June is a consistently crazy time of year. With invoices and finances needing to be settled before the close of financial year, as well as the fact that it’s just downright miserably cold, you could be forgiven for not noticing that the ACT Budget has come and gone, and changes will take effect as of 1 July, 2017.
What you probably didn’t expect is that the government would introduce a tax increase on the Lease Variation Charge (LVC) of at least 300% with seemingly little to no consultation and no significant publicity to speak of. The consequences of this increase will become clearer with time, but initial suggestions include decreased house values in the central established suburbs of the Inner North and Inner South, not enough housing supply for those seeking to live in these areas and fewer townhouses becoming available – the exact housing product that First Home Buyers and downsizers are after.
The bad news
As if it wasn’t already hard enough for entry-level and mid-range home buyers to purchase property in the highly sought after Inner North, the changes to the LVC will restrict that possibility even further.
Independent Projects’ Director of Project Marketing, Wayne Harriden, said “What they’ll kill are smaller boutique developments, like a pair of townhouses on a single block. They’ll basically take out that offering from the market altogether. [These changes] will essentially halt infill. It’s now cost-prohibitive to pick up blocks and develop.”
The increased disincentives to buy a block and develop it in the Inner North and Inner South will not only limit the supply of townhouses and other mid-range housing options, but also significantly decrease the value of land in these areas. If a block now carries an extra $200K in fees to develop just a 6-unit complex, that amount will be factored into the purchase price of the land, so owners in the affected area can expect a significant hit.
The really bad news
Numerous “mum and dad” investors across the ACT have had their dreams of building a boutique townhouse development crushed by the changes to the LVC. A mid-weight investor intending to build an 8-townhouse complex in Dickson, for example, will now have to fork out $192,500 more in LVC than pre-July 1, 2017. That equates to approximately a 405% increase in taxes.
The news will come as a particularly nasty blow to an oft-overlooked demographic in our society: the elderly. For many older residents in the Inner North and Inner South, the area is where they’ve built their lives. Many have brought up their children in the family home, and all of their friends and community are still in the area. When it becomes implausible for someone to support themselves and maintain a freestanding home, should they be forced, due to lack of appropriate supply, to completely uproot and seek a townhouse further out?
Such a move would only render an elderly life even harder, especially considering the fact that they may not want/be able to drive. These people therefore often remain in inappropriate housing, because they have no geographical- or lifestyle-suitable options to move to, further reducing market turnover and affordability for First Home Buyers.
What is the LVC?
Let’s go back to basics. If you’re not up to speed with legislative property jargon, you’re probably wondering, “WTF is the LVC?”
The LVC, or Lease Variation Charge, is a land tax you’re liable to pay when you redevelop a single block for the purpose of building more than one home in the ACT. Canberra is unique in that ACT residents do not in fact own their land; rather they “lease” it from the Crown for a 99-year term under the Crown Lease System.
By constructing multiple dwellings on a single block, the re-sale value of the total land is markedly increased, and the Crown Lease has been varied. The LVC is in place to reflect this variation in land value and serves to compensate the government for the newly increased value of what is still their land.
The LVC was previously known as the Change of Use Charge from 1971-2011, and was judged on an individual application basis with the charges determined accordingly. In 2011, the LVC replaced the Change of Use Charge and implemented a system whereby anyone wanting to split a block and build townhouses to either fund a retirement or increase their property assets would pay $7,500 per unit for the first three units and $5,000 per unit thereafter.
Under the new system, as of 1 July, 2017, developers will have to front up with $30,000 per unit with no reduction for subsequent units. This equates to, at the very minimum, a 300% tax increase. Yes, you read that correctly. The lack of media coverage on this tax hike is astounding, given the minimum 300% only goes up from there and hits 400% at developments with 8 or more units.
The graph below illustrates in red the increase in taxes for land development under the new LVC laws.
Why the change?
On the surface, it’s obvious why the government is sending the LVC tax sky high: the anticipated increase in revenue from developments is a fast-track option to take a significant chunk out of the current deficit.
Disturbingly, this change to the current charge appears to have been driven solely by economists completely removed from the ins and outs of the property market itself, and has therefore resulted in a very poor outcome for countless Canberrans that has not been properly thought out.
The government claims to be correcting an anomaly, but if by doing so they lock more people out of either home ownership at all or living in a property suitable to their needs, it is a very bad outcome indeed.
One positive note is that the Suburban Residential blocks owned and being sold by the government will not be affected by the changes to the LVC. Developers of these blocks will be exempt from paying the LVC, potentially saving hundreds of thousands of dollars.
“The government owns lots of Northbourne Avenue corridor sites”, said Mr Harriden. “They’ve got heaps of land to sell, so they’re effectively taking out the competition. This entire change has been driven by the Treasury to consolidate debt.”
“A positive plan for renewal”…?
The ACT Government budget website exclaims in bold font: “The Government went to the last election with a positive plan for renewal right across our city and suburbs. This Budget starts delivering it.” Further, under the heading “Our Priorities” sits “Infrastructure”, containing the tagline “Building a better city.”
We’d like to suggest to the sitting government that perhaps a “positive plan for renewal” would serve to actually encourage redevelopment and higher-density construction along the Northbourne Avenue corridor to maximise the efficacy of the light rail from 2018.
Michael Hopkins, Deputy Executive Director of the ACT Master Builders Association, told the Canberra Times, “this charge is not welcomed by industry … and it runs counter to a number of other government policies of encouraging urban renewal and housing affordability.”
The ACT Budget was released to the public on 6 June, 2017. Development Applications (DAs) had to be submitted prior to 1 July, 2017 to avoid paying the new tax rates, leaving only 25 days for developers to finalise their building plans and submit their designs.
Mr Harriden was utterly baffled by the timeframe given to prospective developers, saying, “[the timeframe] is absolutely unrealistic. There’s no possible way to lodge by the 30th of June if you weren’t already deep into design when they released the budget.”
The end result will effectively be a complete lock-out for mid-range buyers to enter the market in the central established suburbs of Canberra, and an increase in the gulf between richer home-owners and poorer apartment-owners. The removal of the “middle offering” of executive apartments and townhouses in sought-after suburbs will only further increase the aforementioned economic gap, and decrease affordability once more.