‘Speculative Vacancies’ – The Empty Properties Ignored By Statistics


By Catherine Cashmore

There have been four housing affordability inquiries since the early 2000s.

The “First Home Ownership” inquiry by the Productivity Commission (2004). The Senate Select Committee inquiry into housing affordability (2008). The inquiry into affordable housing by the Senate Economics References Committee (2014), and the current Inquiry into home ownership by the Standing Committee on Economics (2015).

The central recommendation of each inquiry has been to increase the supply of affordable housing.

However, missing from the analysis is any mention of the number of long-term vacant dwellings held for speculative gain across Australia’s major capital cities – not for sale, and not for rent.

Because they are not publicly advertised, these properties are overlooked by current short-term vacancy statistics based on reporting by real estate firms.

Prosper Australia’s annual Speculative Vacancies report uncovers these latent holdings. Using water data as a proxy, we provide a unique insight into the number and ratio of long-term vacancies withheld from the market for a full 12-month period in Melbourne.

Stratified by postcode, the report provides a detailed study to enlighten government on sound policy recommendations to drive prosperity and assist housing affordability.

We cannot have a serious conversation about Australia’s housing supply ‘crisis’ without addressing the fundamental drivers that permit – no-less encourage – owners to lay a significant proportion of prime urban land to waste.

There are many diverse motivating factors prompting owners to leave buildings idle. Some may be undergoing renovation or awaiting demolition. Others may be derelict and in need of substantial and costly repairs.

However, the notable trend underlying the data is the large divergence between residential real estate prices and rental incomes – including both actual and imputed rents on owner-occupation.

During the 2014/2015 financial year alone, Melbourne’s median capital city land price accelerated over 14 per cent.

At just over $700,000, Melbourne’s median house price is 8.8 times median income. Yet, at just 3 per cent, gross rental yields in Melbourne are at their lowest on record.

Real net rental incomes across Australia have been declining since 2001. Between 1994 and 2013, the number of negatively geared investors dependent on rising prices to profit escalated 152 per cent. In contrast, positively geared investors have increased by a much lesser 47 per cent.

The overwhelming majority of negatively geared investors (95 per cent) chase the capital gains associated with existing stock, rather than investing into new residential construction. Australia’s housing stock has been turned into little more than a vehicle for financial speculation, placing increasing pressure on prices.

To evidence further, since 1997, the share of loans for housing has increased from 47 per cent to 66 per cent. Only approximately 10 per cent of the flow of housing finance has been for the construction of new dwellings. Meanwhile, the ratio of business credit to total credit has been declining since the late 1980s.

Credit extended for enterprise is proven to be positively associated with economic growth and faster reductions in income inequality. Household credit (principally mortgage debt) provides no such benefit. Rather, it leads to a misallocation of credit, to feed an elevated level of speculative rent-seeking demand.

It is important to note that increasing land values are not borne from any productive activity undertaken by the owner who (as the classical economist John Stewart Mill termed it) “grows rich in their sleep without working, risking or economising.”

Rather, the value of land reflects its surrounds, growing primarily through increased demand generated by government-funded infrastructure.

Rising land-values yield a special type of unearned income known as “economic rent.”

As a broad measure, land prices can be calculated by multiplying current rents by 20 years. This is known as the capitalisation rate.

It is speculation induced by the capitalisation of the rental value of land into a tradable commodity that drives the boom-bust volatility of the real estate cycle.

Withholding prime locations from the market in an unused state generates artificial scarcity, raising prices and accelerating mortgage debt.

It underpins our cultural obsession of betting on bourgeoning land-price gains and using leverage to climb the mythological property ladder.

The consequential subversion to policy reform is inevitable, as the benefits of government-funded infrastructure flow disproportionately to landowners in the form of unearned windfall gains.

Large divergences between rental income and land price inflation are an unhealthy challenge to both housing affordability and economic stability.

They lead to ‘speculative vacancies.’

These are properties that are denied to thousands of tenants and potential owner-occupiers by landowners that have no motivation to generate any rental income. The result is a lowering of publicised vacancy rates, and increased land prices.

The regulatory environment provides a prime motivator for property speculation.

Landowners betting on a continuation of past high rates of appreciation are advantaged by preferential tax exemptions worth an estimated $36 billion a year.

Negative gearing coupled with the 50 per cent capital gains tax (CGT) discount for property held in excess of 12 months, have ensured high-income individuals are the main beneficiaries of rising land values. The top 40 per cent of income earners hold nearly 80 per cent of all investor mortgage debt.

First home buyer grants and other state incentives such as stamp duty waivers, owner-occupier exemptions from CGT and state land tax (SLT), changes to the superannuation laws enabling leverage into real estate (2007) – typify the commodification of property as a tool for profit seeking gain, advantaging existing owners vis-à-vis the young and the poor.

These incentives strip away any hope of a market aspiring to house people, rather than encouraging speculative greed. Policies that foster land price inflation and reward rent-seeking behaviour cannot deliver positive economic outcomes.

The IMF finds more than two-thirds of the world’s recent 50 systemic banking crises were caused by patterns of accelerating real estate prices relative to GDP.

A comprehensive analysis of historical data demonstrates a clear pattern of repeating real estate and construction cycles topping-out some 24-48 months prior to the world’s major economic downturns.

This cyclical top has been a precursor to all of Australia’s economic recessions.

Yet, it is not the recession that damages the economy. The damage arises from mounting levels of leveraged debt extended for the purpose of land speculation.

In a little over two decades, the share of investment property loans as a proportion of total debt has tripled from one-tenth to three-tenths.

Investors now account for 40 per cent of total housing loans outstanding.19 Australia is the third most indebted household sector relative to GDP in the OECD.

At just over $2 trillion,21 the unconsolidated household debt to GDP ratio sits at an eye-watering 121.5 per cent.

The burden of diverting an ever-increasing proportion of incomes to debt-servicing by both business and buyers has progressively undermined the health and competitiveness of the Australian economy.

The long-term risks to our financial system are precarious. The economic impacts for low- to middle-income Australian’s are disastrous.

Ownership for 15-34 year olds has been in a downward trend since the mid 1970s. For 35-44 year olds, since the mid 1980s.

Even those able to step onto the fabled property ladder, long-term security of tenure is not guaranteed. Significant numbers are ‘churning’ on the edges of owner occupation.

Between 2001 and 2010, one in five homeowners (22 per cent) dropped out of home ownership – for 9 per cent, this move was enduring.

For those that do purchase, there is a spike in the chances of a termination back into rental housing after just one year.

Importantly, the trend is accompanied with episodes of poor health, unemployment and financial stress.

After exiting homeownership, 34 per cent of Australian ex-home owners require access to housing assistance. Additionally, one in 10 Australians has been homeless at least once in their lives.

The incidence of housing stress for owner-occupiers declines with age, however, for long-term tenants and those under 35 years, it remains stubbornly high.

Current policy cements this demographic at the bottom of the pile.

Ineffective use of residential and commercial sites further stimulates the volatility and inequity of the real estate cycle. Land’s locational supply cannot be increased to accommodate rising demand. Buildings banked and withheld from use exacerbate this disparity.

As such, the SV rate can be likened to the unemployment rate for land.

It results in the productive capacity of the economy being ruthlessly compromised as citizens and businesses are forced to pay higher prices and commute greater distances for employment and lifestyle needs.

Prosper Australia’s Speculative Vacancies report gives a unique insight into the impact of current housing policy.

The report identifies 82,724 residential dwellings and 30,085 commercial properties in Greater Melbourne likely vacant for a period of 12-months or more.

As government and real estate industry vacancy statistics are neither impartial nor comprehensive, this report adds a valuable dimension to understanding the divergence between real estate industry short term vacancy rates (the percentage of properties available for rent as a proportion of the total rental stock) and the number of potentially vacant properties exacerbating Australia’s housing crisis.

We advocate these figures should correlated along side our Speculative Vacancy findings to produce the widest and clearest measure of vacant housing supply to guide policy makers.

Read the report

… extract from Executive Summary:

....If just those residential properties consuming 0LpD were placed onto the market for rent, this would increase Melbourne’s actual vacancy rate to 8.3 per cent. If 82,724 properties using under 50LpD were advertised for rent, the vacancy rate could rise to an alarming 18.9%. (1)

Further examination of 130,610 non-residential properties across 254 postcodes over the same period identifies 7,941 or 6.1 per cent of Melbourne’s commercial stock was also vacant over 2014, i.e. having consumed 0LpD.

