Discussion

Introduction of Site Value based land tax at Municipal Level

In trying to improve the competitive nature of Melbourne as a global city, it makes sense to use unimproved land values as the basis for rates collection. This will require a study to determine the appropriate land values, and the relevant taxation rate that will need to apply to match current revenues. This will also solve the problem of unimproved land sitting around not being developed. In all likelihood, building starts will increase, and land will quickly be developed to its highest economic value for the community. This change is likely to be opposed by some entrenched interests, who may deserve compensation as part of any change to rates policy.

-- BrucePoon - 25 Mar 2008

Bruce, following our conversation on Wednesday evening I have had a look at previous versions and found that your land tax reform initiative is still there but in translating the "Actions" in the earlier drafts to "Outcomes" that we now have, it was expressed as an outcome of - "Space in the city is more affordable for business" in Pathway 3 under the Prosperous Goal.

I have now reformed the Outcome to hopefully better reflect your contribution.

-- SandraWade - 23 May 2008 11:58

Hi Bruce, welcome to the Future Melbourne wiki and thanks for your contributions. I've just modified your discussion topic to a heading level 2, to distinguish your point from the one above.

-- DaleBowerman - 25 Mar 2008

Bruce, I have modified to an investigation of rate systems as we need to understand the impacts (good and bad) - rather than an action to change the rating system.

-- SandraWade - 27 Mar 2008

Bruce, I have interpreted and modified your contribution to be aimed at achieving a more affordable city and using the rate system potentially as one means of this.

-- SandraWade - 04 Apr 2008 20:09

Sandra, thanks for restoring this item and modifying to suit. I expect it will generate some discussion. I intend to post additional material in support of the review.

-- BrucePoon - 27 May 2008 13:54

I have changed the establishment of a site value based taxation system to the #1 item and adjusted the responsible entity to be the City of Melbourne (thus deleting the State Government). This is based on my advice that t he municipal charge is described in s.159 of the Local Govt Act (http://www.austlii.edu.au/au/legis/vic/consol_act/lga1989182/s159.html).

The Act constrains the total revenue that can be raised from this charge but does not prevent the charge from varying from one site to another or even being negative for some sites. This means that there is nothing to stop a local council from switching to SV rating and, if desired, setting the municipal charge so that there are no losers in the transition. This would not require any change in State legislation.

-- BrucePoon - 27 May 2008 14:38

Bruce, interesting article in SMH - I will see if we have some info on vacant properties.

Will also forward this rating discussion to more expert folk in here and see if they will join the conversation.

-- SandraWade - 27 May 2008 15:33

City of Melbourne undertakes regular internal reviews of our rating philosophy to determine if it remains the most suitable and equitable methodology for our City.

There are pro and cons for each rate system. In Victoria all Councils assess Site Value, Capital Improved Value, and Net Annual Value. Unimproved Value refers to another, more abstract, concept of the value of land and adds an additional level of complication to the valuation of site value.

The three levels of value - in general terms - approximate to the market value of the site, market value of the whole property (Capital Value), and the market value of the income (Net Annual Value). Each is calculated with reference to market evidence, making Site Value the most difficult due to the lack of sales data in some localities.

The City of Melbourne uses Net Annual Value to determine its rates. This is a good base as it is, arguably, the most stable platform, is relatively transparent, and requires little additional manipulation as the earning capacity of property has a high correlation to the ability of a property to pay and the rate - thus not forcing land use change through inability to pay. However, the negative aspect of NAV is that development sites can minimise holding cost through underutilising the resource, and the information required to calculate values for some classes of commercial properties can be complex.

In jurisdictions where site values are used they often become mired in differential rates - that is - different rates in the dollar applied by land use. These become difficult to administer and open to manipulation - for both good and bad reasons. I have not seen the evidence that a change to site value rating (alone) results in vacant sites being developed. Landholders tend to adjust their expectations of holding costs and returns according to conditions and wait until they feel the market is ‘ready' for their development.

- MarkKarutz - 03 Jun 2008 14:17

Mark,

Great to get some feedback. Thanks for entering the discussion. Agree with what you say in large part (there are Pros and Cons of each method).

In terms of evidence for Site Value driving development, I have seen numerous reports attesting to their role in driving development, including one written specifically for the City of Melbourne. I have attached one such study below. I would appreciate any feedback based on a reading of that.

http://www.lvrg.org.au/Text/1166694489088-8860/uploadedFiles/1166695101659-1633.pdf

What I believe it shows is that (in summary):

1. There are substantial and measurable economic bonuses attributable to site value rating systems
2. Permits for building increase substantially when the penalties to development are lifted (i.e. immediately)
3. Rate base growth is increased using site value
4. S.V. is more equitable and reduces rates for almost everyone except land speculators holding land out of the market
5. The number of businesses increases under Site Value taxation

All things I am sure we want for Melbourne, and impacting on a number of the Future Melbourne key goals, under the People, Prosperous and Ecocity categories.

