Explainer: Do taxes on property cause high house prices? No.

Housing industry lobbyists in Australia and abroad often claim that property-related taxes comprise a large and growing share of the price of new housing and are hence pushing up the market price of new and existing dwellings.

Land taxes, stamp duties on property transactions, GST on value-added investments, and other fees and charges are generally included in this analysis, as are many inferred price effects that are assumed to be due to regulations.

This note explains four reasons why the claims of this tax summation approach are not valid.

  1. Many of the included costs are not taxes on new housing.
  2. Adding indirect taxes double counts.
  3. Assumed price effects are implausible.
  4. Taxes on property assets reduce market prices, not add to them.

A persuasive tax story

Lobbyists for property owners and developers often circulate in the media personal stories about the burden of taxes on new home buyers. Behind these persuasion efforts typically lies an economic analysis of taxes and new housing by CIE economic consultancy based on a “tax summation” approach (and often not publicly available).

For at least two decades, the Housing Industry Association (HIA), Property Council of Australia (PCA) and the Urban Development Institute of Australia (UDIA), have used this strategy.

Three of these tax summation reports are summarised in Table 1. The estimated share of the median new dwelling price that reflects total taxes was 24.6% in Sydney in 2009 and 50% in 2019. In that time, Sydney dwellings increased in price from $663,000 to $841,000. Total estimated taxes related to the production of new dwellings went from $163,000 to $417,000.

The economic reports that sit behind these claims use a tax summation approach. All taxes, fees, or charges that are related to property ownership, transactions, or housing production, are added together and compared to the market price of a new dwelling. Table 2 shows the typical inclusions in the tax summation approach. The included taxes and charges are often levied on a different property-related activity (known as the tax base).

Indirect taxes are an unusual inclusion in the tax summation approach. For example, in their 2003 report, HIA included payroll taxes paid by construction and development companies as a tax on new housing. In a 2015 report, the cost of broadband connections was included alongside an assumed cost of complying with building codes. GST on the value-added in property development is also often included as an indirect tax on new housing.

One of the largest components in the tax summation approach is a price-effect due to regulations. For example, zoning regulations are assumed to add significantly to the price of developable sites. Potential delays in planning approvals are assumed to add risk and require higher margins for developers, with this additional margin counted in the tax summation approach.

The overall argument is that if these taxes and charges were removed, the market price of both new and existing dwellings would fall by the total tax amount.

International example

In the United States, the lobby group for homebuilders, the National Association of Home Builders (NAHB), based their recent analysis on a series of survey questions that required builders to estimates the percentage of costs due to comply with particular regulations. These percentages were added together and applied to the market price of housing. In 2021 the typical new home was $394,300, the sum of surveyed percentages was 23.8%, and the implied tax burden was $93,870.

Lacking economic sense

Not a tax on producing new housing

Land taxes and council rates paid by property owners are not taxes on the production of new housing. They are recurrent taxes on the ownership of property whether housing is built or not. They are therefore not a cost of producing new dwellings.

In fact, building and selling dwellings faster reduces the amount of these taxes paid. These taxes incentivise faster new housing development.

Indirect taxes

It makes little sense to include some of these identified indirect taxes, like, payroll taxes for developers and builders. Just as the taxes paid on wages by the workforce would not be included, nor the GST that the workers’ pay when they buy lunch.

Because the economy is circular in its exchanges (money flows between households and businesses and back) if you add indirect taxes from supply chains your summation will double and triple-count (and more) taxes paid. If all industries took this approach to adding up the taxes they pay, the total would be more than all taxes paid across the economy.

Assumed price effects

The largest components in the tax summation approach are the assumed price effects of zoning, delays, and building codes.

For example, HIA’s 2011 report assumed that $40,381 was an “excessive land price” for each dwelling site, being 29% of their total summation of $141,545 in taxes associated with new dwellings. This approach amounts to relabelling of property asset values as regulatory costs.

The cost of delay attributed to planning also relies on questionable assumptions. HIA’s 2011 report attributed $38,094 to delays. Several assumptions compound to generate such figures.

