.e. the value charged to a home-buyer or renter is not the costs of building or providing the home plus a bit of a profit margin). Rather, developers (and landlords) charge “what the market will bear” — they charge the maximum that they can, regardless of what it costs them.

Because a land tax does not increase the homebuyers’ or tenants’ ability to pay, the landlord must pay out of their surplus.

Land rent and unearned capital gains from owning land is also the primary vehicle for wealth concentration in the 21st century. The barrier to entry for housing is now so high that it is calcifying class lines, creating a new Australian landed gentry and a permanent renter class. The consequence is toxic wealth inequality and a broken social compact.

I should finish by distinguishing between developers that actually build, vs those developers who actively hoard, land-bank and focus on rentierism.

A stronger land tax actively benefits the genuinely productive developers while discouraging the parasitic rentiers who unproductively siphon capital growth and profits through unproductive means. Builders for example should support increased land tax; land speculators obviously hate it.

To fix housing affordability and supply, we need to increase land taxes and windfall gains taxes — in Victoria the Suburban Rail Loop package is a good start. More please! This will penalise land hoarding and incentivise developers to actually build housing quickly rather than drip-feed it.

• More information and reading: Prosper Australia