Government failure to address Australia’s housing affordability crisis is indefensible. Access to affordable shelter is a basic human right and underlies national prosperity.

Vacant properties impose a needless economic burden. Residents and businesses are forced to leapfrog vacancies to lesser sites at great cost, increasing commuting times and placing upward pressure on prices.

Latent supply is usually not visible without a significant downturn in economic activity. If withheld stock were put to use, it would reduce cost-of-living pressures for tens of thousands of low and middle-income families and businesses marginalised by the cost of land.

This report recommends fundamental reforms to reduce the propensity for volatile boom-bust land cycles fuelled by speculation and unsustainable levels of household debt.

Current property taxes discourage investment into new housing, inflate the cost of land, stagnate housing turnover and hinder putting property to its highest and best use.

The report advocates that profound inefficiencies could be significantly alleviated if current transaction taxes were phased out and replaced with a holding tax levied on the unimproved value of land, alongside enhanced infrastructure financing methods for new developments.

Policy makers have thus far ignored Melbourne’s speculative vacancies and their effect on property prices.

With some 4.8 per cent of Melbourne’s houses showing severe under-utilisation, there is no housing supply crisis. Rather, rising prices indicate significant distortions created by policies supporting rent-seeking behaviour.

Government and statistical bodies need to recognise this disparity and employ a more comprehensive data analysis of vacant housing stock.

Read the report


[1] Residential per capita consumption in Melbourne is currently 183 LpD.







Also covered by “Friendly Jordies


The Corruption of Economics

The Corruption of Economics Why Most Are Blind to What They Need to See

By Catherine Cashmore (Contributing editor – Cycles Trends & Forecasts)

In the 1880’s Judge James G. Maguire of the Superior Court of the city and county of San Francisco gave a speech to the New York Anti-Poverty Society in the 1880s. He said…

‘I was one day walking along Kearney Street in San Francisco when I noticed a crowd in front of a show window… I took a glance myself, but I saw only a poor picture of an uninteresting landscape.


Source: henrygeorge.org  

As I was turning away my eye caught these words underneath the picture: ‘Do you see the cat?’ …I spoke to the crowd, “Gentlemen, I do not see a cat in the picture; is there a cat there?” Someone in the crowd replied, “Naw, there ain’t no cat there! Here’s a crank who says he sees a cat in it, but none of the rest of us can…. Then the crank spoke up. “I tell you,” he said, “there IS a cat there. The picture is all cat! …

Untitled 1

…. and then, there it was! Sure enough, just as the crank had said; But now that I saw the cat, I could see nothing else in the picture!…and I was never afterwards able, upon looking at that picture, to see anything in it *but* the cat.”[i]

Maguire’s story was intended as a parable for land’s role in the economy. Like the cat in the picture, it is blindingly obvious once it becomes clear – so obvious in fact, it is hard to see anything *but* the land.

The Man Who Electrified the World

Maguire had been inspired by a passage in the 19th century political treatise ‘Progress and Poverty’ the American journalist Henry George wrote. One of his famous passages was…  ‘That as land is necessary to the exertion of labour in the production of wealth, to command the land which is necessary to labour, is to command all the fruits of labour save enough to enable labour to exist.’[ii]

George had no formal education to speak of. He had left school at the age of 14, drifting in an out of poverty until securing steady employment as a typographer for the newly created San Francisco Times – later going on to edit his own newspapers.

However, George was an avid reader. He had studied the great classical economists such as David Ricardo and Adam Smith. He understood the relationship between the three factors of production – land, labour, and capital – and he used these tools to dissect the system.

He wrote:

Take now… some hard-headed businessman, who has no theories, but knows how to make money. Say to him:

“Here is a little village; in ten years it will be a great city—in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labour.” “Will in ten years, interest be any higher?”

He will tell you, “No!”

“Will the wages of the common labourer be any higher…?”

He will tell you, “No the wages of common labour will not be any higher…”

“What, then, will be higher?”

“Rent, the value of land!” Go, get yourself a piece of ground, and hold possession!”  And if, under such circumstances, you take his advice, you need do nothing more…’[iii]

The book started as a potential magazine article written to address the paradox of why ‘poverty’ rises in tandem with ‘progress.’ When it was published 17 months later in 1879 during an industrial depression, George’s ideas electrified the world. He had not only identified the underlying cause of the boom and bust cycle, George also provided a practical remedy…

The book was an international bestseller. It was translated into Chinese, Danish, Dutch, French, German, Hebrew, Hungarian, Italian, Norwegian, Portuguese, Russian, Spanish, and Swedish.

At its epoch, it was rumoured to have outsold even the Bible.

Seven years later, Henry George beat Theodor Roosevelt to almost get elected as Mayor of New York City – the financial capital of the nation. Henry George gravesite, Greenwood cemetery, New York.


Source: PJA 

Chrystia Freeland, a current Canadian Liberal member of parliament, wrote this recently…(iv)

George ran for mayor of New York again in 1897, but died four days before election day. He was given a statesman’s send-off — his coffin lay in state at Grand Central Station, where more than 100,000 people came to pay their respects. It was the largest crowd of mourners since Abraham Lincoln’s funeral in 1865.’

The Corruption of Economics

Henry George didn’t have the modern tools of today’s economists. So why after 135 years don’t economists once again ‘see the cat’?..

(To read more of this post – sign up to Cycles, Trends and Forecasts – Australian economist and market cycle expert Phillip J Anderson) [

i] The Prophet of San Francisco, Chicago, 1904 – Louis F. Post

[ii] Progress and Poverty, 1879 p210 Henry George

[iii] ibid – ch.19 “The Basic Cause of Poverty

[iv] “The Problem Of Plutocrats: What a 19th Century Economist Can Teach Us About Today’s Capitalism”

Government Inaction on Australia’s Housing Affordability Crisis is Indefensible

The fact that Australia has an affordability crisis is not in dispute. Rather, government inaction for more than a decade must be questioned.

Since the early 2000s, there have been three Senate Inquiries to tackle Australia’s escalating land values and declining rates of homeownership, including Australia’s Future Tax System Review that made a number of recommendations on housing reform.

The first inquiry conducted by the Productivity Commission in 2004, determined that prices had surpassed levels explicable by demographic factors and supply constraints alone. They stressed that a large surge in demand had rather been “predicated on unrealistic expectations (in a ‘supportive’ tax environment) of on going capital gains.”

The second inquiry overseen by a Select Senate Committee in 2008, found that the average house price in capital cities had climbed to over seven years of average earnings and once again, they identified inequitable disparities in the overall fairness of the tax system, that had lead to “speculative investment on second and third properties.”

Australia’s Future Tax System’ review conducted in May 2010, stated that tax benefits and exemptions had been capitalised into higher land values, encouraging investors to chase ‘large’ capital gains over rental income and landowners to withhold supply.

The third and last inquiry which is currently being conducted by the Senate Economics References Committee commencing in March 2014, received a key submission from Prosper Australia examining nine chief economic measures of land, debt, and finance – and found all to be at, or close to historic highs.


“It took forty years from 1950 to 1990 for housing prices to double, but only fifteen years between 1996 and 2010 to double again.” (Soos, Egan 2014).

The submission demonstrated a sharp rise in the nominal house price to inflation, rent and income ratios, driven by a rapid and unsustainable acceleration of mortgage-debt relative to GDP.

The current trend dwarfs the recessionary land bubbles of the 1830s, 1880s, 1920s, mid-1970s and late 1980s that triggered economic havoc, leading Australian households to suffer some of the highest levels of private debt in the developed world.


Today, the investor share of the market is close to 50 per cent. Investor finance commitments are rising at their fastest pace since 2007. Sixty-five per cent of loans to investors are on interest only terms and 95 per cent of all bank lending is being channelled into real estate – mostly residential.

Yet despite these findings, policy makers and industry advocates repeatedly claim that the primary driver of Australia’s affordability crisis is a lack of supply – and that increasing the stock of housing alone, will reduce prices enough to rectify the problem without the need to address the demand side of the equation through necessary and far-reaching tax reform.

Ultimately, this is not possible because our policies work directly against it.

Investor and housing tax exemptions worth an estimated $36 billion a year, have distorted the Australian dream of owning a home into a vehicle for financial speculation.

Consequently, rising land values that impoverish the most vulnerable sectors of our community are widely celebrated – while Australia’s federal members of parliament in possession of a $300 million personal portfolio of residential dwellings, stand solidly against all recommendations from previous Senate Inquiries for meaningful and equitable tax reform.