1. The time taken to approve an application means new dwellings are sold slower than otherwise would occur.
2. The choice of what planning application is made is irrelevant. Yet applicants choose whether to apply for a project design that is likely to be quickly approved or one that is likely to not be approved or involve time-consuming processes.
3. That the choice of when to make a planning application is unaffected by the time taken to approve. If property owners know in advance the time required, they can apply sooner and factor this into their project schedules.

If these assumptions do not hold, then there is little economic meaning in these cost estimates.

Major flaw: taxes reduce asset prices

Some taxes and charges are directly related to developing housing, such as infrastructure contributions. In the build-to-order Australian housing market, the stamp duty paid by the buyer of a new home is also arguably a tax triggered by the production of new homes.

It is important to note that stamp duty and GST are levied as a percent of value and only rise if the value rises. Thus, they are not contributing to price rises, but are the result of them.

But more importantly, since property is an asset that is priced based on expected future returns — be it a development site or a new dwelling — the known additional costs that come with owning the asset reduce its market price rather than add to it.

Tax obligations reduce the net return of the asset. Hence the market value of an asset will be lower to account for those tax obligations.

This means that, for example, because buyers know they must pay stamp duty on property purchases, they will reduce how much they are willing to pay the seller by the tax amount so that the total cost reflects their willingness to pay for that asset return. If stamp duties were removed, buyers would spend that tax amount on paying the property seller more instead.

The same logic applies to infrastructure charges. This additional cost is factored into the price paid for a site by a developer. Higher charges reduce the value of developable sites but do not affect the price of new housing, which is instead prices based on its economic returns, not its input costs.

This fact is so uncontroversial it has persisted from the classical economists of the 18th century to modern industry practice manuals and financial assessment tools used in property development.

Figure 1 shows the claim made by housing industry lobbyists and the more accurate asset pricing view of taxes and their price effect. The left column takes at face value the claim that 50% of the price new detached dwellings is due to taxes, with the remainder as site value and construction cost. The next column of shows the implied logic of the price effect on housing assets if the taxes involved with property ownership, transfer and development were removed.

If this price effect was true, property industry groups have been lobbying to wipe trillions in asset value from homeowners and landlords. The more accurate view is that when taxes are removed from property ownership or development the value of these taxes is transferred to the owners of development sites through higher asset values. The right column of Figure 1 shows this effect, where taxes involved with developing housing are removed and this results in a rise in value of development sites with no effect on new housing prices.

Property owners lobby to remove taxes on development to increase their site values.

Final remarks

While it is certainly valid to examine the effect of property taxes on the incentives to convert property into new housing, the tax summation approach commonly used by property lobbyists is not valid. Taxes on property ownership are generally very efficient taxes for the very reason that they reduce property asset values and can incentivise investment in new housing.

Dr Cameron K. Murray is a Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney. He is also co-author of the book Game of Mates: How Favours Bleed the Nation. You can find Cameron’s work at Fresh Economic Thinking.

Comments

  1. No word from Industry on the increase in cost due to the high insurance premiums builders have to pay – the “Opal Tower Tax”?

  2. When there is a shortage, price is what it takes to outbid the next guy. Price = buying power of the strongest loser

    During abundance price is the cost of production.

    In Australia we have a housing shortage almost everywhere and hence Price = buying power of the strongest loser

    What is the effect of taxes placed upon building, eg a tax on bricks and timber?

    When there is a shortage, a tax on building will result in less profitable building. Price = buying power of the strongest loser, and this is essentially unchanged by the tax.

    During abundance, a tax on building will raise price by the exact amount of the tax. Price is the cost of production, and the tax becomes an additional cost of production.

    • I don’t think there’s a housing shortage. The problem is lower and lower rates which has caused all these people with equity in their housing portfolio to be able to snap up even more.

      Property speculation and favourable tax breaks are other primary issues which are causing this perceived shortage. This place turned housing into a market where people can own 15 properties as an example.

      • If there was no shortage then rents would be as low as ever. Currently rents are extremely high as a % of an ordinary wage.

        What makes you think there is no housing shortage when:

        * prices are high
        * rents are high
        * homelessness is high
        * the poorest people live in overcrowded share housing
        * there are literally NO areas anywhere in our cities (or regions) where a poor person can easily afford to rent housing.

