Recently, it was reported that the median price for a housing lot in Melbourne had passed the $300,000 mark, driven by the influx of new arrivals into Melbourne pushing up against sluggish land supply:
Melbourne’s long-held status as the country’s most affordable new housing market is under severe threat with median lot prices hitting $300,000 in October, pushing the total cost of building a new house to well over $500,000…
According to red23, which analyses lot sales across all active projects, over the past 12 months median lot prices rose 24.6 per cent (or $59,000) – more than double the 10 per cent increase in existing Melbourne house prices over the same period. Five years ago the median lot price was $200,000.
Over the past few weeks, we have witnessed some classic examples of why capital city lot values have become so expensive, with farmers on Melbourne’s fringe netting multi-million dollar windfalls as their farms are rezoned residential.
Here’s Commercial News:
A huge farm in Melbourne’s north could one day be home to the city’s newest suburb, after its longtime owners put the property on the market.
The 600ha of land known as “Deloraine”, at Beveridge, about 40km north of Melbourne’s CBD, could accommodate 6000 residential lots, agents say, along with schools and public parks once it is eventually rezoned.
The farm has been owned by the Laffan family since 1964, when they paid a reported £64,000 for it.
Today, the farm is tipped to fetch in the hundreds of millions of dollars, and would be worth billions to developers after rezoning…
And here’s The Age:
A Tarneit family who held onto their enormous farm, while neighbouring blocks were in recent years acquired by some of the country’s biggest property players, are this week celebrating a circa $80 million payday.
The 60 hectare parcel at 1135 Leakes Road, about 25 kilometres west of the Melbourne CBD, is covered within the local council’s Riverdale Precinct Structure Plan (PSP), which aims to replace rural blocks with low-density housing.
This property was offered with a masterplan proposal to be subdivided into 841 lots.
At present, the market value of a retail plot in the area is more than $300,000 – meaning the buyer who is acquiring the property, a local developer, is also set for a windfall.
Let’s be clear, the only reason why these farms are worth so much now is because the government has rezoned it residential. Therefore, it makes policy sense for the government (taxpayer) to capture some of this value uplift.
Dr Cameron Murray explains how this should be done in his book, Game of Mates.
Essentially, the government would capture 75% of the value gain, payable upon approval of the development application (i.e. approval is conditional upon payment).
So, in the first example above, if the property was worth, say, $30 million as agriculture and $350 million as a housing estate, to get approval for the housing estate the developer would have to pay 0.75 x ($350m – $30m) = $240 million. They would account for this and subtract it from their payment for the site, so in the case the land owner would only get $350m – $240m = $110 million. Therefore, a quarter of a billion dollars that is pure windfall would now flow to the public.
As an ancillary reform, I would also eliminate Melbourne’s urban growth boundary (UGB). This would raise competition and contestability in the land market, and prevent landholders like the above from charging monopoly-style rents. A developer would be free to obtain a cheaper site further afield (i.e. across the old UGB), thus ensuring cheaper land values (and lower cost fringe homes).
Regardless, the existing setup is not working effectively, which is resulting in rapid land cost escalation that is ultimately borne by home buyers and the younger generation, all for the benefit of a few wealthy landholders.