Poli investments

“The trends in the data suggest a sizeable majority of federal politicians have a vested interest in maintaining high housing prices, particularly since most have mortgages over their own investments.” (Egan, Soos and David)

Under current tax policy, investors that withhold primary land and dilapidated housing out of use are rewarded with substantial unearned incomes due to government failure to collect the economic land rent (the ‘capital gains’) society generates through public investment into social services.

The subsequent uplift in values that comes as the result of neighbourhood upgrades and taxpayer funded facilities – further accelerated by plentiful mortgage debt and restrictive zoning constraints, capitalises into the upfront cost of land by tens of thousands of dollars year on year. Yet rental incomes, at typically no more than $18,000 to $19,000 per annum are a mere trifle in comparison.

In the 12 months to September 2014 alone, Melbourne’s median house price increased by 11.7 per cent – over $60,000. In contrast, gross rental yields at 3.3 per cent are currently the lowest in the country and the lowest on record.


This broadening divergence between rental income and ‘capital growth’ typifies the commodification of housing used only as a tool for profit-seeking gain.

Indeed, net rental incomes in Australia have been declining since 2001. Growth in both the relative and absolute number of negatively-geared investors between 1994 and 2012 has soared by 153 per cent. In contrast, positively-geared investors have increased by a much lesser 31 per cent.12

Large divergences between rental income and land price inflation thus produce an unhealthy challenge to both housing affordability and economic stability.

They lead to ‘speculative vacancies’ (SVs) – properties that are denied to thousands of tenants and potential owner-occupiers, lowering relative vacancy rates and placing upwards pressure on both rents and prices. The housing supply crisis is therefore greatly obscured by current vacancy measures that cannot identify sites that are withheld from the market for rent-seeking purposes.

The consequential subversion of housing policy is evident when it is considered that since 1996 Australia has built on average one new dwelling for every two new net persons nation wide. Yet over the same period, government legislation, politically manufactured to protect the unearned profits of a large cohort of speculative investors, has resulted in vacant median land prices on the fringes of Australia’s capital cities ballooning from approximately $90 per square metre in 1996, to over $530 per square metre today.


Indeed, there is no better example of the astonishing escalation of land price inflation than the very recent report of a Melbourne family who purchased a 108 hectare Sunbury ‘hobby farm’ in 1982 for $300,000 and following new residential rezoning, have realised an estimated windfall gain of over $60 million.

This means of ‘creating wealth’ common in most western nations sits at the root of many of our current economic and social problems. Our tax and housing policies shift income to landowners, eroding the living standards of future generations of Australians who are required to shoulder an increasing burden of debt just to secure a foothold on the fabled ‘property ladder’.

The effect is to broaden the intergenerational divide as families are forced to live on the threshold, marginalised into areas lacking essential amenities and jobs, while 92 per cent of speculative investment into real estate pursues the ‘capital gains’ associated with second-hand dwellings, rather than increasing the stock of housing through the purchase of new supply.

Aided by a complicit banking system, Australia’s rising house prices produce wide ranging inefficiencies to the economy. High land prices damage Australia’s competitiveness with higher living costs. The resulting demand on both business and wages channels investment away from genuine value adding activities, leading to a gross and wasteful misallocation of credit to feed an elevated level of speculative rent-seeking demand.

The debilitating and destabilising effect on the economy can be evidenced clearly in a painful and rising trend of income and housing inequality that places an unsustainable strain on the capacity of the welfare state to compensate.

Australian’s like to think of themselves as a ‘fair go society –however, inequitable disparities in our housing, tax and supply policies result in an English-style class divide, evidenced in:

  • Fewer Australians owning their homes outright [i]
  • A rising percentage of long-term tenants renting for a period of 10 years or more[ii]
  • A decrease in the number of low income buyers obtaining ownership, particularly families with children [iii]
  • A drop in the number of affordable rental dwellings with a marked increase in the number of households in rental stress[iv]
  • Greater requirements for public housing.[v]
  • A rise in homeless percentages and those who drift in and out of secure rental accommodation –with ongoing intergenerational effects[vi]
  • An increase in the number of residents living in severely crowded accommodation.[vii]

As many as 105,000 Australians are currently homeless, while between the dates of 1991 and 2011 homeownership among 25-34 year olds has declined from 56 per cent to 47 per cent, among 35-44 year olds from 75 per cent to 64 per cent, and among 45-54 year olds from 81 per cent to 73 per cent.

Homelessness is often blamed on dysfunctional relationships, mental illness, drug abuse, domestic violence, job losses and so forth. But at the root lays an acute lack of affordable accommodation available for the most impoverished members of our community in need of both security and shelter.

‘Speculative Vacancies 7’ gives a unique insight into the impact of current housing policy by highlighting the total number of underutilised and empty residential and commercial properties currently withheld from market.

Melbourne is a perfect case study for this report.

• Its real estate is ranked among the most expensive in the developed world
• It has dominated Australia’s population growth, attracting the largest proportion of overseas immigrants, alongside strong immigration from interstate.

As government and the real estate industry are not sources of impartial information, the report adds a valuable dimension to understanding the divergence between real estate industry short-term vacancy rates (the percentage of properties available for rent as a proportion of the total rental stock) and the number of potentially vacant properties exacerbating Australia’s housing crisis.

Screen Shot 2014-11-19 at 2.24.42 am

Download Speculative Vacancies 7.

Read past reports

Related media:


[i]ABS – In 1996/7, 42% of households owned their home without a mortgage. This proportion is now down to 31%

[ii]ABS  -A third of all private renters are long-term renters (defined as renting for periods of 10 years or more continuously), an increase from just over a quarter in 1994

[iii]ABS  – A drop of 49% to 33% between 1982 and 2008

[iv]ABS  – In 2009–10, 60% of lower-income rental households in Australia were in rental stress.

[v]AHURI 2013 – 28% increased demand for public housing projected by 2023

[vi]ABS  – Between 2006 and 2011 the rate of homelessness increased by 8% from 89,728 to 105,237

[vii]ABS  – The total number of people living in ‘severely’ crowded dwellings jumped 31% (or 9,839 people) to 41,370 from 2006 – 2011

Australia’s Empty Houses…

By – Catherine Cashmore

“The home, built in 1857, had been unoccupied for years” said the report of a dilapidated Victorian-era mansion in Sydney’s Balmain East.

Balmain East

Situated in an exclusive residential pocket next door to Balmain East ferry wharf and sporting bayside views of Sydney’s Harbour Bridge, the 457 square metre block of land attracted 200 people to the auction, 18 registrations to bid, and sold $830,000 above the reserve to a local home buyer for $2.68 million.

According to Property Observer, the site had been acquired in 1973 for $33,500 by the notable gay right’s activist and historian, Alexander ‘Lex’ Watson – president of The Pride History Group, and lecturer in Australian Politics at Sydney University, who sadly passed away earlier this year after a long battle with Cancer.

$33,500 in 1973 dollars would be $289,724 in real terms today – making the selling price of $2.68 million, a value almost ten times as great.

The location was the key of course, with planned upgrades to Balmain East ferry wharf, which will now receive services from the Parramatta River along with extra ferries to McMahons and Milsons Point, further enhancing its value.

Had the home been only a few kilometres away, a few hundred thousand could have been wiped off the price tag and the media sensation may not have been so great, even so, it is not the only dilapidated property to make the press of late.

Opportunistic buyers caught up in Sydney and Melbourne’s property boom, have snapped up a string of empty homes, selling under stiff competition while exceeding all expectations of price.

An empty hat factory on Wilson Street, Newtown, also vacant for years, sold earlier this month for $1.725 million.

A dilapidated home on 360 square metres of land in Thornley St, Leichhardt, vacant for more than 30 years, sold a few weeks ago for $1.4 million at auction.

A home in total disrepair at 19 Durham St, Stanmore, situated on 172 square metres of land, vacant for years and sold for $923,000.

And not to leave Melbourne out, an unliveable Richmond property on 726 square metres of land, also vacant for years, sold for $2.544 million – $900,000 above the price it achieved only two years ago.

Screen Shot 2014-09-30 at 2.50.03 pm The list goes on…..

Barring the last example that came with plans and permits for two town houses, these properties transacted for nothing more than their land value.  However, while the buyers purchased a location, they did not pay for the services that rendered that location valuable or, in the case of the first example, compensate the local residents for suppressing access to some of the best views in town.

Instead, reinforced by inelastic zoning constraints, generous tax treatment, and unrestrained speculative growth in dwelling finance commitments, they unwittingly rewarded the sellers with a substantial unearned gain for withholding valuable land from use and depleting the nation’s housing supply.

