Oct 29, 2023Liked by Tim Helm, Cameron Murray

In some sense the PURPOSE of regulation is to increase the value of property by diminishing negative externalities. We do not allow a tannery to be built in the middle of a group of singe family homes even though that might increase the value of the tanner's property because it would reduce the value of the properties around it. The aggregate property values would fall.

Things are trickier when the new multifamily building will raise some nearby properties (retail shops in the area) but maybe harm others (homeowners worried about street parking or "neighborhood character." How taxes may transfer some of the increase in value stemming from a relaxation of some land use or building code restriction also has to go into sorting out costs and benefits and to whom they accrue.

Expand full comment
Oct 29, 2023·edited Oct 30, 2023Author

Well put.

Distributional equity - who wins and loses - in policy change is important, and not just as a political economy barrier to reform. It's a matter of fairness.

The beauty of land value taxation as a long run policy solution is that by making the land component of the overall property purchase price lower, property ownership is de-risked. The effect of any change (including policy change) on your overall net wealth is lessened. If some change renders your land only half as valuable to occupy, then instead of losing half of your land value you face half as high a recurrent tax bill. So there's automatic compensation for change.

In that way land tax is a "risk pooling" mechanism. It's costless social insurance. There's no moral hazard (because you can't change your land value) or adverse selection (because you can't opt your land out of the tax system). Yet it protects people from risks they don't necessarily want to take on and which serve virtually no social purpose when privately borne. Land value risk is mostly unhelpful and should be mostly pooled.

That's in the long run. In the short run, with low land taxes and high land values, we can and should use more direct means of capturing windfalls and compensating for wipeouts - e.g. rezoning windfall gains taxes, very local property taxes (so net benefits are returned to the local area), saleable air rights, etc.

Expand full comment

But don't you get the ~same in a property tax system? In practice a land tax is just a property tax with a deduction for the cost (replacement cost?) of the improvements.

Expand full comment

I would put this another way. Ground rent and capitalisation are means to extract value from land, while building or developing land creates value upon it. As a general rule, we would want to tax activities that extract value, not activities that create value. In practice, a land value tax achieves this. It allows the value uplift of re-zoning to be recovered by the state, and it allows a developer to take a profit from their development - but not from sitting on a land bank.

Expand full comment

You get part of the same.

But tax on capital (improved) values doesn't fall as much when your neighbour does something nasty or rise as much when the planning system gives you new rights.

Externalities and the value of land-use rights find their way into land values, not into the value that structures add to the land.

Expand full comment
Oct 29, 2023Liked by Tim Helm

I am not trained in economics, so a lot of this goes over my head, but I think I have got the gist of what is being proposed. By the way, the Prosper Papers have been very enlightening and I highly recommend them.

So I will put on my simple town planning hat and state that, economic theories aside, ONE way (but not the magic bullet) this issue could be addressed, in tandem with what is being proposed here, is to revisit the whole concept of "currency period" (as defined in Qld Planning Legislation) or legal life of development approval before it lapses to give it common usage.

The original theory of currency period was that in the majority of cases a developer is rarely "shovel ready" at the time of gaining their Development Approval (DA). So some leeway is given in the legislation to allow the developer to do all the necessary things to start doing the development within a reasonable time period. At one stage this was 3 years, but now is 6 years. Added to this is past (appeal) case law that has allowed this 'currency period to be extended well beyond this 6 years in certain circumstances. It begs the question - how long does it require a developer to get all his ducks in a line before substantially commencing the development for which they have received some legal right???

I still think 3 years is more than adequate IF the intent is to do the development once the DA is obtained. But lets be a bit more generous and say 4 years. If after this period of time and the development has not substantially commenced and notwithstanding any legal case law - then the higher land valuations should kick in based on the expected valuate of the final approved development. They could even be ratcheted up each year by say 5% to get things moving quicker. IF the developer has been holding this land for speculation / asset valuation purposes (i.e. they have no intentions of actually doing the development) then there will come a economic break point where they will on-sell or voluntary rescind their DA. I can only see this approach working for infill development and greenfield development may require a different approach.

I've said it before and I will say it again - this (housing affordability) is an issue that won't be solved solely through economic or land use planning, but through a range of mechanisms that all need to be better aligned so they are all working in the same direction. I don't know if all the recent Housing Summits have addressed this on a holistic basis or just on a few narrow cast basis.

Expand full comment

Rental prices rose 7.7% between September 2022 and September 2023

Vacancy rates are negligible.

Plainly a case of inadequate supply.

The Victorian government, realizing that the planning system is holding up supply, has announced that it will allow the installation of granny flats up to 60 Square metres in area without a planning permit.

In Western Australia The Planning and Development Amendment Bill 2023 (Bill) was tabled in Parliament in October 2023. The Bill includes various changes to the Planning and Development Act 2005 focused on streamlining processes, reducing red tape, improving efficiencies in planning processes and decision-making to support the delivery of housing and other critical infrastructure.

The key reforms proposed within the Bill include:

The creation of a new permanent significant development pathway and supporting amendments to support its implementation including changes to ensure strategic planning and State policy framework stays contemporary and is achieving intended outcomes.

Involves a reconstruction of the WAPC.

Expand full comment

“Plainly a case of inadequate supply.”


Can’t is also be a symptom of rising rents due to rising incomes?


Expand full comment

Absolutely. But let's imagine that there are 1000 renters desperately chasing 100 houses and they start a bidding war. It's happening now. Alternatively, 1000 people unable to meet their mortgage payments and the bank forecloses and puts these houses up for auction and many potential buyers who's borrowing capacity has been cut by a third due to higher interest rates decide to go to the beach instead of the auction.

Expand full comment