-- BrucePoon - 03 Jun 2008 19:38

Explanatory note: The difference between SITE VALUE and UNIMPROVED VALUE concerns so-called MERGED IMPROVEMENTS -- that is, man-made features that are hard to distinguish from natural features of the land. Examples include historical tree-clearing, tree-planting, levelling, filling, top-dressing, and some forms of draining. The "unimproved value" attempts to exclude the value of merged improvements. The "site value" includes the value of merged improvements, and thereby avoids the need for historical inquiry. The disincentive caused by including merged improvements in the rating base is minimal because the value of merged improvements tends to be small by comparison with other improvements (especially buildings), and because merged improvements have usually been made by someone other than the current owner-ratepayer.

-- GavinPutland - 04 Jun 2008 10:27

Mark Karutz wrote: "There are pro and cons for each rate system."

I'd like to know what the "pros" of NAV and CIV are. In defence of NAV, Mark Karutz wrote:

"This is a good base as it is, arguably, the most stable platform, is relatively transparent, and requires little additional manipulation as the earning capacity of property has a high correlation to the ability of a property to pay and the rate - thus not forcing land use change through inability to pay."

Let's examine these claims one by one.

"THE MOST STABLE PLATFORM": The annual rental value of a property is indeed more stable than its capitalized value, because the rental value does not rise and fall in response to speculative bubbles, which by definition involve a decoupling between prices and rents. But the "net annual value" used in Victoria does NOT have that advantage, because NAV is defined in terms of the capitalized value!

"RELATIVELY TRANSPARENT": The combined value of the site and buildings is no more "transparent" than the value of the site alone. Indeed, for the ratepayer wishing to verify the fairness of his/her valuation, the combined value is LESS transparent because its verification requires inspections of buildings, whereas the verification of the site value merely requires comparison with nearby sites whose locations and sizes can be read from maps. In the absence of significant boundaries, site value per unit area is a smoothly varying function of position. This SPATIAL CONTINUITY property does not apply to NAV and CIV, which are therefore favoured by those who wish to avoid public scrutiny of valuations. To call this "transparent" is an example of what George Orwell called "blackwhite".

"THE EARNING CAPACITY OF PROPERTY HAS A HIGH CORRELATION TO THE ABILITY OF A PROPERTY TO PAY AND THE RATE": The "earning capacity" of a property is its rental value, which is not the same as the NAV; the latter is apportioned to CIV and therefore can get out of proportion to the rental value, due to speculative bubbles and bursts. In the context, "ability to pay" an annual rate presumably refers to annual income; but if that criterion has any merit, it calls for an income tax, not a property tax! As to whether it has any merit, consider the next claim.

"NOT FORCING LAND USE CHANGE THROUGH INABILITY TO PAY": That means not forcing landowners to redevelop or sell out when the income from their chosen use of the land is no longer sufficient to pay the rates. NAV doesn't guarantee this outcome, not only because it is apportioned to capitalized value rather than rental value, but also because "rental value" refers to POTENTIAL rental income, not ACTUAL rental income, and it is the POTENTIAL rental income that influences capitalized values. But more importantly, if a landowner's income fails to rise in proportion to the rental value of the site, that means the use of the site has become non-optimal. It is neither efficient nor equitable for the rating system to indulge ratepayers who want to underutilize a resource -- land -- which is limited in supply and essential to life and livelihood. In particular, in view of the present shortage of housing, the rating system should not mollycoddle property owners who want to maintain low-density housing (or worse, no housing at all) on sites that are zoned for higher density. That said, if it were such a good idea to avoid forced sales or forced redevelopment, one could do it by allowing increases in rates to be deferred until the increase in value of the property is realized by sale or bequest.

Mark Karutz continued:

"In jurisdictions where site values are used they often become mired in differential rates - that is - different rates in the dollar applied by land use. These become difficult to administer and open to manipulation - for both good and bad reasons."

One reason for differential rates under NAV and CIV is the desire to avoid penalizing property owners who provide new accommodation. Site-value rating automatically avoids such penalties.

Furthermore, if you read ss. 161 and 161A of the Local Govt Act, you will see that there is far more scope for differential rates under CIV than under NAV or SV.

Mark Karutz continued:

"I have not seen the evidence that a change to site value rating (alone) results in vacant sites being developed."

For examples of such evidence, Bruce Poon cited the paper by Phil Anderson at http://www.lvrg.org.au/Text/1166694489088-8860/uploadedFiles/1166695101659-1633.pdf .