This means of ‘creating wealth’ common in most western nations, sits at the root of many of our economic and social problems today. It has both a debilitating and destabilising effect on the economy, evidenced clearly in a painful and rising trend of  income and housing inequality that burdens the capacity of the ‘welfare state’ to compensate.

Interestingly, Lex Watson, the prior owner of the Balmain East property cited above, was purportedly greatly influenced by the writings of John Stewart Mill whose work was said to be: “the touchstone of his life and later activism.”

Born in London in 1806, John Stewart Mill is remembered as: “the most influential English-speaking philosopher of the nineteenth century.”

Inspired by his father James Mill, who tutored his nine children with daily lessons in Latin, Greek, French, history, philosophy, and politics, John Stewart Mill was a leading economist – a prolific logician, who dedicated his life to championing the causes of liberty and equality, while advocating ‘radical’ ideas, such as the abolishment of slavery and equal rights for women.

In 1848 he published the most prominent textbook on economics in the 19th century: Principles of Political Economy – critiquing systems such as communism and socialism and cementing Mill’s reputation as a leading public intellectual.

Extending on the ideas set out by Adam Smith and David Ricardo, Mill employed concepts that that have been written out of today’s economic narrative, that conflate land and capital – virtual opposites – while failing to distinguish between income that is ‘earned’ and the economic surplus that disproportionately flows to those that “love to reap where they never sowed.” A process best set out in Mason Gaffney’s book, “The Corruption of Economics.”

Writing on the moralities of taxation in Book V, Chapter II of ‘Principles of a Political Economy’ Mill commented:

The ordinary progress of a society, which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing.”

From this Mill concluded that the government should collect society’s economic rents in lieu of taxes that impede productive labour and industry, including taxes on the improvement and the transfer of property, (stamp duty) which he said, should rather be: “distributed over the land generally, in the form of a land-tax.”

He was not the first or last to do so.

He followed a long line of influential activists, from Thomas Paine, who in his 1797 publication Agrarian Justice stressed:

“Men did not make the earth…. It is the value of the improvement only, and not the earth itself, that is individual property…. Every proprietor owes to the community a ground rent for the land, which he holds.

To most recently, Dr Ken Henry, who chaired Australia’s ‘Future Tax System Review’ and noted: “… economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”

The classical economists recognised that unless profits from the ‘enclosure of the commons’ – land, water rights, minerals, and so forth – were effectively collected and shared for the benefit of the community, all productive gains, every improvement in society and the economy, would be capitalised into rising locational land values, enriching those that owned the assets but more so, those who created the credit and traded on the debt.

This is equally applicable to reductions in the cost of construction.

For example, news that high-density apartment towers close to public transport in Sydney, will no longer require parking facilities, delivering an estimated saving of $50,000 – $70,000 in development costs, will do little to ease affordability.  Rather it will simply leave more funds available to bid up the price of land and this is precisely what we are seeing in Australia – sky rocketing land prices requiring ‘super tall’ structures to provide a viable return on investment.

While the small one and two bedroom units may be spruiked as affordable, when calculated by cost or rental value per square metre of floor space, they are remarkably expensive.

Mason Gaffney expanded on the theory, coining the acronym ATCOR – “All Taxes Come Out of Rent.” Showing that whether renting or buying, total tax liabilities from whatever area carried by the consumer, deduct from the cost of a site to the extent they limit the amount a buyer is both prepared and able to pay.

It follows that the removal of all taxes would naturally wash up into higher prices for real estate, which in theory leaves the resulting rise in the economic rent of land ‘just’ enough to replace the forgone revenue. (For more, see Fitzgerald (2013) “Resource Rents Of Australia”)

When that liability falls on productive industry, deadweight losses occur. For example, 90% of our taxes are distortionary, adding 23% to prices of goods and services.

However, when the burden falls on land and monopoly rents – minerals, fuels, the broadcasting and communications spectrum, patents etc. The reverse is the case.

In respect of land, a higher tax rate levied on the unimproved value would discourage leaving dilapidated homes vacant for years while we struggle with an assumed housing shortage – suppressing the speculative element that adds to the volatility of the market cycle.

Furthermore, when the gain is collected and used to fund the expansion of infrastructure in order to service a growing population, the tax base is expanded without a subsequent lift in rates.

In the 19th century, nature’s ‘free lunch’ was largely limited to the aristocracy of the great landed estates, today monopoly profits are absorbed by the financial sector which wields significant political leverage from lending ‘endogenously’ created credit against real estate collateral, with the compounding interest disproportionately increasing levels of household debt. As I pointed out previously – Australia will increasingly feel the effect of this as we move into 2019.

Our current tax system is crooked. It allows large companies to jump through loop holes in legislation and ‘cook the books,’ shipping profits offshore, leading to an estimated $1.6 billion in tax revenue forgone, while land on the other hand, is used by investors as an effective tax haven.

In a recent post by Dr Gavin R. Putland of the Land Values Research Group, he notes:

“No matter how high your gross income may be, you can make your taxable income as low as you like, simply by buying enough negatively-geared properties. Such artificially reduced taxable incomes are used in ATO statistics on negative gearing, which are then trotted out by the property lobby as “proof” that most negative gearers aren’t rich — as exposed, for example, in Michael Janda’s article “The myth of ‘mum and dad’ property investors” (The Drum, 24 September 2014).”

Enlightening the disparity of our tax laws further, Putland includes a citation to a series of exchanges posted in the comments section of Michael Janda’s article in The Drum:


… Deductions for expenses incurred are a fundamental of our and every other economy. Show me one society where you cannot deduct expenses incurred.

Gavin R. Putland:

How about *our* society? The cost of commuting to work is manifestly a cost incurred for the purpose of earning your wage or salary, but you can’t deduct it against your wage or salary (or anything else) for tax purposes. QED.

Mitor the Bold:

That’s an ATO commandment, but theoretically you should be able to.


Actually, Mitor, it predates the ATO by about 200 years, and is derived from a pre-industrial-revolution House of Lords ruling which said that if tradespeople choose not to live in or over their business premises, then they should not be able to deduct the cost of travelling to their work.

However, I agree that theoretically you should be able to. Which is why the novated vehicle lease business has grown so rapidly, because that effectively enables people to deduct the cost of travelling to their chosen place of work. Bad luck for all of us who travel by public transport.


The cost of travelling from your home to work is not a work related cost. It is the cost relating to your choice where you live, a personal aspect of your life. No worker, contractor or business can claim as a deduction ‘personal’ costs. QED.”

As Putland points out:

“So there you have it, proles: The industrial revolution never happened. You always have the option of living at your place of work. If your place of residence is somewhere else, that is a “personal” choice on your part, and the cost of travel between the two is a ”personal” expense, not a work-related expense. If you want a big deduction against the wages of your labour, you’ll have to gear up and speculate on assets.”

Australia’s economic narrative is more concerned with suppressing wages than high land values.

Joe Hockey has unashamedly stated that any rise to the minimum wage “will cost jobs” and “reduce competition,” while remaining notably silent on the average CEO pay, which sits at an estimated 63 times average earnings (as at 2013,) as well as showing scant regard for rising land values which increase the associated costs of running a business, while discouraging growth in productive industry.

It uncovers a damaging Neo-Liberal agenda, which will do nothing to raise the living standards of Australians struggling to make ends meet.

Meanwhile in Germany, the house price-to-income ratio has fallen by almost a third nationally since the early 1990s, yet residents enjoy low unemployment and some of the highest wages per capita in the world – including the highest minimum wage in the world. Germany weathered the 2008 depression better than any other country in Europe by maintaining its focus on value adding growth.

(The Economist – German house price to average income.)

Screen Shot 2014-09-30 at 5.37.01 pm


The public needs to recapture the debate and push for a better set of democratic tools, that let the people decide directly on the benefits that can aid their communities, rather than the current state of affairs which is coloured with vested interest, polarising voters with false promises and flawed economic thinking.

The rise of citizen’s juries, where a diverse and representative group of people are randomly selected and given the information and training needed to deliberate together on matters of policy – for the benefit of all, not just a few –  limiting the power of corrupt government officials, may take us one step closer to achieving this.

Top of the agenda should be every citizen’s right to affordable access to land and shelter.

A Political Game of Smoke And Mirrors – Supply Verses Demand

By Catherine Cashmore

(Written for Property Observer – September 2014)

The only explanation offered to Australia’s low-income residents over the past few weeks, expected to take on a colossal amount of private debt just to put a roof overhead in our rentier economy, is that Australia is suffering from a ‘housing shortage.’

