Victoria’s Ball-and-Chain Taxes Drag Down Development

As Victoria tackles its ambitious construction targets driven by an acute housing shortage, property developers are sounding the alarm about a tax regime they say is throttling investment and sending capital fleeing across state borders. With multiple layers of property taxes, surcharges and levies creating a heavy burden, industry experts warn the state is becoming “uninvestable” just when new housing is most needed. “Governments think the taxes applied to property will create additional revenue, but what it’s doing is driving people away and driving investment away from Melbourne, which is counter-intuitive,” Molti managing director Ben Teague tells The Urban Developer. The Urban Development Institute of Australia (UDIA) reports property taxes now constitute more than 40 per cent of the Victorian Government’s total tax take—a dramatic increase from 18 per cent when the Andrews government came to power in 2014. Charter Keck Cramer data shows Melbourne will add just 4163 homes for sale this year—the smallest number since the global financial crisis and less than half the new apartments needed to meet demand over the next four years. As Premier Jacinta Allan’s Government plans to stimulate construction of 360,000 additional homes tied to Melbourne’s train network, developers question how this can be achieved in the current tax environment. Resimax Group development director Callan Ainsaar says Victoria’s tax regime “has contributed to an outflow of capital into other markets, particularly Queensland, South Australia and Western Australia, which have been the beneficiaries of increased investment into housing”. “The Australian Centre for International Economics has reported 43 per cent of the cost of a greenfield home in Melbourne goes toward regulatory costs, infrastructure charges and tax,” Ainsaar tells The Urban Developer . “As a result, Victoria is suffering its worst property downturn in over a decade.” ▲ Molti managing director Ben Teague. Municipal Association of Victoria data show 119,536 homes in Victoria have planning permits but haven’t proceeded to construction—86,619 of these are in established Melbourne suburbs. Teague says council levies and contributions are particularly problematic. “The levies are really challenging in Victoria. Open space contributions for sites are so much higher than in other states,” Teague says. He says that a project incurring around $150,000 in infrastructure contributions in Brisbane would face significantly higher equivalent fees in Melbourne, “which has a big impact on project viability”. In Stonnington Council, developers pay 8 per cent of the land valuation at Armadale, and 5 per cent at Toorak for open space contribution fees. “It’s crazy. You’re looking at very large numbers purely for open space contribution fees,” Teague says. Carpe Group co-director Stuart Kacir says land tax is particularly burdensome. “We pay a lot of land tax with all of our sites … we’re in and out of project within three years, so we get hit with sort of three years’ worth of land tax and it’s not pleasant,” Kacir tells The Urban Developer . “And it’s jumped up by 100 per cent more in the past couple of years.” The compounded effect of various taxes creates significant cost pressures, Kacir says. “About 30 to 40 per cent of our total development costs consist of fees, taxes, levies and surcharges and other things … that all just gets passed on to the consumer.” ▲ Resimax Group development director Callan Ainsaar. Teague says pulling back on land tax and the windfall tax might get more developments off the ground sooner. “It’s going to be a hard thing for them to do because they’re looking at their Budget and thinking, ‘We need to create this revenue’ … but they’ve got to take a long-term view.” UDIA Victoria has identified the Windfall Gains Tax as a major impediment to housing supply. “Windfall Gains Tax is a blocker, not an enabler, of new houses and new communities. It is extraordinarily difficult to calculate and holds up the delivery of much-needed homes,” a UDIA submission says. “We’re realistic about the Government’s Budget position,” UDIA chief executive Linda Allison says. “We’re not calling for the abolition of taxes. But what is unrealistic and unreasonable is for the Government to double down on a raft of property taxes and expect activity centres and new communities to grow.” The Property Council of Australia (PCA) is calling for extending off-the-plan stamp duty concessions until at least 2027, removing foreign investment surcharges for three years, providing exemptions from the Windfall Gains Tax for large-scale housing projects, and implementing tax relief for active development projects. For foreign investors, the situation is even worse with the Absentee Owner Surcharge recently doubling from 2 per cent to 4 per cent. The PCA notes “foreign investors in the housing market in Victoria have been hit with a range of regressive additional taxes and surcharges, which are hindering the supply of much-needed new housing”. ▲ Carpe Group co-director Stuart Kacir. The exodus of property investors is confirmed by Australian Bureau of Statistics data showing investor loans in Victoria comprised just 30.6 per cent of all housing loans in April, compared to 40.5 per cent in NSW and 37.6 per cent in Queensland. Irongate chief executive Graeme Katz told The Urban Developer the foreign land tax surcharge made the numbers unworkable for those seeking offshore capital for development projects. “Victoria is uninvestable at the moment, because if you’re looking at a like-for-like basis after tax, your returns just aren’t there,” Katz said. Charter Keck Cramer chief executive Peter Hutchins says the 2016 abolition of off-the-plan stamp duty concessions “killed the market”. Ainsaar says a “reduction in land tax, a freeze on new property taxes and increases to existing taxes would make the most significant difference to development and acquisition decisions”. “We would like to see future stamp duty reforms to include detached housing, rather than just apartments and townhouses, as this is still the type of housing that a majority of Victorians prefer.” Kacir has a surprising perspective on the land tax situation that few in the industry highlight. “It’s actually opened up some opportunities for us,” Kacir says. “Sites we bought recently have come to market because the families just don’t want to afford to hold the land anymore ... they might be asset-rich, cash-poor and they just can’t keep stumping up a couple of hundred grand a year on holding these sites.” While the Government maintains its focus on planning reform as the solution to housing shortages, Teague says this won’t suffice. “The planning side is important but changes here don’t necessarily mean you’re going to be able to build it. You need to unlock it with funding, it needs to be a viable project,” Teague says. Teague points to “luxury built-to-sell [developments] in blue-chip locations” as those still performing well despite current conditions. This resilience stems from multiple factors, he says. Many buyers are cash-rich downsizers or ‘right-sizers’ less dependent on financing, allowing them to remain in preferred neighbourhoods regardless of interest rate fluctuations. These premium markets may benefit from pricing elasticity, though Teague says “it ’ s still very difficult to make things work”. “The limited supply of new multi-residential offerings in these desirable locations further supports viability,” he says. ▲ Inside the penthouse at Molti's Ocean House Hampton project. Charter Keck Cramer national executive director of research Richard Temlett confirms this assessment, saying that it now costs $4200 to $4500 a square metre to build an apartment, with total costs needing to remain around $15,000 a square metre for a project to be viable. While Victorian Treasurer Jaclyn Symes has left open the possibility of continuing stamp duty concessions beyond this year, she has made no firm commitments to broader tax reform. “The stamp duty changes again sort of help this market,” Kacir says. “It’s nice to have but that’s not the main reason downsizers are buying. “But that’s running out at the end of the year which is a shame because I think the industry needs all the help that it can get.” Despite these challenges, Teague believes “all the fundamentals for Melbourne and its future are there and for it to go well—it’s just that the sentiment is not great right now”. “Just pulling one lever can make all the difference as it can create that confidence within the market,” he says. “Changes to planning is not the be-all end-all solution—it is helpful but there’s more to it—high taxes are driving investment away from the state.”

Victoria’s Ball-and-Chain Taxes Drag Down Development

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