This is the second of a series of posts providing extra information for an article in The Conversation about land taxes.

Last year it was estimated that there were over 90,000 vacant houses in Melbourne alone that were not available to rent. That’s right, 90,000 houses just sitting vacant while the owners wait for the land prices to go up. Sufficient land tax would discourage land banking of this kind as well as the more familiar land banking on urban fringes. A tax of just one or two per cent of the land value per annum would make other investments more appealing than land banking and would bring most of these houses back on the market – either for sale or for rent. So, not only would supply increase – in a much more real sense than that created by urban sprawl – but many buyers would be removed from the market because some property investors would turn to other kinds of investment.

Taking some investment buyers out of the market will reduce price rises or lead to price drops depending on the rate of the tax. In the medium to long term, taxes could be set to keep land price rises well below wage increases. In this way, housing affordability could be restored while avoiding a price crash and the resulting broader economic downturn.

A serious political challenge with the introduction of land taxes is that the it causes a one-off drop in land values the moment it is announced (see the Henry Tax Review V1 p249). This is beneficial for those about to buy land but it comes at the expense of current landowners. The transition must be carefully and sensitively managed, requiring long term planning and the capacity and willingness to explain quite complex ideas to the community.

For more information on land taxes and land prices, see the Henry Tax Review Volume 2 pp. 247-270.