Speaking at the 2014 Bloomberg Economic Summit in Sydney, where the investor share of the market is close to 50 per cent and finance commitments have sky rocketed some 44 per cent higher than July 2013. Treasurer Joe Hockey, denied that prices were ‘credit fuelled’ because:

“….fundamentally we don’t have enough supply to meet demand (and) that doesn’t suggest a bubble.”

His views were supported by David Cannington, senior property analyst at Australia & New Zealand Banking Group Ltd (ANZ), who referenced an apparent shortage of ‘300,000 homes,’ while at the same time welcoming an elevated level of foreign speculation: “as adding about $4.5 billion every quarter to total dwelling construction.”

The shortage Cannington refers to, is derived in part from research put together by the National Housing Supply Council (NHSC) established in May of 2008, just prior to the last Senate inquiry into housing affordability, yet promptly disbanded by the incoming Abbott Government who are now only too willing to use its findings to support their populist view.

Using ABS data, the NHSC assessed what is known as ‘underlying demand’ – that is, the amount of extra housing needed per annum over the last decade for all residents in Australia (not just active buyers,) ‘IF’ we had continued to produce enough homes for an increasing population based on existing household composition figures.

The supply side findings of the report were hotly debated and justifiably so.

Planning for population growth is not an easy task, it is predictive in nature and makes many assumptions and revisions along the way.

However, this was not the NHSC’s only role.

It was also commissioned to produce a comprehensive evaluation of Australia’s affordability problems, which included the status of those impacted most – homeless, renters, first homebuyers, low wage families, and tenants in the public and social housing system, which helped clarify its findings.

The NHSC reports showed utility costs such as electricity, gas, water, and sewerage, have been increasing at more than 10 per cent per annum – yet they are not typically calculated as part of current assessments of housing affordability which tend to concentrate on mortgage serviceability rates alone.

They gave a good statistical overview to show a dramatic shortfall in affordable rental accommodation for low-income families. And clear evidence that our housing crisis is not that we do not produce enough homes ‘per se’ – but that we do not produce enough affordable and feasible options across the sector as a whole – in both the public and private sphere.

For example – the NHSC reports noted a “shortage of housing for lower-income people (specifically families) that results from a mismatch of housing prices relative to income.”

It made a point of stressing that Australia’s supply challenges cannot be met by ‘simply adding to the housing stock.’ And further elaborated on the inability of apartment construction to meet both need and price for the majority of family residents – the value of the land and associated costs being too high, and the size of apartments being too small to adequately fulfil the task.

This places Cannington’s second comment – regarding the level of foreign investment pushing an unprecedented inner city boom in apartment construction, into context.

For individual renters, students and a small percentage of couples living downtown, the increase in high-density accommodation will assist in placing downward pressure on rents.

It cannot however assist in addressing Australia’s real housing shortage (that of affordability) or accommodating the growing number of family and low-to-middle income residents, that want to buy – not just rent – and in the face of declining wages, find it increasingly difficult to do so.

This is not because we have booming population growth and a shortage of roof space, as our ministers are fond of sermonizing. But because our tax policies work directly against it, subverting supply side policy and negatively affecting wage growth by pushing up the price of land and the associated costs of doing business

They encourage a system of false scarcity, in which land and dilapidated housing is hoarded and not effectively utilised, forcing a process of social polarisation, as low income residents are forced to ‘hop’ the middle and outer rings, in search of cheaper options further afield.

They distort the use of the nation’s savings, encouraging speculation on rising land values, negatively affecting the financing of new supply, as investors chase the capital gains associated with established stock, over and above rental income.

investor loans

The behavioural impacts are profound, amplifying the boom and bust swings of the market cycle.

The financial sector accommodates, with property prices dependent on how much ‘endogenously’ created credit a bank chooses lend, subject once again, to our dysfunctional tax system and absence of macro prudential regulation in our lending institutions.

Negative gearing, depreciation and lower land taxes, leave more economic rent available to be pledged to the banks in the form of higher prices, producing a rentier economy which prioritises ‘creating wealth’ through asset inflation and rising levels of private debt – rather than improving living standards by supporting tangible investment into value adding activities.


The distortion that inflated values have on the economy acts to subvert housing policy as any danger of a marked decline in prices places risks financial stability.

Affluent neighbourhoods are protected from ‘over development,’ while inelastic responses to market conditions, coupled with restrictive planning laws that are often overly sensitive to neighbourhood complaints, allow professional land-bankers to squat on sites at low cost and secure windfall gains when they are later rezoned for residential development.

Stamp duty adds to the equation, placing a fine on labour mobility and the regular turnover of housing stock.

The resulting effect is illustrated on the maps below that show where affordable options were located in 2001 for low-to-middle income buyers, compared to 2011, in all of our major capitals.

The yellow patches being affordable, and blue patches unaffordable.

Screen Shot 2014-09-30 at 5.55.55 pm

(NATSEM Income and Wealth Report Issue 29 – The Great Australian Dream – Just a Dream?)

Prior to the 1970’s, infrastructure financing was funded in part, through the capture of economic rent from the land that directly benefitted from the accompanying improvements. The process had no negative effect on productivity, yet reduced the amount of rent available to be capitalised into the prices.

Now, infrastructure costs are financed through deadweight taxes on residents who derive no benefit in their own local neighbourhood, or loaded onto the upfront cost of new dwellings in fringe localities and promptly passed to the buyer.

The banking lobby loves minsters like Joe Hockey that offer no threat to their profits and instead, waft away any necessary concern over rising prices with simplified responses that fail to identify the root cause.

It has driven up the cost of housing – damaging the potential of future generations, with a lifetime worth of debt sold as “forced savings,” while the interest is re-packaged an into an array of obscure financial instruments, allowing the country’s wealth to gravitate into an elite nuclei of financially strong hands.

Notwithstanding, all the above points were highlighted in the last Senate inquiry into housing affordability, as well as being set out clearly in the Henry Tax review. Yet studiously ignored in a budget that surgically set about reducing the living standards of Australia’s low to middle-income earners, the most productive sectors of our economy, rather than collecting the tax revenues from resource rents and monopoly profits.

Joe Hockey has reaped substantial unearned gains from an impressive portfolio of property investments – reportedly, picking up his Canberra home “for a song” in 1997 at $320,000, and watched that land value more than triple in nominal terms to an estimated $1.5 million today.

In light of the above evidence, it can only be assumed that Hockey’s comments are based on a vested interest to protect his own back pocket and seat in power, rather than the urgent need to invest in Australia’s future by eliminating the losses inflicted by our current system of taxation, that force up the cost of land and levels of private debt.

Skyscraper Hubris – Pride Before A Fall

By – Catherine Cashmore

“Bill, how high can you make it so that it won’t fall down?” reportedly asked financier John J. Raskob, as he pulled out a thick pencil from his drawer, and held it up to William F. Lamb, the architect he had employed to design and construct The Empire State Building.

It was the ‘race to the sky’ and it marked the peak of the roaring Twenties. Capturing what is perhaps one of the most exciting periods in New York’s history.

“Never before have such fortunes been made overnight by so many people,” said American journalist and Statesman Edwin LeFevre (1871–1943)

While areas of the economy such as agriculture and farming, were still struggling to gain ground from the post WWI depression, and a large proportion of the population continued to live in relative poverty. Advances in technology, rapid urbanisation and mass advertising accelerating consumer demand, produced an era of such sustained economic prosperity, it led Irving Fischer one of America’s ‘greatest mathematical economists’ to famously conclude that:

“Stock prices have reached what looks like a permanently high plateau.”

“Only the hardiest spoilsports rose to protest that the wild and unchecked speculative fever might be bad for the country.” Wrote historian Paul Sann, in his publication, ‘The Lawless decade.’

“The money lay in stacks in Wall Street, waiting to be picked up. You had to be an awful deadhead not to go get some.”

Land values of course captured the gains, and between 1921 and 1929 lending on real estate increased by 179%, and urban prices more than doubled.

According to research collated by Professor Tom Nicholas and Anna Scherbina at the Harvard Business School in Boston, by 1930 values in Manhattan, including the total value of building plans, contained “only slightly less than 10% of the total for 310 United States cities (Manhattan included) during the same period.”

A staggering figure considering Manhattan at the time, contained only 1.5% of the US population.

Few raised concerns however.

It was believed the Federal Reserve Act, created in 1913 “to furnish an elastic currency” would tame the business cycle and – as the First Chairman of the Federal Reserve Charles S Hamlin put it:

“..relegate to its proper place, the museum of antiquities – the panic generated by distrust in our banking system..”

