In a bold move that has sent a few shockwaves through the real estate industry, the Victorian government has announced the implementation of a new land tax levy.
The levy — a part of the COVID debt levy included in this year’s budget — aims to raise $4.7 billion by reducing the tax-free threshold for general land tax rates on properties that are not considered principal places of residence. (The details are here.)
While the measure is intended to ease the burden on the state’s finances, it has understandably sparked discontent among landlords, who will bear the brunt of the increased taxes.
Predictably, therefore, property lobby groups wasted no time in denouncing this new levy as an assault on hardworking ‘mum-and-dad’ investors, warning that it will inevitably lead to skyrocketing rents.
However, let’s set the record straight: the notion that landlords can effortlessly pass on land taxes to renters is nothing but a fallacy!
Land taxes fall solely on the shoulders of the landowners themselves and cannot be transferred onto tenants at a whim.
If they could — why would landowners be howling? Higher taxes would be of no consequence.
The truth of the matter is that rental prices are determined by the principles of supply and demand within the local market and are tied somewhat to wage growth.
If there is an abundance of available properties, landlords cannot unilaterally raise rents.
In fact, it is reasonable to assume that landlords are already charging as much as the market can bear.
Higher land taxes do not alter this fundamental dynamic.
Instead, they will have the marginal effect of lowering land prices (all else being equal) as new purchasers will take the higher tax rates into account when assessing their budget for new sites.
They will also likely reduce competition from speculators who will favour investment in states where land tax thresholds are higher.
After all, that’s the disgruntlement that the property industry has with these measures.