The great Australian town planning give-away

It works like this. Property developers buy land with the accompanying right to use it for a certain purpose, which is typically prescribed in the local council planning documents. They then lobby their mates in power to change the prescribed uses in the plan, in the process giving them a new property right which they did not pay the previous owner for. Nor did they pay the government for that new right. It was a gift.

But in Australia’s beloved capital city this game of giving planning gifts to your mates doesn’t work. There is no gift. In the Australian Capital Territory, if you want more property rights, you pay the government for them.

The ACT government achieves this in two ways. First, it has a public body that plays the role of land developer, the Land Development Agency, which converts land into urban uses, invests in infrastructure, and sells the new plots of land at market prices. When it sells this land it comes with the requirement to build on that land within two years in accordance with the purpose clause of the land title. By acting as the developer, 100% of the windfall planning gains goes to the government in manner that is economically efficient.

Second, if you have land that can be developed to higher uses within relevant zoning rules of the town plan, you must pay the government a Lease Variation Charge (formerly a Change of Use Charge) of 75% of the value gains to the land from allowing the higher value use.

These two schemes earned the ACT government $164 million and $19 million in 2014-15 respectively. That’s $183 million in revenue that would be given away to land developers in other states.

So how big is the great betterment give-away occurring in other states? We can scale up the ACT data to get a good estimate of the size of this give-away happening in the rest of the country.

There are two main adjustments necessary to do this. First is to adjust for the dwelling price differences across states. While the two schemes apply to all types of land, including residential and commercial, the residential values dominate. I therefore adjust the figure by the ratio of state median dwelling prices to ACT median prices to get the price ratio. I then adjust for the number of new dwellings in other states completed in that year to get the dwelling ratio. I then calculate the total scaling factor as price ratio times the dwelling ratio. Then I multiply this by the ACT betterment revenue and sum across states.

The result is summarised below. And the answer is $11 billion.

That sounds right to me. $11 billion is what the Australian states gave away to landowners and property developers in 2014-15, that they could have recouped had they had the system of betterment taxes that the ACT has had since 1971.

As a final point, you might think that the degree to which the ACT government controls land uses might have some effect on slowing new investment in dwellings. This is not the case. The ACT has the largest homes in the country, and has the same bedrooms/person ratio (a measure of dwelling stock per capita) as Queensland, slightly behind Tasmania, but in front of NSW and Victoria. While I remain cautious about the ability for such systems to be gamed, I see the current system of private landowners taking planning gains and determining the new supply even more prone to political corruption and favouritism. Rezoning gifts don’t even come with obligations on developers in other states to actually build what they promise. They can sell the land with the new rights the following day and cash in their gains.