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

“By hoarding housing, the rich pay less, while the poor pay more”

By: Catherine Cashmore

(Short article written for Property Observer – covering items made in detail else where on this blog.)

I was contacted twice last week to comment on news stories that featured young Australians building their way to retirement, through debt, leverage and speculation, on the back of rising property prices.

Described as ‘an entrepreneur,’ another a ‘wonder kid,’ both stories told a similar tale.

A gift from mum and dad had helped with the deposit – living in the family home had enabled investment into areas that may not have suited their ‘home’ buying requirements.

Rising property prices had enabled equity to leverage into the second acquisition – it was not reinventing the wheel, rather a repeat of an all too familiar theme.

One had managed to reach his sixth investment by the age of 26 (having started at only 19) – both were on their way to becoming property investment advisors – wanting to help others achieve real estate riches too.

“Young buyers are entering the property market as investors” prompted one reporter – which is no more obvious than saying “circles are round”.

Everyone who enters the property market is an investor, I responded.

There would be few in the industry working on the buying side of the equation who had not been involved in what I often term ‘the capital gain game’ – where every option suggested is followed by the question “but which will get the best growth?”

Australia has a lopsided neoliberal economy founded on the back of a 5.1 trillion dollar housing market, over 4.1 trillion dollars of which is irreplaceable land.

We’re slaves to a system where the retirement wealth egg is the family home – our personal economic leverage for all lifestyle and business needs – something that is only achievable if policies are manufactured to ensure values remain high (and climbing), whilst debt levels remain ever affordable.

click image to open in a new window

Source: Philip Soos

It used to be called ‘Monopoly’. Today its termed: ‘getting onto the property ladder’.

Retire as a renter or find a way to ‘work the system,’ playing a dangerous game of debt and leverage, and hoping when the wind finally blows, you’re not left holding the house of cards.

For those unable to afford current high prices, they will see no tax benefit – unless their income is low enough to require welfare assistance.

Rather they will be at the mercy of rising rents with an uncanny tendency to outpace inflation, tight vacancy rates and few low budget options.

If, as above, they are the ‘lucky’ beneficiaries of family assistance to enable their step onto the first rung of the ladder, they’ll enter a tax system skewed toward ownership, the benefits of which are capitalised into the price, pushing values higher.

Source: Bubble Economics by Paul D. Egan and Philip Soos

Under such a system, the final consequences are set in stone.

On a global scale, the land bubble induced financial crisis of 2008 left millions suffering fatal burns.

Tough austerity measures that followed destroyed the hopes and dreams of thousands of Europe’s youth.

For those just entering retirement, savings were wiped away, along with any chance of employment in later years.

Australia escaped relatively unscathed, but this isn’t because we’ve solved the boom/bust cycle.

Our policies differ little from the affected countries that promote ownership with similar inflationary measures.

First time buyers have no memory of a recession and understandably want their share of the pie.

However our history is littered with recurrent patterns of boom-bust credit and asset bubbles, commonly triggered by high land prices.

They all heralded financial instability and dreadful social consequences – a study of which should perhaps feature higher on the school curriculum.

We’ve just entered into another cycle and already prices have exceeded previous peaks.

Housing cycles are long-term affairs, however unless we begin to studiously take measures to change our tax and supply policies, when the clock ticks round again – as it inevitably will – our house of cards will blow over like the rest.

Many applauded Malcolm Turnbull as he made the most of his share of publicity during the CEO sleep out last week, to raise money for the homeless.

However, Turnbull is part and parcel of a budget and government that exacerbates housing affordability, and by consequence, the very problems he endured a cold night to help ‘solve’.

This is because the government has structured the tax burden to fall predominantly on wages and productivity – which advantages those at the top, who see their landholdings increase way in excess of any taxation or earned income through no individual effort of their own, rather the collective efforts of community investment (items of which I’ve detailed previously) – whilst the productive earners at the bottom of the pile, struggle to make ends meet.

In other words, by hoarding housing, the rich pay less – the poor pay more.

Unless we restructure our tax and supply policies to address this and reduce land prices, encouraging instead, individual investment into productivity rather than speculation on rising land values. Welfare measures to help the homeless are merely a Band-Aid to capture the increasing number falling foul of the system and never a cure.

Which brings me back to the one question both reporters failed to asked,

“Who are rising property prices good for?”

Our Interrelated Property Cycles – easy ‘windfall’ gains – but, what’s the Consequence?

Our Interrelated Property Cycles – easy ‘windfall’ gains – but, what’s the Consequence?

Take a cursory look through the international press and reports on housing related matters, and it could be merged it into one text as property cycles become increasingly interrelated and investors search for ‘safe havens’ off-shore.

