Back in November, The AFR reported that first-home buyers (FHBs) were desperately fighting for land in Melbourne as the city’s population soars.
Then in December, The AFR reported that the median price for a housing lot in Melbourne had hit $318,500 – up 31.5% over past 12 months – driven by the influx of new arrivals into Melbourne.
And in June, The AFR reported that Chinese developers have taken a “virtual stranglehold” of Melbourne’s land supply pipeline, “acquiring more than two-thirds of all big greenfield land parcels offered for sale in the past 18 months”, thereby driving-up prices.
Now we have a textbook example of why capital city lot values have become so expensive, with three Victorian brothers to pocket $50 million by selling the family farm to a developer in the Melbourne suburb of Mickleham:
Back in 1935, the Troutbecks forked out 500 pounds for a 25 hectare patch of land in the Melbourne suburb of Mickleham, a 45 minute drive from the CBD…
But now their modest weatherboard home and sprawling dairy farm is up for sale and with a number of developers already eyeing off the property, the Troutbeck brothers are expecting a $50 million payday.
Speaking to 7 News, Keith Troutbeck said his dad knew long ago the property was a good investment.
“Dad said, ‘One day, one day you’ll come into a fortune but don’t sell it before you do,” Keith said. “It’s taken a long time to get there hasn’t it?”…
The three elderly farmers, aged between 70 and 82, have worked on the dairy farm their whole lives but are due to close up shop and become multi-millionaires instead…
The sale, which will close next month, is expected to fetch the brother at least $15 million each, a figure Edward initially thought was a “joke”.
“Forty five years I’ve been playing Tatts Lotto and never hit the jackpot,” he said…
When sold, developers are expected to divide the land up into hundreds of residential plots for first homebuyers.
The only reason why the Troutbeck family’s land is worth so much 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 could 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 this case, if the property was worth, say, $5 million as agriculture and $50 million as a housing estate, to get approval for the housing estate the developer would have to pay 0.75 x ($50m – $5m) = $33.75 million. They would account for this and subtract it from their payment for the site, so in the case the Troutbeck family would only get $50m – $33.75m = $16.25 million – still a handsome payday for effectively doing nothing. However, $33.75 million dollars that is pure windfall would now flow to the public.
As an ancillary reform, Melbourne’s urban growth boundary (UGB) should also be removed. This would raise competition and contestability in the land market, and prevent landholders like the Troutbeck family 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).
Whatever your perspective, the existing setup is clearly not working effectively, resulting in rapid land cost escalation that is ultimately borne by home buyers and the younger generation, all for the benefit of a few lucky landholders effectively handed monopoly-style rents courtesy of the state government.
