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The Forum > Article Comments > Development levies, stamp duties, and housing affordability > Comments

Development levies, stamp duties, and housing affordability : Comments

By Gavin Putland, published 3/11/2006

Housing would be more affordable if development levies, betterment levies and stamp duties were replaced by a single property-transfer tax.

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Sorry Champ,

Can i ask, how many developments you have done yourself?

I think your mesmerising economic and tax theories is a facade for not realy understanding development.

1 comment you made

"The only way development levies can raise land prices is by discouraging development, so reducing the supply of developed lots."

If you understood the way profit is derived from development, you would realise that developers take a margin over the total cost of the project. the more the cost, the higher the profit. Whilst levies and charges are high and inconvenient, with alot of projects being fully funded, this amount is allocated as a soft cost and if the development works it actually increases profit margin.

In simple terms, if a project had a total cost to develop of 10 million dollars, the developer for reasons of obtaining finance and viability will take a margin over the total cost, lets say 30%., the total project value would equate to 13million ie. 13 million dollars worth of apartments/land must be realised for the project to be viable.

So by development levies increasing or being immense, this actually increases a developers profit margin. just like petrol prices and the tax imposed on them. whilst people could argue that they would increase profit if it was not there or reduce losses, they forget that the price of these levies and charges are geared into the prices of the properties they are valuing against.

This equates to an increase in property prices.

land cost + construction cost + Profit (risk) margin = Property Value/price. Forgetting supply and demand factors this is why your argument has flaws, you dont understand the nature of the business your spruiking.
Posted by Realist, Friday, 3 November 2006 10:10:56 AM
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"Realist" asks how many property developments I have done.

None. But, rather than trying to compile a list of things
that "Realist" has never done, I'll get straight to the
point.

The "Realist" thesis seems to be that developers sell land
for a price that gives them a predetermined profit margin
over all costs, including taxes.

But what if that price is less than the market will bear at
the time of sale? Does "Realist" expect us to believe that
developers ever sell land for less than they can get? How
would they explain that to their shareholders?

And what if the price that gives the predetermined profit
margin is *more* than the market will bear? By definition,
developers can't sell for more than the market will bear.
So *if* they insist on a certain price, they will delay the
sale (and preferably delay the expense of development)
until such time as the market *will* bear that price
(e.g. because of population growth). That is what I mean
by "discouraging development, so reducing the supply of
developed lots."

My thesis is that a transfer tax which does *not* create a
new liability for every transfer and which *cannot* cause
or increase a capital loss (e.g. the SWT) will cause less
restraint on supply, hence less upward pressure on prices,
than a tax which *does* create a new liability for every
transfer or which *can* cause or increase a capital loss
(e.g. stamp duty and development levies). The underlying
assumption is that a seller facing a capital loss will (if
possible) delay the sale in an attempt to avoid the loss.

The "new liability for every transfer" argument is more
relevant to a stamp duty than to a development levy (which
by nature tends to be a one-off). So, to refute my thesis
in relation to development levies, one would have to show
that a development levy cannot cause or increase a capital
loss for a developer even in the absence of delay. That
would be a difficult circle to square.
Posted by grputland, Friday, 3 November 2006 1:02:30 PM
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You simply do not move forward to develop if the project is not viable ie. there is no profit margin. Banks wont lend you the money. You dont even buy the site in the first place. In theory, the quicker the turnaround, the more profit due to less holding charges and the like.

Surprise surprise, Development is about profit. The end realisation is never an exact figure ie. if i aimed for 30% profit and the bank funded me the money based on this margin, if my realisation increases to 40% due to capital growth of property during the time of development, you beauty. If costs are incurred, sales are slow etc the realisation may drop eg to 19%.

Whilst it is a quantifiable science it is never an exact one, for the reasons outlined above. In a developers calculations you have fixed profit and risk percentage for viability purposes, but this inevitably changes over the project life.

If you had experience in it you would not refute this and realise exactly what im saying. That is why it is called 'profit and risk'. but in summary, we calculate margins based on total development cost, if costs, charges and taxes increase but yet property prices have not and you cannot derive a profit margin from the site, it becomes unviable and you simply dont do the project.

Mate, its great to have all that theory knowledge, just make sure you put it use and get out there make some coinage out of those brains.

As for your stamp duty theory, my opinion being at the coalface is leave it the way it is, it is not a barrier to entry and it is not a focus or detterrant of a property purchaser. It is an incidental and whilst it does cost the buyer money, the FHOG takes care of it in most cases, and if they are a second home buyer or experienced investor, i suggest their financial capacity may not be on the cusp that stamp duty burdens will stop them from buying. And its tax deductable.
Posted by Realist, Friday, 3 November 2006 2:12:40 PM
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I can't help suspecting that "Realist" and I are at cross purposes. So let me try to clarify a few points.

First, I don't deny that development levies, as presently implemented, raise land prices. Rather, I claim that *if* development levies raise land prices, they do so by causing a bottleneck in supply.

Second, I don't even deny that development levies cause a bottleneck in supply. My point is that if development levies were, in effect, set at a fraction of developers' profits -- instead of some fixed amount, possibly based on the cost of headworks -- then they could no longer cause an otherwise profitable development to become unprofitable, and therefore would have less tendency to deter or delay development; that is, they would have less tendency to cause a bottleneck in supply.

Similarly, I claim that stamp duties as we know them can cause an otherwise profitable resale to become unprofitable (by reducing the duty-EXCLUSIVE prices that buyers are willing to pay), in which case prospective sellers may respond by avoiding or delaying sales, causing a bottleneck in supply and a rise in duty-INCLUSIVE prices. My solution is to redesign stamp duties so that they cannot cause an otherwise profitable resale to become unprofitable.

The redesigned development levies and redesigned stamp duties are combined in the SWT.

"Realist" writes: "You simply do not move forward to develop if the project is not viable..." and "if costs, charges and taxes increase but yet property prices have not and you cannot derive a profit margin from the site, it becomes unviable and you simply dont do the project."

I agree. That is why I suggest that the charges and taxes be redesigned so that they cannot cause an otherwise viable project to become unviable.

Is there a problem here?
Posted by grputland, Friday, 3 November 2006 3:22:52 PM
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Perhaps governments could make housing far more affordable through encouraging the adoption and development of low cost construction techniques. The BBC recently reported the construction demonstration of a two story house in three hours at a cost of under 18,000. The house was made of wood, of strong construction, and fully insulated.

http://news.bbc.co.uk/2/hi/uk_news/england/north_yorkshire/6107114.stm

My impression is that governments are quite happy to leave the issue of housing affordability as it is. The welfare of a majority of Australians is being flushed down the toilet for the sake of a few making obscene profits.
Posted by Fester, Friday, 3 November 2006 10:16:47 PM
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Realist, Spend a bit more time listening to your accountant (or get a new one). Stamp duty (and other govt levys) may be tax deductible for developers, as they are purchasing (and incurring costs) with a view to making a profit. It thus follows that all incomes and costs are recognisable on a revenue basis (subject to actual sale). However, for the investor, stamp duty is not tax decutible. It forms part of the cost base for any future capital gain. For homeowners, there is no deduction in any form.

Understanding taxation issues may help you with pricing your development projects.
Posted by Country Gal, Saturday, 4 November 2006 8:41:05 PM
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