I have cited that paper, together with further empirical evidence from other sources, in Prosper Australia Working Paper No.5 (http://grputland.com/working/paper05.htm#empir). But the mere fact that such evidence is requested is indicative of the extent to which the rating debate is rigged by vested interests. As I wrote in the working paper:

"In any other debate about taxation, it would be common ground that taxing a product reduces its production and all the effects that follow therefrom. The proposition is so simple, so reasonable, so commonplace, so confirmed by experience, and so often assumed as a foundation of policy, that to question it would be regarded not as skepticism but as folly or knavery. Applied to local rates, the proposition implies that the inclusion of building values in the rating base reduces the supply of buildings and all the economic activity that depends thereon. And yet, through most of the world (with notable exceptions including Queensland and NSW), local property taxes on the combined values of land and buildings are the norm, and it is the advocates of site-value rating who, if they are not simply ignored (as they usually are), are called upon to prove their case with hard data -- and to prove it again and again. So they do."

Mark Karutz continued:

"Landholders tend to adjust their expectations of holding costs and returns according to conditions and wait until they feel the market is 'ready' for their development."

Developers wait until the market is ready to pay whatever ransom they demand for the release of the land. The chief obstacles to this racket are holding costs in the form of rates and land tax. NAV and CIV rating give an advantage to landholders with undeveloped land. SV rating doesn't. Therefore SV rating is more effective in encouraging developers to develop. Therefore developers prefer NAV and CIV, and promote their preference with numerous spurious arguments such as those parroted by Mr Karutz -- who, I hasten to add, is entitled to the presumption that he is an innocent dupe.

The first such spurious argument was:

"Each [rating base] is calculated with reference to market evidence, making Site Value the most difficult due to the lack of sales data in some localities."

The shortage of sales of vacant land is not a barrier to valuation, because: (a) when a property is sold with buildings that are used by the buyer, the site value can be obtained from the total value by subtracting the value of the building(s), and a separate valuation of the building(s) is needed anyway, e.g. for insurance; and (b) when a site is sold with improvements that are demolished by the buyer, the price paid for the bare site is the purchase price plus the demolition cost.

You can't value a building and its site together unless you can value them separately. Similar-looking properties have different values in different suburbs because the SITES differ in value. Locational value attaches entirely to the site, not the building, because the value of the building is limited by the depreciated construction cost, whereas the site has a location, and hence a locational value, whether it is occupied by a building or not. To account for the effect of location on CIV or NAV means nothing more or less than to account for the site value. You can't directly exploit spatial continuity when calculating the entire CIV or NAV; you can exploit it only for the site component.

---

By the way, it was I who drew Bruce Poon's attention to s.159 of the Local Govt Act (http://www.austlii.edu.au/au/legis/vic/consol_act/lga1989182/s159.html). The aforesaid working paper (http://grputland.com/working/paper05.htm) proposes a mechanism for introducing site-value rating without creating winners and losers in the TRANSITION to the new system. That mechanism involves introducing a threshold into the rating system (so that the rate applies to the margin by which the site value exceeds the threshold) and allowing the threshold to vary from site to site so that the annual property tax payable in respect of each site is not changed by the rate reform. This mechanism would require an amendment of the Local Govt Act, which at present does not allow thresholds. But an alternative mechanism, which could be implemented by Melbourne City Council or any other Victorian municipality, involves allowing the Municipal Charge to vary from site to site.

Either mechanism would immediately remove the tax penalty for building, extending, or renovating, and would provide the full benefits of site value rating in respect of future increases in site values, although not in respect of present site values.

-- GavinPutland - 10 Jun 2008 14:36

Thanks for all that input Gavin. But to get back to Bruce Poon's original topic of making Melbourne a competitive place to do business in a global environment, there are a number of mechanisms that could be explored which impact on affordability and to stimulate development of vacant properties. Perhaps a way forward at this point is to urge the Council to again review the method of rating these properties in its overall rating strategy.

-- SandraWade - 13 Jun 2008 12:29

In the "Goals" table, I added a row on business site utilization (analogous to that which I added on the "Affordable place to live" page, and incorporating the earlier indicator referring to "bombsites"). Under "See also", I added a reference to my article "The mother of all BBQ stoppers", which is relevant to business accommodation as well as residential accommodation. Other editors will decide whether the reference is appropriate.

I think this will have to be my last post. I thank the organizers for the opportunity to take part.

-- GavinPutland - 15 Jun 2008 20:09

Gavin,

I have reworked the site utilization but hopefully not lost the intent - same in housing. I have also parked the indicator info you provided and are refining it.

Thanks for all your contributions to the project.

Less delay between rezoning of land (for business) and actual availability of business premises for sale or to let.

Fewer vacant lots ("bombsites") in commercial/industrial areas.

Fewer abandoned, blighted commercial buildings (not to be confused with premises available "to let").

Fewer underdeveloped business sites (e.g. low-rise on sites zoned for high-rise, but obviously excluding heritage buildings).

-- SandraWade - 18 Jun 2008 12:39