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%.