        • Perhaps house rents have increased due to all those getting out of apartments along with escaping the cities. Believe apartment rents have dropped. Plenty probably sitting empty due to help of banks. Would like to accurately know how many still deferred and propped up.

          As mentioned, lower rates are driving the prices and you can’t deny that property speculation isn’t an issue. How many people are sitting on multiple properties? Lots..

          If they just raised rates by .5, you watch how many would come on for sale.
          Loads of investors buying regional properties also and as some have said here sight unseen. Just have a search in regional VIC and how many under offer in this climate. As a bolthole with view to future short term airbnb. It’s a real problem for regional towns also and in pricing out locals and what would have been sufficient existing stock.

          I hear what your saying and sympathetic to those homeless or looking to buy their first home. It’s disgusting what CBs and banks have done and politicians have allowed all to enrich a generation.

        • There is no shortage, the market has just been cornered by developers/investors that can not sell their new builds, so take them off the market.

          There are (tens of) thousands of new builds which developers are unable to sell, and unable to rent because they will incur a tax event, or have been bought by investors and not listed for rent.

          I know this for a fact.

          • Your message is incoherent.

            Cornering a market creates an artificial shortage. You apparently claim that developers are able to corner the market and then hold 10,000 new builds that they cannot sell at these artificial high prices.

            Firstly, if the developers have cornered the market, then this would create the shortage faced by buyers. So don’t deny the shortage.

            Secondly, if the developers have cornered the market, why would they create so many new builds? Surely a smart market cornerer would only create enough to trickle onto the market that he has cornered.

            Thirdly, if the developers have cornered the market (there is some truth in this) why are you denying the shortage instead of attacking the factors that enable such a huge market to be cornered by a few special developers? I will list some of them:

            * slow rezoning
            * slow transportation and infrastructure building
            * abysmal town planning
            * excessive immigration
            * shortage-denial

          • Cornering a market creates an artificial shortage. You apparently claim that developers are able to corner the market and then hold 10,000 new builds that they cannot sell at these artificial high prices.

            Firstly, if the developers have cornered the market, then this would create the shortage faced by buyers. So don’t deny the shortage.

            Probably because the point is that there is only a shortage of available properties due to this hoarding. Changing policies that artificially create more demand and allow these same developers to double down again doesn’t solve the problem.

            One way to solve it would be to trigger tax events on issuance of certificate of occupancy and put a development time limit on builds so they have to get the occupancy within a reasonable time.

            Secondly, if the developers have cornered the market, why would they create so many new builds? Surely a smart market cornerer would only create enough to trickle onto the market that he has cornered.

            There is talk around Canberra that a lot of the big apartment builds are funded by some money laundering from a few criminal groups with ties into the materials supply trade. The apparent idea is they fund the builds through loans but the developer has to buy their materials through the “owned” suppliers. The properties are then sold off slowly to prevent a collapse in prices and the loans are paid back slowly over time. I personally think this is a bit far fetched but I was told this by someone working with a particularly well known developer and there is a development in the city centre which a Mate of mine lived in for 3 years that had less than 10% occupancy during that time. Only 1 or 2 apartments listed as for sale at a time and a few rentals.

            Thirdly, if the developers have cornered the market (there is some truth in this) why are you denying the shortage instead of attacking the factors that enable such a huge market to be cornered by a few special developers? I will list some of them:
            * slow rezoning
            * slow transportation and infrastructure building
            * abysmal town planning
            * excessive immigration
            * shortage-denial

            There is not just some truth to this in Canberra all new estates are effectively given over to development companies, who divide them up and sell them off. They control who can build and how fast they are released, they do the town planning, infrastructure etc and they are the reason its so bad. Development in the “Stromlo” area has taken 10 years, is still less than 70% complete and mainly small blocks for houses and lots of apartments. These same developers have been screaming for years that they need to government to release more land for development but haven’t even finished the last lot.

  3. Its an interesting position to take, from what I have seen comparing US housing to Australian there seems to be a downward pressure on real estate pricing due to land taxes.

    I dont find it that surprising that proponents of real estate would claim the opposite, they need to talk their book.