7 Comments
Nov 21, 2023Liked by Common Ground Aotearoa

Economics of the change is sound, but the politics is challenging - it is not just that it is hard to explain complicated things to the public. There will be winners and losers from this change, which should be managed.

To that end, I think the politics of implementing a land value rating system would work better if there was a transition period where no residential property paid more rates.

So, for the small minority of residential properties who would pay more under a LV only valuation scenario could be given a guarantee that their rates would not be higher than the previous land + capital valuation system - this guarantee would only be for the current owners - once the property is sold or ownership is transferred then it comes under the land value only valuation system.

Thus, it would take a generation or so to fully transition to LV rates.

I think the average residential household would still get a rate reduction, because underutilised land not in residential use would be rated at a higher level - hopefully this effect on the average rates bill could be calculated.

This guarantee would make the change to land value rates more palatable. No one would be forced out of their homes by an unexpected increase in their rates bill.

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Brendon, I agree that a fair transition is critical for the politics and for, well, fairness.

But grandfathering concessional rates treatment would be unfair, since those benefitting will be paying less than their neighbours who are in otherwise-identical situations, and inefficient, since it will discourage those people from selling or developing their properties.

A better system would let homeowners defer paying the portion of their total rates bill that is caused by the change of system, i.e. the amount above what they'd have paid regardless under capital value rating. The debt could be secured against the property by a tax lien (or whatever legal instrument is used for rates postponement policies at present), with that debt carried forward to sale at commercial interest rates (i.e. mortgage rates) so as not to discourage sale by effectively providing a sub-market-price line of credit conditional on continued ownership.

That would ensure no-one is forced from their homes by the change in rating system.

I'd actually go further to argue that deferral should be allowed more broadly to allow homeowners whose values have been significantly increased relative to the city average by upzoning under the NPS-UD and/or other zoning change to defer the increase in their rates. Because like a rating change, a zoning change is effectively a regulatory risk that would become punitively unfair if it triggered a cashflow crisis that forced someone to leave their neighbourhood.

Yes, we want land used as productively as possible, but no, we don't want major changes to the regulated limits of what "as productively as possible" means to force people from their neighbourhoods.

Plus, the more councils let people defer their rates, the more revenue they make by way of the net interest margin between council borrowing costs and rates deferral indexation rates (which could be ~2%).

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author

Hey Brendon! Thanks for your comment. Certainly those worse off under land value rates won't like it, thankfully though there are fewer landbankers than productive property owners. We've calculated average rates reductions in lots of cities. Wellington is about a 3.8% average rates cut. Queenstown-Lakes is 28%.

I'm skeptical of how this logic applies to other taxes. There are winners and losers of cigarette taxes, alcohol taxes, and gambling taxes. Should we have waited until SkyCity is sold to tax their gambling business? Probably not. Negative externalities should be corrected quicker than in 25 years. The housing crisis, of all things, cannot wait.

Something similar but more extreme was passed in 1978 in California, called Proposition 13. This law caps the annual increase in the assessed value of real estate at 2%, which effectively locks in low property tax rates for long-term homeowners. The cap has led to reduced funding for public services like schools, libraries, and infrastructure. Newer homeowners often pay significantly more in property taxes than their long-term neighbors. Delaying LVR might cause similar distortions.

- Aidan

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What about the farmers who make 100x less per sqm of land than a an income producing property?

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Their land is equivalently 100x cheaper per square metre, so it cancels out. We're not proposing rating based on the area of a property, but its value. Land values in rural areas are really low (per square metre).

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I really like podcasts .The information is so much easier to access . Thanks

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Thanks for that feedback Eleanor. Will keep this in mind for future posts.

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