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%.

 

Advertisements

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

 

The 2019 downturn…

In 2014 I wrote this blog post predicting a period of financial instability in 2019 based on the skyscraper index.

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.

Following the slowdown in the market cycle in 2018 due to the Royal Commission into the banking sector causing an extreme tightening in lending conditions, not to mention jitters regarding the pending general election in 2019…. All indicators point to further downward pressure in land values into 2019 – and it may not be pretty.

The Sky scraper index is rubbished by a few who have not studied it in full. However, my comments are also based on our expertise of the 18 year cycle – you can find more information regarding that from my business partner Phillip J. Anderson at http://www.andresoncashmore.com.au.

Following this downturn, we’re upwards into a 2026/2027 peak and a potential land price lead recession/depression into 2027/2028.

I’ll write more detail on this in the next post.

 

‘Speculative Vacancies’ – The Empty Properties Ignored By Statistics

SpecVac_cover2015_SS600 (1)

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

Footnotes:

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

http://www.afr.com/real-estate/leaky-data-water-use-shines-a-light-on-occupancy-20151207-glhewz

http://www.bloomberg.com/news/articles/2015-12-08/nobody-s-home-australian-boom-leaves-swathe-of-empty-properties

http://www.news.com.au/finance/real-estate/shocking-number-of-melbourne-properties-left-vacant-despite-huge-housing-demand/news-story/4dc12b7033d1e43e91458b673fdabf79

http://www.domain.com.au/news/nearly-20-per-cent-of-melbournes-investorowned-homes-empty-20151209-glixgs/

http://www.businessspectator.com.au/news/2015/12/9/property/vacant-properties-soar-victoria

http://www.macrobusiness.com.au/2015/12/the-melbourne-ghost-city-revealed-2/

Also covered by “Friendly Jordies

https://www.youtube.com/watch?v=clC_vIlbtME

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.

Screen Shot 2018-01-17 at 6.43.26 pm

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! …

Screen Shot 2018-01-17 at 6.44.19 pm

…. 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.

Screen Shot 2018-01-17 at 6.46.59 pm

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.

Egan_Soos_01

“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.

Egan_Soos_08

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.

ScreenHunter_4876-Nov.-10-07.41

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.

2014-09-19---03

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:

(Footnotes)

[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.

richmond_0003_4.jpg

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.

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:

“AE:

… 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.

Overit:

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.

JoeBloggs:

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

130508_-_Wages_and_salaries_growth_rates_in_Germany__total_economy

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.