Victoria’s Labor Government has made clear its determination to do something about housing affordability, recently announcing a suite of reforms – many aimed at first home buyers. The changes are for the most part designed to boost supply of homes both for purchase and rental. However, they also attempt to lower the barriers to purchase for those on lower incomes. Although well intentioned, and attracting some support from none other than Scott Morrison, they are not without their critics.
The planned changes include variations to stamp duty concessions, a shared equity pilot scheme, some priority rights for first home buyers to purchase properties in government sponsored urban renewal projects, substantial new land releases on the Melbourne fringe and an eye-catching new Vacant Residential Property Tax, modelled to a large extent on Vancouver’s recent initiative in this area.
Stamp duty reform
Victorian Treasurer Tim Pallas has introduced a stamp duty exemption for first home buyers on purchases up to $600,000, with tapered duty concessions up to $750,000.
Off-the-plan investors will lose their existing stamp duty exemption. The saving will largely offset the revenue loss from the new exemption favouring first home buyers.
Critics of the stamp duty reforms argue that the exemption will benefit sellers rather than first home buyers, as the latter will simply use the stamp duty saving to bid higher in their attempt to win properties in a heated market. Removal of the exemption for off-the-plan investors may also dampen demand by investors, thereby slowing the supply of rental properties.
Many leading economists favour replacing stamp duty altogether with a low rate annual land tax that applies to all properties, including owner occupied homes. But that is a very big and important topic that deserves its own blog post.
Shared equity – pilot scheme
In January 2018, Victoria will also introduce a new $50m pilot shared equity scheme (HomesVic) targeted at first home buyers. Under this modest pilot, the Victorian Government will co-purchase 25% of the equity component in the home, correspondingly reducing the first home buyer’s own equity and debt funding need.
When the property is sold, HomesVic will recover its share of the equity, along with its share of any capital gain.
The scheme is aimed at buyers who can manage the necessary regular mortgage repayments, but who haven’t been able to save enough to fund the normal 10% purchase deposit. Eligible first home buyers will need to provide a 5% deposit. Income eligibility limits will be set at $95,000 for couples and $75,000 for singles.
Up to 400 homes are expected to be funded through HomesVic and up to a further 100 homes funded through an analogous national community sector shared equity scheme (Buy Assist), to which the Victorian Government is contributing $5m.
Victoria’s proposed shared equity scheme is not a new concept in Australia. For example, Western Australia operates the Opening Doors Shared Home Ownership program, under which eligible purchasers can get the government to co-purchase up to 30% of a home. The South Australian Government has a different but analogous approach, offering shared equity loans through its finance arm HomeStart Finance.
An April 2010 AHURI Policy and Research Bulletin focused on the opportunity for shared equity schemes to facilitate home ownership in Australia. It provided a cautious endorsement of the concept, noting the wide variety of schemes on offer in 2010, and stressed the importance of taking account of consumer preferences and local market context in the structuring of such programs.
Critics of shared equity schemes claim they are likely to increase housing demand and therefore prices, or that they have a habit of going badly wrong in terms of mortgage defaults and issues around the sharing of gains or losses.
Priority purchase rights for first home buyers
The Victorian Government also announced that it will give first home buyers priority in all government led urban renewal developments, with at least 10% of all such properties allocated to first home buyers.
New land releases
Premier Andrews is clearly intent on boosting land supply to address housing affordability, no doubt music to the ears of those in the Federal Government who see supply as the answer to all our housing affordability ills.
Within the next 2 years, Victoria will use rezoning powers to create 100,000 new residential lots in key growth corridors, spread across 7 councils in metropolitan Melbourne. This will result in the creation of 17 new suburbs, with associated new infrastructure and services. Treasurer Tim Pallas claims that the new housing will include good access to jobs, schools, hospitals and public transport.
Victoria’s Streamlining for Growth Program will be extended for another 3 years, to help Councils streamline subdivision processes, unlock sites and speed up residential development approvals.
New Vacant Residential Property Tax
Perhaps the most innovative initiative of the Victorian Government is its plan to impose, as from 1 January 2018, a new Vacant Residential Property Tax (VRPT). The tax will be levied at 1% per annum of the capital improved value of properties left vacant for more than 6 months in a calendar year and is likely to be geared towards properties in inner and middle suburbs of Melbourne.
The existence of a substantial number of empty homes was highlighted in Prosper Australia’s Speculative Vacancies Report in late 2015. Based on water usage data made available by Melbourne’s three main water retailers, across some 1.7m homes, Prosper Australia estimated that up to around 83,000 homes, or 4.8% of Melbourne’s total housing stock, were vacant during 2014.
The author of the Prosper report, Catherine Cashmore, noted:
‘Vacant properties impose a needless economic burden. Residents and businesses are forced to leapfrog vacancies to lesser sites at great cost, increasing commuting times and placing upward pressure on prices.’
Victoria’s proposed new VRPT is modelled on Vancouver’s Empty Homes Tax (the subject of a recent blog post by this author). The EHT was introduced with effect from 1 January 2017, after a very extensive research and consultation exercise.
Although Victoria’s announcement is short on detail, the VRPT appears to differ from the Vancouver EHT in a couple of important ways. First, it applies to capital improved value rather than unimproved land value. This may raise more valuation issues than a tax on unimproved land value, which is typically the basis for both council rates and land tax. Second, it exempts holiday homes, an exemption initially considered by Vancouver, but finally jettisoned to avoid administrative complexity, including problems defining a “holiday home”.
The new tax is expected to raise up to $80m over 4 years, though Premier Andrews hopes that the tax will change behaviour rather than raise revenue. His primary aim is to put the vacant homes to good use as rental housing or sold to owner occupiers.
No commitments have yet been made about the purpose to which any VRPT will be put, but advocates of affordable housing clearly hope it will be used to fund new or upgraded social or public housing. That is certainly Vancouver’s intent.
Oliver Frankel is a former corporate finance and M&A lawyer, who has spent the second half of his career in finance, investment and management. Most recently, he has taken a strong interest in how to address the affordable housing crisis.