State governments are giving away billions in development rights that create huge private land windfalls, when pricing those rights could fund housing, infrastructure and fairer state taxes.
The debate over capital gains tax has exposed a deeper issue in our property market. Many of the gains now being argued over in Canberra are not ordinary investment returns that happen to be lightly taxed. They are windfalls created much earlier, by state governments, and only later dressed up as normal returns.
When permission is granted for more intensive development, government is handing over a valuable asset – a ‘development right’. A factory site can become an apartment precinct. Farmland can become a housing estate. Millions of dollars in land value can be created not by work, risk or innovation, but by the stroke of an official’s pen.
Yet instead of pricing these development rights at a fair market rate, states usually give them away for free. The Commonwealth is then left to tax this value later, after it has been capitalised into land prices and reported as a private capital gain, as if it were comparable to an ordinary return from enterprise or investment. This is the wrong government trying to capture value at the wrong time, with the states on the hook to provide the schools, hospitals and infrastructure that a growing population requires.
As taxpayers we’d expect any state government selling a gas pipeline, a port, or a casino license to sell at a market price. But our report for Prosper Australia estimates that state governments across Australia are giving away development rights worth $11 billion for free every year.
The principal beneficiaries of this hidden giveaway are major landowners who own the large parcels of land where the vast majority of new homes are built. Over 96 per cent of approved growth in housing stock has been major developments, typically greenfield developments on the edges of cities and towns, or brownfield developments such as on former industrial land.
With development rights unpriced, these major landowners often see huge windfall gains when their land is rezoned or planning permission is granted. Following the rezoning of the Fisherman’s Bend precinct near Melbourne’s CBD in the early 2010’s, properties granted planning approval saw an average 368 per cent uplift in land value.
And with so much money to be made on a single decision, corruption is inevitable. Sometimes it is discovered. In 2023, the NSW’s ICAC found that three former councillors of the Hurstville City Council had engaged in ‘serious corrupt conduct’, with two found to have accepted around $170,000 from a developer seeking approvals. And Victoria’s IBAC found developer John Woodman made payments totalling about $1.2 million to two former mayors of the City of Casey.
Putting a price on development rights would call time on the unjust and unjustifiable giveaway of public assets. And selling these public assets at their fair market value would be a far better way to raise revenue than taxing productive economic activity.
We already have a playbook, thanks to the ACT, which has been pricing development rights since 1971 with its Lease Variation Charge (and has led the nation in homebuilding over the last decade). Singapore has an almost identical policy in place.
Every state should do the same.
Pricing development rights should also encourage land to be developed, rather than ‘banked’. A landowner’s decision to develop land (or sell it to a developer) is about timing – when to do it to maximise profit. Landbankers and speculators often want to sit on land in the hope of reaping large windfall profits in the future. Taking this off the table tilts the scales in favour of developing land sooner. Even more so if a price on development rights is phased in over time, as it should be.
The revenue raised could be used to improve housing affordability too. We estimate it could abolish stamp duty – perhaps the most distortionary state tax – for every single first home buyer across Australia, while also funding nearly 200,000 social housing dwellings. Alternatively, it could be used to reduce reliance on the other distortionary taxes that make up a large part of states’ budgets – such as duties on insurance and motor vehicles, and payroll tax.
For any government serious about housing affordability, or who cares whether taxpayers get a fair price for public assets, pricing development rights is a long overdue reform.
