The Victorian government recently announced several proposed changes to land tax, which will come into effect from July 1, 2023, if they are legislated. These are designed to help bring the state economy back into surplus from the debt incurred during the pandemic. There is significant pushback from industry lobby groups, but the short story is that, while inconvenient, this is going to be a nothing sandwich when it comes to the effect on the overall market. Any increase in land taxes will be easily offset by the increase in rents by several orders of magnitude, having soared 14.6% in the last 12 months. We expect 2024 to deliver another year of double-digit growth in rents before rent increases begin to taper off to mid-single digits in 2025. Let’s have a look at the land tax changes.
From 1 January 2024, the tax-free threshold for general land tax rates will temporarily decrease from $300,000 to $50,000. Those who pay land tax will attract a temporary additional fixed charge starting at $500 for landholdings between $50,000 and $100,000. There will be a $975 fixed charge for landholdings above $100,000, and the tax rates will temporarily increase by 0.1% for both general and trust taxpayers with holdings above $300,000 and $250,000, respectively. Land taxes are tax deductible, and these changes are estimated to raise $4.7 billion to repay COVID debt over four years.
It is expected these tax changes will apply until 30 June 2033. The existing land tax exemptions will continue to apply. This includes exemptions on the primary place of residence, primary production land, land used by charities, and residential care facilities.
The government has argued that the changes to land tax are necessary to raise revenue. The government’s only way of ‘making’ money is by taxing its constituents in one form or another. The other side of the argument is that the increase in land tax will make it more difficult to buy a property, thereby decreasing the demand for rental property (in the middle of a rental crisis), which ultimately ends up with the costs being added to rents. I imagine that if you were able to find decent time series datasets for all the drivers of the property market, then plug them in and run a multivariate regression, you would be able to confirm that there’s a positive correlation between increased land tax and higher rent prices. But the effect would almost certainly be so small that it would be inconsequential.
The boring truth is that the rental market is going to get tighter regardless, and in most cases, the rise in rents has already offset the land tax charges by several orders of magnitude. It also won’t change the long-term capital growth of the market since the biggest driver of asset prices, by far, is central bank liquidity. Another way we could look at it is to find an analogue market. For example, in California, all property (even your primary place of residence) is subject to around 1% tax every year. This is calculated on the combined value of the building and the land rather than the land alone. Yet long-term property prices there continue to track the growth rates of Sydney and Melbourne extremely closely. This won’t stop the media from reporting on it until people get bored and move on to the next topic though. For us, the long-term investment thesis still hasn’t changed and we expect the property market to continue to push higher until the first rate drop, then move into boom time conditions as rates begin to fall.