Overwhelmingly – affordability – bubbles – the rise of Asian investors – and fears over a new breed of non-home owning ‘renters’ dominates, and although headline chasing would place any sensationalist report front of line, the reader comments and related dialogue that follow, present a familiar picture for the ordinary home buyer – no matter what reforms are taken, it never seems to get any easier.

You could be forgiven in thinking it’s by some abject force of nature, bustled in at the time of the ‘big bang’ that property – (or as I pointed out here, ‘land’) – is deemed ‘unaffordable.’ Outpacing wage growth and inflation through the course of a cycle, subject to the whims of a bank’s propensity to lend – burdening buyers with one of the most stressful experiences they’ll go through in life.

Or in the bleak words of the eminent poet Leonard Cohen;

“Everybody knows…. That’s just the way it goes.”

This is what the real estate and finance industry would have you believe as they navigate through the fluctuations of the property cycle with authoritative analysis, on what and where to buy.  And no doubt, it’s been a prosperous affair.

The number of ‘property investment books’ written by the I Did It – And You Can Too! experts, belies belief. And yet, becoming successful in the game isn’t incredibly hard for anyone with an ounce of locational common sense. The authors are simply singing their own interpretation of an age-old song titled ‘Monopoly.’

Over the course of a business cycle, which is both lead by, and correlated to the housing cycle, the gains – more correctly termed economic rent or “earnings from land,” alone – by far and away surpass those that can be gleaned from other more productive investments.

This was stressed in a recent submission by “Earthshare Australia” to the upcoming Senate enquiry into housing affordability

Unearned incomes in land increased a whopping $187 billion in the December 2013 quarter alone (ABS 6416). Total yearly dividends (2013), for investors engaged in risk, was recently reported at $84 billion – $103 billion less for an entire year.”

(Leaving them to question) “Why invest in small business or the ASX when one can earn more for less risk at a lower tax rate as a land speculator?”

These gains occur primarily because we choose to leave the larger proportion of ‘economic rent’ (mistakenly termed, ‘capital growth’ – however in this context, we are talking about the unimproved value of the site) locked in the land, rather than recycled back into community – from where it evolved.

Hence why housing is so expensive – the financial benefit derived from improving the surrounding facilities, is not effectively utilised – and our tax and supply policies do little to assist.

The Henry Tax review was not slow to point this out, when it suggested progressively scrapping a vast array of ‘bad taxes’ (payroll, insurance, vehicle registration, stamp duty, and forth, as well as reducing those that ‘reward’ speculation) and instead, collecting more of the economic rent of natural resources – significantly ‘land.’ (Notwithstanding, it was another Government ‘review’ which fell largely on deaf ears.

Yet, historically, the capture of economic rent (through land tax and to some extent ‘betterment’ taxes) financed some of the most remarkable infrastructure we have. Sydney Harbour Bridge being a case in point.

The tale of a Bridge and our accumulated wealth….

It was acknowledged at the time, that residents on the north shore would benefit significantly from an increase in their property values as a result of this essential piece of infrastructure.  Therefore, a framework was set in place to capture a proportion of the uplift – approximately one third – to assist with funding.

This was in no way detrimental to the property owners.

The increased advantage of economic activity coupled with the rise in prices resulting from the enterprise, more than compensated. A win-win if you like – and readily accepted by the public as ‘fair.’

Over time, changes in the way both state and federal government collected tax moved focus away from land values, onto productivity, effectively, placing a fine on labour and doing a good job of keeping us asset rich and income poor.

It’s great for the haves – but not the ‘have-nots’ (our growing pool of tenants.)

Consequently, the wealth locked in our residential land market, through the process of this accrued speculation – sits at post $4 trillion (add the buildings on top, and it’s an estimated $5.02 Trillion.)

It’s so large a number; it’s almost meaningless in real terms.

Western civilisation has not been around for a trillion seconds – go back a trillion seconds  – (31,688 years) – and you’d see Neanderthals roaming throughout Europe.

Yet our housing market is worth 5 of them.  It’s quite an achievement.

In comparison, the UK housing market is assessed to be $5.2 trillion with a population of around 60 million, so the distribution across a population of 23 million, is telling.

It’s this, that enables publications, such as the ‘‘Global Wealth Report’ produced annually by Credit Suisse, to assess Australian’s to be the ‘richest in the world’ in median terms.

In other words – if you stand everyone in a long line, richest to poorest, the middleman has more ‘asset’ wealth than any other country assessed.

It should therefore come as no surprise that our wealthy know where to ‘bank’ their dollars – and it’s not down the high street

As economist Adair Turner and others have pointed out in response to a recent report by Oxfam, which demonstrates how Britain’s five richest families are wealthier than the poorest 20% of the population.  The riches are only in part derived through productive activity – the vast ‘wealth’ however, has been derived through ‘rents’ (unearned gains) in land.