The National bank runs of the past had been exacerbated because there was ‘no stretch’ in times of crisis, or moderation in the rates of interest.

However, the bulk of lending against real estate over this period was not limited to New York, or to institutions that were members of the Federal Reserve.

Thousands of new banks were setting themselves up in outlying areas and as noted by Elmus Wicker, author of ‘The Banking Panics of the Great Depression

“..(they) were either operated by real estate promoters or exhibited excess enthusiasm to finance a local real estate boom”

It brought with it a period of high inflation, and coupled with speculation in real estate securities, produced an explosion in the value of construction that would not be equalled until the boom and bust era of the late 1980s.

NY construction(Tom Nicholas and Anna Scherbina – Real Estate Prices During the Roaring Twenties and the Great Depression)

By 1925 real estate bond issues accounted for almost one quarter of all the corporate debt supplied – and between 1925 and 1929 alone, a quarter of New York’s financial district was rebuilt and 17,000,000 square feet of new office-space added.

This, prompted the owners of the grand Waldorf-Astoria Hotel at 34th Street and Fifth Avenue to sell.

Arising from a family feud between two competing cousins, the iconic guesthouse had been built at the top of a preceding boom and bust land cycle in the early 1890’s, and as ‘the most luxurious hotel in the world’ stood 17 stories high towering above the surrounding residences.

W&A hotel

By the late 1920s however, the décor had become dated and the social elite had centred themselves much further north.

The owner’s decision to upgrade into the Park Avenue district, and build what was then, ‘the tallest hotel in the world’ allowed John J. Raskob to acquire the site for The Empire State Building for the not so small sum of $16 million.

Raskob needed a further $50 million for construction, which he achieved by way of a $27.5 million dollar mortgage, as well as engaging with a limited number of substantial backers.

“If the amounts seem considerable the backers knew that this was a money maker. The building would be the greatest showcase in the city filled with them.  And tenants would line up to print “Empire State Building” on their letterhead….” wrote Robert A. Slayton author of Empire Statesman: The Rise and Redemption of Al Smith

The location was later criticised for being too far from public transport, but no such concerns were raised at the time.

New York office leases began on May 1st – the sooner the building was completed, the sooner it would bring in an income and notwithstanding, Raskob’s two main competitors also in the race for height supremacy – auto industry giant Walter Chrysler and investment banker George Ohrstrom – had already commenced.

Chrysler had seized his opportunity when gratuitous plans for an opulent office block designed by architect William Van Alen had fallen through due to financing.

He took over the project with clear intentions.

Adjusting the tower’s ascetics to reflect the company’s triumphs, with gargoyles, eagles and corner ornaments made to look like the brand’s 1929 radiator caps. Chrysler instructed the builders to make sure his toilet was ‘the highest in Manhattan’ so he could look down and as one observer put it, “shit on Henry Ford and the rest of the world.”


Around the same time, George Ohrstrom, also determined to set the record, purchased the site that was to become the headquarters of The Bank of Manhattan at 40 Wall St (now the Trump Tower.)

Ohrstrom’s architect was H. Craig Severance, former partner and competitor to Walter Chrysler’s designer, Van Alen – and the bitter rivalry between the two added considerably to the dynamic.

Construction for 40 Wall St start started in May 1929 and no less than one month later, in April of the same year, fearing the competition Chrysler reportedly called his architect in frustration exclaiming:

“Van, you’ve just got to get up and do something. It looks as if we’re not going to be the highest after all. Think up something! Your valves need grinding. There’s a knock in you somewhere. Speed up your carburettor. Go to it!”  Higher: A Historic Race to the Sky and the Making of a City Neal Bascomb

Van Alen subsequently increased the height of the Chrysler tower to 925-feet and added more stories – 72 in total.

Not to be outdone however, Severance added 4 extra floors to his own design, extending the building’s height to 927-feet – only marginally taller than Van Alen’s efforts, but by this stage the steel frame for the Chrysler building had already been completed and in Ohrstrom’s mind, he had already won.

The Bank of Manhattan was finished at record speed, taking just 93 days in total – meeting the May 1st deadline and setting the record for skyscraper construction.

40 wall st

It opened with great celebration – with Ohrstrom boastfully laying claim to the title of “the world’s tallest,” while in blissful ignorance of the final trick Chrysler had yet to pull from his sleeve.

Replacing the original plans of a dome shaped roof, Van Alen enhanced the design with the addition of a 186 foot iconic spire, which was hoisted to the top of the structure in secret and assembled in a mere 90 minutes.


This raised the building’s height to 1,046 feet, a total of 77 floors – allowing Chrysler, less than one month later to trump Ohrstrom’s record.

The battle continued long after both blocks were completed, with the consulting architects of 40 Wall Street, Shreve & Lamb, writing a newspaper article claiming that their building contained the highest useable floor and was therefore more deserving of the title.

The Empire State Building however, was to settle the matter.

Hamilton Weber the original rental manager, takes up the story.

“We thought we would be the tallest at 80 stories. Then the Chrysler went higher, so we lifted the Empire State to 85 stories, but only four feet taller than the Chrysler. Raskob was worried that Walter Chrysler would pull a trick – like hiding a rod in the spire and then sticking it up at the last minute” The Empire State Building Book by Jonathan Goldman

The solution to Raskob’s worries was to add what he quaintly termed “a hat!” – marketed as a mooring mast for dirigibles – although never utilised due to the strong winds and updrafts that circulated at the top.

This raised the building’s height to 1,250 feet, easily outstripping both Chrysler’s and Ohrstrom’s efforts, allowing Raskob to scoop the title.

Taking just 13 months to complete, 58 tons of steel, 60 miles of water pipe, 17 million feet of telephone cable and appliances to burn enough electricity to power the New York city of Albany. The Empire State building with 2.1 million square feet of rentable space opened on May 1st 1931 empty – just as the country was entering one of the worst economic depressions in recorded history.


Dubbed ‘The Empty State Building’ – it did not turn over a profit until 1950 putting Raskob who, in 1929 had penned the famous article ‘Everybody Ought to be Rich‘ by investing in “America’s booming corporate economy,” deep in the red.

The history of this era is a fascinating study.  However as entertaining as the story is, it does not stand in isolation.

From long before the Empire State Building was completed, to the most recent example – the Burj Khalifa in Dubai – mankind’s quest to reach the heavens and demonstrate power through the imposing dominance of boasting ‘the world’s tallest’ structure has – with no notable exception – commenced at the peak of each real estate cycle and opened its doors during the bust.

The pattern is easy to follow:

Improvements in the economy are first reflected in rents, which adjust quicker to market conditions than associated expenses – insurance and utility rates for example – which are subject to contract and therefore typically rise out of step.

This in turn attracts speculative investment, pushing prices upwards beyond the cost of replacement, fuelling a cyclical rise in construction – usually for the purpose of speculation, rather than genuine homebuyer demand.

The steeper land values become, the higher the building must be in order to achieve a profitable return, this in turn increases demand to concentrate both labour and capital around what is usually a centralised core.

There is however a lag in the time it takes for high-density construction to reach the market – usually a number of years – before the extra supply can drive down both rents and values, resulting in the building boom outlasting the boom in prices, and an overhang of vacancies when the fervour dissipates.

Notwithstanding, there are limits to how high you can extend before the whole project becomes unprofitable.

William Mitchell, dean of the School of Architecture and Planning at the Massachusetts Institute of Technology, makes the following point in his 2005 publication ‘Placing Words Symbols, Space, and the City.’

… floor and wind loads, people, water and supplies must be transferred to and from the ground, so the higher you go, the more of the floor area must be occupied by structural supports, elevators and service ducts.  At some point it becomes uneconomical to add additional floors, the diminishing increment of useable floor area, does not justify the additional cost.”

In a subsequent publication he goes one-step further.

“I suspect you would find that going for the title of ‘tallest’ is a pretty good indicator of CEO and corporate hubris. I would look not only at ‘tallest in the world,’ but also more locally—tallest in the nation, the state, or the city. And I’d also watch out for conspicuously tall buildings in locations where the densities and land values do not justify it”  ‘Practical Speculation’ By Victor Niederhoffer and Laurel, Kenner

Mitchell’s warning to look for the “tallest” is not to be taken lightly.

The New York Tribune Building for example, one of the world’s first skyscrapers boasting to be “the highest building on Manhattan Island” – opened in 1874 and coincided with the 1873 financial crisis in both Europe and North America.

