Governments cannot tax their way to increased housing supply

The Victorian government has granted local councils new powers to limit short-stay accommodation as it moves to introduce a 7.5% levy on properties listed on platforms like Airbnb and Stayz.

The government has also granted local councils and owners’ corporations powers to ban or limit short-stay accommodation.

The Victorian treasurer, Tim Pallas, said the reform would help in “getting the balance right” in Victoria’s mix of housing.

But Pallas could not say how many of Victoria’s short-stay properties – which number almost 50,000 – would transition to permanent rentals.

In response, Tim Reardon, Chief Economist of the Housing Industry Association (HIA), delivered a critical analysis of the Victorian government's newly introduced ‘Short Stay Levy Bill 2024.’

According to Reardon, this legislation is misguided in its attempt to address housing shortages through additional taxation on short-stay accommodation.

His critique highlights a fundamental issue: governments cannot tax their way to increased housing supply.

The Flawed Logic Behind the Tax

The Victorian government’s rationale behind the Short Stay Levy is that by imposing a tax on short-term rentals, more properties will become available for long-term rentals, and the generated revenue can be directed towards funding public housing.

On the surface, this seems like a reasonable strategy.

However, Reardon argues that this approach lacks the logic needed to deliver meaningful, long-term results.

“No one supports landlords withholding homes from market.

But the proposition that another tax on short-stay accommodation will increase housing supply or make more homes available for rent, in the long-term, lacks logic,” Reardon states.

His argument centres on the unintended consequences that often follow well-intentioned policies.

Unintended Consequences: Higher Rents and Reduced Supply

Reardon acknowledges that the initial impact of the tax might see some properties transition from short-term to long-term rentals.

However, this “first-order effect” is likely to be overshadowed by the “second-order effects,” which could ultimately exacerbate the housing crisis rather than alleviate it.

“Fewer short-term rentals, and growing demand, will see the rent on these properties continue to rise attracting landlords back out of the long-term rental market,” Reardon explains.

In other words, the tax could create a cycle where higher rental prices in both short and long-term markets push landlords to revert properties back to short-term rentals, thereby negating any temporary gains in long-term rental availability.

The Accumulation of Taxes: A Barrier to Housing Supply

This new levy is just the latest in a series of taxes and regulatory costs that have been heaped upon the housing market in recent years.

Reardon details how these cumulative financial burdens have created significant barriers to increasing housing supply:

1. Windfall Gains Tax: Taxing the uplift in land value following rezoning at a rate of up to 62.5% for gains over $100,000.
2. Land Tax Surcharge: A surcharge for Victorians with more than one home, up to $975 plus a 0.1% increased rate of land tax.
3. Absentee Owner Surcharge: An increased surcharge, now at 4%, up from 0.5% in 2016.
4. Vacant Residential Land Tax: Up to 3% on the capital improved value of taxable land.
5. National Construction Code Changes: Adding tens of thousands of dollars to the cost of new home construction.

These taxes, fees, and charges have not only made housing more expensive but have also reduced the incentive for developers and investors to contribute to the housing supply.

Public Housing: A Public Good, Not a Tax Target

Reardon’s critique goes beyond just the Short Stay Levy, touching on the broader issue of how public housing is funded.

“Victoria requires more public housing stock, and this is the right time in the cycle to build more public housing,” he says.

However, he is clear that public housing should be funded by all Victorians, not by taxing a narrow group of property owners or renters.

“Burdening new home buyers and renters with the cost of providing public or subsidised housing is part of the cause of this housing shortage, not the solution,” Reardon asserts. He points out that up to 50% of the cost of a house and land package is made up of taxes, fees, and charges, making housing one of the most heavily taxed items in the economy. This tax burden, he argues, is a key driver of the current housing crisis.

The Path Forward: Reducing Taxes to Increase Supply

In closing, Reardon offers a clear solution to the housing crisis: reduce the taxes and regulatory costs that are stifling the housing supply.

“It is these taxes and government regulations that are the cause of the housing shortage and removing them is the solution,” he concludes.

As the Victorian government continues to seek solutions to the housing crisis, it’s crucial that they consider the long-term effects of their policies.

Taxing short-stay accommodation may seem like a quick fix, but without addressing the underlying issues, it could end up making the situation worse. Instead, a reduction in taxes and regulatory barriers could provide a more sustainable path to increasing housing supply and easing the pressure on both the private rental market and public housing stock.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.