Land grab economy continues as councils continue to tax apartment-owners more than landbankers

Sunday, 20 February 2022

As cities grow, developers build upwards in central areas, should the rating system recognise this?

OPINION: It is surely a little embarrassing that New Zealand, one of the least populated countries in the world, has apparently run out of land.

The humiliation was laid bare for the world to see in an Economist article last week showing New Zealand house prices rose 256 per cent during a period when they rose by just 64 per cent in the United States and 110 per cent in the United Kingdom.

You can think of it as the latest development in a time-worn Kiwi tradition of grabbing land and spending as little as possible on it.

This practice arguably runs all the way back to the New Zealand Company, the original pioneers of holding land and subdividing it for the next DIYer.

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* OPINION: Rates gripe one of many, writes Andrew Bydder

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It is a profitable endeavour, especially if you don’t pay any tax on land, and even more profitable if you pay lower council rates the less efficiently you use it.

You only need to look to Wellington, the national leader in embarrassing stories about the housing crisis (no other city seems to be able to match its weird mix of containers, dungeons and former brothel rooms for rent) to see how council rating policies can work to discourage people from building housing.

The supply of new housing has lagged behind population growth

Take a 1920s bungalow in the Wellington suburb of Karori on Parkvale Rd. Its owner has a 422m2 section and pays rates of $3931 on it, which means they pay just over $9 per square metre in rates to the regional and city councils.

Compare the rates this landowner pays to the owners of apartments in a block on Hanson St which takes up 660m2 of land. There all the owners pay over $95 per square metre in rates, more than ten times what the bungalow owner pays.

Does each apartment-owner consume ten times the amount of council services per square metre? No. Are they ten times as wealthy? Unlikely.

To see why this system shakes out so unfairly you need to think about how most council ratings systems work.

Councils divvy up rates on the rateable value of a house or a piece of land. Most councils have chosen to go with a capital value rating system which means they are charging rates based on both the value of land and whatever improvements have been made on it.

So, imagine a council area with just three landowners (we’ll call them Landbanker Larry, Bungalow Barbara and Townhouse Tina) who own three equally-sized blocks of land.

Landbanker Larry wants to do nothing with his land. Bungalow Barbara decides to put one house on it, while Townhouse Tina decides to build two.

A council which calculates rates according a capital rating system takes both land values and investment in the land into account when deciding rates.

In this scenario Landbanker Larry owns $100,000 worth of land and makes no improvements to it, so his property carries a capital value of $100,000.

Meanwhile, Bungalow Barbara’s house costs $300,000 to build, so her property carries a capital value of $400,000, while Townhouse Tina puts two $300,000 houses on her land, so her property has a capital value of $700,000.

Habitat for Humanity believes 300,000 families are living in unacceptable housing conditions as a result of unaffordable homes, overcrowding and poor housing stock. RNZ's podcast the Detail explores the decades of policy making which got us here.

Landbanker Larry has the lowest rates bill because he builds nothing on his property. Bungalow Barbara pays the next lowest, while Townhouse Tina pays the most.

This is because the capital value of the whole town is $1.2m, and Townhouse Tina’s property is worth 58 per cent of that total.

So if a council wants to raise $100,000 from all three landowners, Tina will pay more than 58 per cent of the town’s rates bill (just over $58,000) while Larry will pay just over $8000 in rates.

Compare this to a ratings system based on land value. There all three of these owners would pay the same amount in rates.

White Man Behind A Desk is the work of satirist Robbie Nicol and playwright Finnius Teppett. See more at Patreon.com/WhiteManBehindADesk.

A capital rating system encourages Larry to wait and see how the whole town develops before he builds something on his land, because as soon as he builds his share of the town’s rates bill goes up.

The system is not so unfair if your town consists of only three landowners who own equal amounts of land. After all, Larry may be a landbanker, but he is also not consuming as many council services as the person who has two houses.

However, it becomes a bigger issue as your city gets larger and landowners start hoovering up large chunks of land.

A capital value council rating system means landbankers don’t face much of a rates bill if they buy and hold, while others face larger bills if they go ahead and invest in building more housing on their land.

Tall apartment buildings are very expensive, especially if they need base isolation, and often end up pricier to build than the land underneath them.

The apartment building on Hanson St mentioned earlier has improvements valued at over $11m, while the land underneath it is valued at just over $1.1m. It means building an apartment building on a piece of land significantly bumps up your rates bill.

The Mapping the Market report by CoreLogic NZ released displays info of 966 suburbs across the country. (First published on Jan 17, 2022)

Councils actually do not have to rate this way, they have the option of choosing between land value rating or capital value rating systems.

So, as population numbers increase, and land values skyrocket, you might have expected more councils to move to a ratings system based on land values, if only as a way to encourage more apartments to be built.

Instead, the opposite has happened.

A report for the Productivity Commission produced by Insight Economics in 2019 reported that the number of councils operating a rating system based on land values actually decreased between 2007 and 2019.

In 2007, 47 per cent of councils rated property based on land values, but by 2019 that had shrunk to 29 per cent.

Much like moves during the same period to apply a land tax, moves to rate land according to land values have proven a hard sell.

That is strange, because in large cities the alternative, a capital rating system, can actually leave the majority of ratepayers worse-off.

Auckland Council’s former chief economist calculated 59 per cent of Auckland ratepayers would actually pay less in rates if the city moved to a rating system based on land value rather than capital value.

However, those who pay more are some of the most politically influential within local government: villa owners in leafy central suburbs, developers who are sitting on land, or landlords who are keen on minimising upkeep and maximising their capital gains.

Some argue a capital value rating system is more progressive because people who invest big money in developing land are more likely to be rich, but that ignores the real pattern of how people invest in growing cities.

More money gets invested in development as a city grows so that people can live in taller buildings, which allows more people to squeeze onto a well-located plot of land without compromising floor space.

People who live further out from the city centre, because that’s all they can afford, still pay lower rates under a land value rating system, because their land is less valuable than plots in more central suburbs.

With all of this going for it, it is surprising debates around land taxes, or mandating land ratings for councils, don’t get more airtime.

Then again, when you have spent decades living with landbanking as the norm, it is a little difficult to wean yourself off.