The Manhattan Building in Chicago Illinois and the Pulitzer Building in New York, boasting the title of “the world’s tallest” – opened between 1890 and 1891 and coincided with one of the worst economic depressions of that time (particularly in Australia.)

The Singer Building and The Metropolitan Life Insurance Company Tower in New York, boasting the title of “the world’s tallest”  – opened in 1908 and 1909 respectively and coincided with stock market panic of 1907 (the Knickerbocker Crisis.)

The World Trade Centre in New York, boasting the title of “the tallest twin towers in the world” – opened in 1973 and coincided with the 1973-75 economic recession.

The Sears (or Willis) Tower, boasting the title of ’the world’s tallest” opened in May 1973, coinciding once again, with the 1973-75 recession.

The Petronas Towers in Malay – surpassing The World Trade Centre as “the tallest twin towers in the world” – opened its doors to tenants in 1997, coinciding with the Asian financial crisis.

The Taipai 101 in China, the first to exceed half a kilometre, boasting the title of “the world’s tallest” – opened in the early 2000s, coinciding with the ‘Dot.com’ bubble and burst.

And most recently, the Borj Khlifa in Dubai, the current ‘tallest in the world’ -, opened in 2009, coinciding the sub-prime crisis, estimated to be the worst economic disasters to date.

Screen Shot 2014-09-11 at 3.41.05 PM

There are numerous examples, and rarely do these structures go up alone.

As we are seeing currently both here and abroad, the rate of high-rise construction globally, stands at unprecedented levels – funded by low interest rates and a wash of easy credit.

Matthew Guy, Minister for Planning in Victoria, has been a staunch supporter of higher density dwellings, but the risks surrounding a boom on the scale we are witnessing presently, cannot be diminished.

The small one and two bedroom apartments, funded in main by offshore speculation, are poorly designed, lack natural light, do not offer value for money, and lay out the reach of most first home buyers who face tighter lending restrictions for dwellings of this type

Notwithstanding, Prosper Australia’s Speculative Vacancies report for Melbourne in 2013, revealed many of these properties sit empty – up to 22% in the Southbank and docklands area – a figure that could well be higher today, considering the rate of what can only be termed, ‘bubble’ construction.

And to make matters worst, there is growing evidence the approved sites for skyscraper construction are being ‘flipped’ prior to commencement, with new owners reapplying to have height limits extended still further.

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(Developers ‘flipping’ projects for huge profits – The AGE September 1, 2014)

The next ‘world’s tallest’ will be the proposed Azerbaijan Tower in Baku, due for completion in 2019 – and projected to be 1km high.


It coincides nicely with the completion of ‘the tallest’ residential tower in the Southern Hemisphere – Australia 108 in Melbourne – which at 319 metres, will exceed the height of the current record holder – the Eureka Tower – and unless we see changes to current policy – will mark another period of financial instability.


Only by removing the accelerants that produce this behaviour – contained in our tax, supply, regulatory and monetary policies – can we start to address the boom and bust cycles that lay us open to economic instability, fuelling the boastful passions of financiers at the expense of the rest of the population.

It is these policies that keep us locked around a centralised core, increasing the cost of land at the margin and resulting in decades of dead weight taxes on every worker in the country being clawed back by way of preferential tax treatment for those that speculate on the rising value of land.

Every citizen in Australia would be richer by a significant margin if we collected instead, the economic rent from land, resources, banking profits, government granted licences and so forth, and used these to fund society’s needs rather than progressively taxing productivity to feed an elevated level of rent seeking behaviour.

But until such a time there is only one moral to this story.

Pride comes before a fall.

Land, Governance, and Finance – “Our Distrust Is Very Expensive”

Land, Governance, and Finance – “Our Distrust is Very Expensive.”

By: Catherine Cashmore

In June 2013, as the Senate voted unanimously to hold an inquiry into the corporate watchdog ASIC. Chairman, Greg Medcraft, gave a keynote speech to the ‘Global Investor Education Conference.’

Using the allegory of a stool, Medcraft identified three essential components needed for an “efficient and effective” financial market;

  • A robust regulatory framework that is enforced effectively
  • A competitive financial services industry that offers quality products and services, and finally
  • Investors who feel confident when participating in the market, and are able to make sensible and informed financial decisions.”


“If one of the legs is missing, the stool will fall over.”

However, recent findings from the senate inquiry, along with media reports exposing wide spread corruption, political lobbying, and financial fraud within the banking industry, have proved all three legs of Medcraft’s stool are missing.

The regulator is at best a totally ineffective operator. At worst, allegedly guilty under the Crimes Act for actively concealing information from victims of financial fraud.

Charged with overseeing a sector that is more than 80% owned or tied to the big four banks and AMP , the Government will now cut funding to ASIC by $120.1 million over the next five years, while also watering down recommended reforms from the ‘Future of Financial Advice’ report.

The retrograde changes will allow planners to claim they’re working in the best interests of clients, whilst still collecting ‘targeted’ rewards for pimping their employer’s products – moves that will do little to inspire confidence in the public, or improve the quality of products offered.

When asked about the budget cuts, Medcraft commented;

“What it means is that we do not have the luxury of doing as much proactive surveillance.”

But, ASIC have not been doing ‘proactive surveillance.’

They have been systematically turning away and ignoring consumer concerns, resulting in more than 1100 people losing millions, due to alleged questionable practices by advisers from the CBA and other financial institutions.

It’s hard to conceive how Medcraft concludes we have a ‘competitive financial services industry.’

Together, Australia’s ‘Big Four’ control more than 80% of domestic assets – that is, assets held by any individual, business or organisation resident in the country.

They enjoy 89% of total banking sector profits, 82.5% of the net interest income from ADIs, loans, and advances, and 83.2% of total interest income from residential mortgages.

Moreover, bankers have important privileges.  They hold the keys to the economy. Want a house?  You’ll need a mortgage. Want an education?  You’ll need a student loan.

They have the power to endogenously create (from thin air) and direct the flow of their own, and other people’s money – amplifying the inflationary and deflationary swings of asset cycles – all backed by taxpayer-funded insurance should their plans go awry.

Meanwhile, investors battling an economy tilted toward privilege, that does not allow workers on an average wage to achieve a comfortable retirement through saving alone, are charged with assessing the risks associated with an increasing array of elaborate financial products, which in itself, keeps dependence on industry ‘advice’ from sales agents whose moral judgement is subverted by the fees, commissions, and kickbacks they receive.

The system is pinned on trust and as American lecturer, Ralph Waldo Emerson once commented;

“Our distrust is very expensive.”

When trust breaks down, so do economies. It is therefore no surprise that in the latest annual survey of chief executives, put together by the Financial Services Council – ‘trust’ comes top of the list, followed by regulatory overload and sustainability, as the top three threats to industry profits,

trust fsc

“Industry leaders recognise there is a need to restore consumer confidence following global events such as the financial crisis.”

The wording in the report is mild, placing both focus and blame on the ‘GFC.’

However, former ASIC employee, lawyer and whistle blower to the recent senate inquiry, James Wheeldon, paints a picture of what is little more than a sales industry, spruiking its goods with glossy prospectuses, celebrity glamour shots, arrows pointing ever skyward, while the serious warnings are wrapped up in incomprehensible language and buried deep within the reports.

He cites the example of financial service provider RAMS, which in 2007 offered shares in its ‘Home Loan Group,’ – gifting both founder and major shareholder, John Kinghorn, $500 million – before collapsing just three weeks later as a result of a ‘major liquidity disruption.’

At the time RAMS claimed it was, ‘the victim of unforeseeable circumstances.’ 

In reality, the ‘major liquidity disruption’ hinted at within the small print of the report, was already underway.

Investors who purchased RAM’s Home Loan shares at the time, did not see the economic collapse coming – much less so those who bought into Real Estate Investment Trust (REITs) during the run up to the peak.

This is because the advisors in the banking industry will never acknowledge how Australia’s rising land values, far from being indication of economic prosperity, bear their consequence in a gradual destabilisation of the economy.

More than half the value of household assets (54%,) is comprised of real estate. While superannuation along with life policies – a significant and rising percentage of which is also invested into property – accounts for a further 25%.

Additionally, property also makes up a large percentage of stock market value, not just in the form of REITs and housing related companies, industry studies indicate that real estate makes up more than 25% of the assets on an average corporate balance sheet.

But, while it is well accepted that a housing bubble yields disastrous consequences and should be avoided at any cost, (although, is in fact promoted at great cost.) There is far less focus on how fluctuations in market prices bear a consequential affect on business activity, which ultimately yields to the same result.

