The downturn of 2019 continued..

As many know, I’m President of Prosper Australia.  One of Prosper Australia’s executive members is Bryan Kavanagh, a former valuer and resident expert on real estate cycles.

Mr Kavanagh and Prosper Australia researcher, Dr Gavin Putland, have developed the K-P index to predict economic declines from real estate speculation.

The latest update of the K-P index points toward the 18 year mid-cycle downturn which I referenced a few posts ago.

 The index shows the total value of Australian real estate sales to GDP.

The Kavanagh-Putland Index demonstrates that recessions usually ensue within 12 months of the year-on-year index declining by more than 25%.

The index did this mid 2018.

Since 1984, Australia’s total land values increased by a factor of 23.5, averaging an increase of 10% per annum, whereas seasonally-adjusted nominal GDP growth has tracked at just 6.6% per annum.

Whilst this represents a great return for buyers and landholders, it has been counterproductive because wages and demand have languished.

Quite simply, the more we spend on real estate, the less we have to spend as consumers. This hurts small business, wage growth and employment.

Australians have been doing what the tax system has encouraged them to do: to invest in real estate, because their increase in real estate wealth tends to dwarf the wages they’re able to earn,

As Mr Kavanagh comments, In 2010 “The Henry Tax Review” (Australia’s Future Tax System) recommended getting rid of 100 taxes in favour of four: income tax, the GST, the resource super profits mining tax and an all-in land tax. Implementing those reforms would have gone some way to redressing the imbalance between real estate investment and productivity” he said. “Except for a failed attempt at the new mining tax, these recommendations have not been taken up.”

The Progressive Era, from the late 1890s to the early 1920s, when much of Australia’s infrastructure and its regions were developed, carried lessons for Australia. Some 50% of all revenue at the time was real estate-based whereas it now represents less than 10%. Over the last six years, Australia’s income tax has ranged between 57.0% and 59.1% of all revenues and property-based taxes are now only between 8.6% and 10.8%.

 

What are you paying for?..

A man walks into a real estate agency.  He’s new to the country and its policies. He tells the realtor he wants to buy a plot of land for his factory. He gives the agent an idea of his budget, and land size needed.

“Sure sir” replies the agent. “I have just what you are looking for.”

She takes him in her car to the outskirts of Melbourne.  They drive up a muddy track, through some empty fields, to a block of land. Its dimensions are neatly marked out with wooden stumps.

“Here you are sir, exactly what you’re looking for, 1000sqm and the cost is $10,000.” smiles the realtor.

The man gets out the car and looks around.

“Is this the only road to access this plot?” He asks..

“Yes sir…” she replies pointing – “Your closest neighbour is a few kilometres that way, along with the local primary school and a few village shops.”

“Oh!” The man responds. “This will never do! How will my workers get here on time, and where will my customers come from?!”

Noting the man’s reaction the agent thinks for a moment.  She ushers him back into the car. “I think I understand what you need sir.. “

Driving back into the outskirts of town, they come across another plot of land, exactly the same size and dimension as the first.

Exiting the car she exclaims excitedly “ This is perfect for you sir!”

“See the school over there?  That school is SO good, that people pay $200,000 or more just to live in the ‘zone’!….Over there is the local hospital.. it has some the best surgeons in Melbourne. It’s very popular and the staff that work there, use this shopping strip all the time…..Down the road is train station where your employees can commute to work, and as you can see, the local bus stop is right outside….And crime..? Crime is very low. The police patrol this street every 15 minutes….”

“Oh!” Said the man excitedly. “This is exactly what I am looking for!” He reaches for his checkbook.. “How much is it?”

“$100,000” replies the agent.

“$100,000?!” explains the man aghast.. But it’s exactly the same size and proportion as the other block!”

“Sir you’re not thinking!” Replied the agent..”Look at what you’re getting! The location will attract plenty of business to your factory..”

Pondering for a moment, the man agrees – “you’re right – the price is worth it to me. I just have one question, who do I make the cheque payable to?”

The agent looks confused.

He explains further “The high school, the police station, the hospital, the public transport company..?”

“Oh no sir!” Laughs the agent.  “You make it out to the vendor. He’s in Florida, he’s going to retire on the profit from this sale!”

“Then who pays for the facilities that give the land its value” says the man confused.”

“Well Sir, when you set up your factory, and employ your workers, and start producing goods into the economy.. you’ll pay income tax, GST, Payroll tax, Property tax on the building….”

“But that’s not fair!” exclaims the man. “I’m paying twice!.. Once in the land price to a private owner, and once through taxes on my goods and labour for all the services that give the land its value..…! ”

I hope you understand this story. It’s one I use when trying to explain economic rent and the Georgist economic perspective to people who have never considered how the economy works.

It’s time we stopped paying twice…

#sharetherents