By Bernard Hickey
The grand hope of home buyers and Governments alike is that the Unitary Plan notified last week will unleash a boom in housing development to try to swamp the market with supply and suppress prices.
Instead, for now, it has unleashed a boom in ads encouraging buyers to scoop up the just-rezoned land and sit on it as 'land banks.'
Here's an example being advertised this week for a 3.33 ha lifestyle block in Alfriston that is set to be rezoned 'Future Urban' in the Unitary Plan.
"Investors can enjoy rental income whilst land banking or your family can enjoy a relaxed country lifestyle whilst you land bank," the advertisement proclaimed in a listing titled: "Land banking at its Best in Alfriston!"
"Urbanisation is closing in, get ready to tap into Auckland's growth," it concluded.
Another advertisement for an 818 square metre section in Glendene pointed out the section had received resource consent for two houses: "Make this Your Next Project with Land Banking Opportunity," it proclaimed.
On Wednesday there were 1,062 listings on Realestate.co.nz for bare land, including sections and lifestyle blocks, that used the phrase 'land bank' in the advertisement.
This latest frenzy is understandable. It's all about price expectations and holding costs.
Auckland land prices increased eight fold in the 18 years to 2014, making it the best investment choice in the history of New Zealand investment. A block of land bought for NZ$1 million in 1996 would have produced NZ$7 million in tax-free profit over that period, simply for growing grass. There was no stamp duty for buying it and not many ongoing costs for holding it. Auckland's region-wide shift in 2013 from rating a property on land value to rating it on capital values has accidentally worsened the low holding costs problem.
Ultimately, as Building and Housing Minister Nick Smith said this week, the only way to change the land-banking behaviour is to zone so much land for urban development that prices stop rising because of supply shock. He points to the experience in Christchurch where a surge in housing and land supply during the rebuild has stopped prices rising quite so fast, and last year they actually fell a bit.
The trouble is Auckland is different.
Its population is rising at a rate of more than 2% per annum from migration alone and there is already a shortage of 40,000 houses.
There is also plenty of capital surging into Auckland land prices from overseas that has also not been such a factor in Christchurch. Much of this overseas capital also seems happy to sit around for a long period without earning much from rent or development. It's as if it really is a land bank -- a store of value rather than a generator of cash.
The chances of any sort of fall in prices Auckland, let alone a slowdown, seems much more remote, at least in the minds of potential land-bankers. And their expectations are the crucial component in this latest frenzy of land-banking.
The only way to truly change price expectations is a price shock, and the only way to change holding costs is to apply a tax. There are a couple of options, and both have been recommended to the Government at various points in the last eight years. They would both deliver the price shock and increase the holding costs.
The 2009-10 Tax Working Group that proposed a GST-hike -for-income-tax switch also proposed a land tax-for-income-tax switch. John Key rejected the land tax because the 1% tax suggested would have led to an immediate 17% drop in land values. Labour has promised to reconvene the Tax Working Group if leads the Government next year, and has said it would consider such a land tax as part of a wider review of taxing capital. The up-front price shock of a land tax and the ongoing holding costs should scare the living daylights out of land bankers.
Another option is encouraging Councils to levy targeted rates that capture the 'value uplift' from any zoning changes. This is essentially a tax on the capital gains created by a Council redrawing the lines on a map. This idea was proposed last week by the Productivity Commission in its draft report on Better Urban Planning. Council would essentially include an extra rating charge for those areas where the land values had risen sharply because of a public policy decision. It would kill two birds with one stone by encouraging housing development and paying for the infrastructure needed to underpin those new houses.
Both a centrally-levied land tax and targeted rates for zoning or resource consent-related value uplifts would be more than enough to stop the land bankers in their tracks. They are conventional policies used widely and regularly overseas. New Zealand has the lowest tax rates on land in the developed world so we should not be surprised that land bankers abound in Auckland.
Now which politicians will be brave and honest enough to propose either or both types of taxes?
A version of this article also appears in the Herald on Sunday. It is here with permission.