Development levies, stamp duties, and housing affordability

Property developers, through their mouthpieces such as the Housing Industry Association and the Property Council of Australia, have waged a vociferous campaign against the increasingly prevalent lump-sum development levies that state and local governments impose on developers for the purpose of financing infrastructure.

The developers blame the levies for allegedly driving up prices of residential land, hence the prices of house-land packages, and demand that the infrastructure be funded instead from general taxation - the GST being often mentioned.

(Of course the developers of a new estate may provide considerable infrastructure within the estate - such as roads, footpaths, drains, sewers, power lines, water mains, and gas mains. But governments or their corporatised utilities still need to provide headworks and incidental works, which connect the internal infrastructure to the rest of the system and ensure that the system has sufficient capacity: the headworks and incidental works are the "infrastructure" that the development levies are intended to pay for.)

In opposing these levies, the developers fail to tell us that the provision of infrastructure, by itself, increases the value of the serviced land. So even if the infrastructure were funded out of general taxes, first home buyers would still pay for it in the prices of housing lots and house-land packages. The difference is that in the absence of development levies, more of the uplift in land values would accrue to the developers (or to those who are waiting to sell land to developers; this may tell us where the rest of the opposition to development levies is coming from).

The only way development levies can raise land prices is by discouraging development, so reducing the supply of developed lots.

This sort of bottleneck cannot be removed by funding infrastructure out of general taxes, because that would attach a fiscal cost to every development application so that governments would be less likely to approve development.

It can be removed only by redesigning the levies so that the developer's tax liability is less dependent on the act of development, and therefore less of a disincentive for development.

The obvious way to do this is to make the levy payable on resale of the land (not on development or permission to develop) and to make it proportional to the real increase in the land value since the last sale, with a deduction for the cost of acquiring the land between the housing lots (if this land is to be transferred to the public domain as a condition of development) and for the cost of providing the internal infrastructure. The modified levy will then tax the increase in land values caused by provision of the headworks and by permission to develop, but will not penalise the actual development.

The "modified levy" would be some fraction of the unearned real increase in the site value since the last transfer - the site value (SV) being the value of the ground and-or airspace, including any attached building rights, but excluding any actual buildings or other improvements. Accordingly, let us call the proposed levy a site windfall tax (SWT).

The increase in the land value caused by permission to develop (or, more generally, by rezoning) is commonly called betterment and is automatically included in the base of the SWT. So the SWT could replace not only development levies, but also the betterment levy imposed in the ACT.

Of course, as responsibility for infrastructure is shared between state and local governments, the revenue from the SWT would need to be similarly shared.

Another existing tax that is widely blamed for unaffordable housing is the stamp duty imposed on property conveyancing by each state and territory. If the SWT were applied to all property transfers - not just those involving development or rezoning - it could replace stamp duties.