Statistician Victor Niederhoffer and Laurel Kenner, cover the subject briefly in their book; ‘Practical Speculation’ with additional updated research that can be sourced on their website ‘Daily Speculation.’

They make the point that stock market investors can gain valuable insights from studying the land cycle – dispelling the conventional belief that gains in stocks drive up real estate prices because people have more money to invest.

Using a REIT index as a general proxy for values, they note an ‘amazingly’ large correlation between changes in property prices over the course of one quarter, and the S&P 500 index, the next.

Their research demonstrates that quarterly declines in REIT prices, can forecast overall market gains at close to twice the normal rate in the following quarter – yet, when viewed in reverse;

“…the correlation between the change in stocks in one quarter and the change in REIT prices the next quarter however, was close to zero”

The research helped them conclude that it is the housing cycle that ultimately leads the business cycle – not the other way around, as is often assumed.

The authors employed their analysis to successfully predict an imminent decline in real estate values in March 2002 – receiving wide spread criticism from industry advocates who suggested their warnings belonged “in the trash can.

However, as they go on to note;

“The torrent of vituperation is instructive in many ways. As economists who study the subject invariably conclude, contradictions are likely just when developers and banks are most convinced that business conditions warrant expansion.”

The concept, ignored by most real estate advocates is simple enough to understand.

Land is the beginning of all production.

All economic activity needs land – and therefore the value of land has a powerful impact on the activities that take place above.

Lower land prices enable production to expand, assisting small businesses and innovative ‘start ups.’

On the other hand, an excess of rent – the capitalised tradable value that is locked into the price – leads to a decline in business activity, as owners and tenants are required to take on a higher level of debt, to service the associated costs.

For the lender, it’s an extremely profitable exercise.

Banks quite literally ‘mortgage the earth.’

For each new buyer that moves onto a previously paid off plot, a new contract is issued.

Buyers purchase for tomorrow’s capital gains – with rents and company profits used to service the debt rather than expand their core business and the land used as collateral.

“Once upon a time, tenants paid rent for the use of land to landlords. Today, the bulk of those rents are disguised as interest and paid to the financial sector to fund mortgages” (British economist Fred Harrision)

The process is self-feeding – property prices are valued against recent sales. The higher property prices become, the more buyers need to borrow – the more buyers borrow, the more bank created credit is lent into existence against what is now little more than a speculative premium, encouraging vendors to hold out for ever increasing returns.

The rising appraised market value of a banks’ mortgage portfolio coupled with the need to meet shareholder expectations of return, further encourages lending – amplifying the volatility of the cycle, particularly during periods of easy monetary policy.

As the air is sucked out of the productive sectors of the economy, depressing both wages and job growth, increasing the costs of welfare and compromising the ability of monetary policy to stimulate demand.  Assets inflate, while the ‘real economy’ stagnates and the sharp rise in interest rates, that typically comes towards the end of the cycle – when it is noted far too late in the game, that prices have exceeded any thread of rationality – is enough to tip the balance.

In the case of a crash, the last buyer in will be the biggest loser. The banks however, will be ‘saved.’ And with land prices now low enough to attract new investment, the stock market, which prices in recovery ahead of time, will be first to rise from the ashes.

For the elite, this system works perfectly.

It makes those at the top of the pyramid very rich.

Therefore the economic disasters that derive from this process are passed off as unforeseeable ‘Black Swan’ events. Except – they are not – they can be predicted with quite a degree of accuracy.

We have enough reliable public data to trace the land-driven boom bust cycles over hundreds of years.

Some of the older data sets include Homer Hoyt’s classic ‘100 Years of Land Values in Chicago, 1833-1933,’ which details five major crashes that affected not just Chicago, but the whole of the USA.

Real estate analyst Roy Wenzlick, author of the 1936 publication “The Coming Boom in Real Estate” produced similar research, monitoring transaction volumes, rents, values and construction into the early 1900s.

Maastricht Professor, Piet Eichholtz’s index of prices for the Herengracht canal area in Amsterdam, which begins during the 1600s, an era associated with a fall in land values of 50% – and shows a similar pattern of volatility right through to the late 1900s.

A comprehensive history of cyclical research around the globe, can be found in the work of scholars such as Philip J. Anderson, Mason Gaffney, Fred Harrison, and most recently, the publication ‘Bubble Economics,’ by Paul D. Egan and Philip Soos, which records the Australian history of speculative land crashes from the 1800s onwards.

The precursor is always a rapid run up in land price to GDP and consequently bears evidence of a marked increase in consumer debt for the purpose of lending against speculation, rather than investment into productive activities.

This has been the trigger for all of Australia’s recessions. The 1890’s, 1930’s and more recently 1974–1975, 1982–1983, and 1990–1991, and would have additionally been the trigger in 2008, had Kevin Rudd not thrown every last penny of a budget surplus (and then some,) into propping up house prices and preventing any significant private debt de-leveraging.

Soos GDP Land

(Philip Soos)

Of course, the clear and obvious link between land price volatility and the ongoing negative effects on both society and the economy, should be enough to push ministers to more than just tinker at the edges of both real estate, monetary and regulatory policy.

As former CEO of the Commonwealth Bank and head of the Financial System Inquiry, David Murray, correctly noted last week, distorted asset prices” will eventually “cause a correction” resulting in “political pressure on financial systems.” 

The type of political pressure that will ultimately fall upon the taxpayer to chip in, when the institutions that have monopolised the public rents, need to be bailed out.

The RBA is also not ignorant of these matters – they were covered in detail in their 24th annual conference in 2012, co-hosted with the Bank for International Settlements;

The crisis has challenged the benign neglect approach to real estate (and other asset price) bubbles. That approach was backed by a theoretical framework that saw the structure and behaviour of financial intermediaries largely as macroeconomic-neutral and by the belief that policy was well equipped to deal with the consequences of a bust.”

In it, Glenn Stevens noted that;

Monetary policy cannot surely ignore any incentive it creates for risk-taking behaviour and leverage. Simply expecting to clean up after the credit boom is not sufficient .. the mess might be so large that monetary policy ends up not being able to do the job”

Yet monetary policy does ignore it – as do the regulators.

Following the senate inquiry, in July 2014, Greg Medcraft  was interviewed by the ‘Centre for International Finance and Regulation’ as part of a symposium on ‘Market and Regulatory Performance.’

The theme that emerged from the interview and the conference as a whole, was the need for a change of culture within the banking sector.

However when Medcraft was asked if he agreed with Governor of the Bank Of England, Mark Carney, who suggested regulation should play a critical role in changing culture, the response was telling;

“No I don’t think the regulator can change culture… it’s not about complying strictly with the law, but just making sure you pass the perception test… how would it look if this became public”

‘How it would look if this became public’ – was discovered, when Lindsay David, Paul D. Egan, and Philip Soos, published details of the dwelling investments held by our Federal members of parliament – causing outrage on social media toward what is a clear conflict of interest impeding the ability of MPs, to successfully address issues relating to housing affordability, and ultimately head off another financial crisis.

Poli investments


Yet, despite the social and ethical problems that result from the process, our politicians that own substantial investments in real estate are merely the ‘pin up’ boys and girls for an industry, born of a culture that promotes an unsustainable system of leveraged debt and rising land values as the road to both freedom and riches.

It has driven up the cost of housing – damaging the potential of future generations, with a lifetime worth of debt sold as “forced savings,” whilst the interest is re-packaged an into an array of obscure financial instruments, allowing the country’s wealth to gravitate into an elite nuclei of financially strong hands.

Only by removing the accelerants that produce this behaviour – contained in our tax, supply and monetary policies –  can we start to address the systemic boom and bust cycles that lay us open to financial crises.

Every citizen in Australia would be richer by a significant margin if we collected the economic rents from, land, resources, banking profits, government grated licences and so forth – the ‘commonwealth’ of the country – and used these to fund society’s needs rather than inflicting harsh penalties and impeding economic growth, in the form of dead weight taxes on earnings and productivity, to feed an elevated level of speculative demand.

In addition to this, we must remove all barriers that increase the cost of land at the margin, with an overhaul of supply side policy – ensuring cheap land is available for need, not greed.

It’s impossible to have a trustworthy banking system, until we first create an honest system surrounding the fundamental principles of property rights.

Ultimately, this must come by way of a collective and democratic agreement – ‘a discussion over what belongs to you, me, and critically – us.’

However, until such time, we remain subject to the self-satisfied complacency of our politicians, who continue to undermine the people’s trust.