If you thought wars were about religion – think again.

The compounded rent is effectively what we pay for when acquiring real estate – a calculation that takes into account expectations of future growth, minus expenses for the time held – along with a range of other variables such as wages and borrowing rates.

Yet capturing a greater percentage of annual land values, whilst at the same time reducing those on productivity holds much in its favour.

  • It reduces the propensity of boom/bust housing cycles,
  • Encourages timely construction and effective utilisation (good for both the economy, employment and consequently, our welfare state)
  • Aids infrastructure financing,
  • Supports decentralisation,
  • Assists in keeping the cost of shelter affordable – levelling to some degree, the playing field between non-owners and owners.
  • And importantly, in regions where it’s been implemented with success – Pittsburgh and Pennsylvania being examples -most owners pay less tax when there’s a shift from productivity onto land, than would be the case otherwise

Change ahead?

Of course, to change the mindset of any nation that has been encouraged to use their housing investments as leverage for economic activity, a welfare fund for retirement, collateral for the advancement of business and commerce, and an ATM for family emergencies, is no easy task.

Not to mention the many vested interests in both Government and the property industry, all of which derive their income from the promotion of it.

However, it’s vitally important we do so – because it sits at the very base of every conversation Government is current having regarding the welfare state, cutting pensions, and increasing the working age until retirement.

Even in our technological age of driverless cars, lasers that can change the weather, 3D printers that can produce substitute body parts, and solar farms that can produce enough energy to run a small city, nothing is possible without the land which gives us the food we eat, the water we drink, the air we breathe, and a rich array of commodities to fuel our appetite for ‘growth.’

There is nothing to be gleaned in from the hording of land, and whilst secure private tenure of property is vital in so much as land needs to be cared for, cultivated, and effectively utilised, a proportion of ‘unearned’ economic gains that come from the locational rent of the unimproved value alone – should not be privatised to the extent that prices escalate through the inducement of speculative gain.

Can supply policy solve it alone?

We talk a lot about supply, but whilst the status quo exists – rising land values being used as the primary driver for economic growth – high prices ensure land will only developed for profit, timed to capture the upward wave of a cycle, rather than developed to meet the immediate needs of a home buyer, which does little to deter the wasteful process of land banking.

It is not insignificant that the burdens to supply policy, which we consistently criticise – the structural impediments to development – were implemented along side a gradual shift of the rental capture of land, onto productivity.

As Bob Day asserts in his submission to the Senate debate on Housing affordability, (first published; Home Truths Revisited May 2013)

“The regulatory seeds of the housing affordability crisis were sown in the 1970s. Until then land was abundant and affordable, and the development of new suburbs was largely left to the private sector”

The 1970’s was not only the point at which urban zoning (a process of false scarcity) was imposed by state Governments – it also came at a time at which any hope of tax capturing the fair uplift in land values to keep construction timely and offset soaring costs, had been truly eroded.

This, coupled with a shift in infrastructure financing – as private enterprise played an ever-increasing role and projects were no longer provided with capacity ahead of time, but required to prove revenue – ‘user pays’ whilst homeowner benefits – was the beginning of the end.

A Glance Back At Policy..

Early settlers had rejected the British system of taxing both land and buildings, in favour of the methods advocated by the classical economist Henry George, who had previously presented his ‘single tax’ theory in Australia to thunderous success.

However, over time, the Government’s inept and poor administration in the regularity and standard of valuations, the creeping in of exemptions (including the family home) coupled with lobbying from large landholders – a group which have historically maintained the greatest political clout – significantly eroded the system, and by the 1950s an array of taxes were falling increasingly on productivity, rather than land.

In 1953 when the Menzies Government abolished the Federal Land Tax, rapid ‘post war’ population growth had firmly laid the foundations for a thirst to profit through ‘capital gain’ (mounting land values.)

The then Labour party – which had historically always rallied in favour of raising revenue from the economic rent of land rather than productivity, were up in arms, prompting Arthur Calwell to speak in opposition of the plan, passionately declaring

“…We have always believed in the land tax….The land belongs to the people, and its use must be safeguarded and protected at all times!” ((Hansard, Vol 221, pp 165-170 passim)

However, it was the beginning of the end.  Up until 1961 it was an integral part of the Labour platform.  By 1963 however, the commitment had been omitted all together, apparently, without conference approval. (Cameron Clyde “How Labor Lost Its Way”  “Progress” May-June 2005)

When Whittlam came to power in 1972 (see Bob Day’s comment above) he ignored any call to bring in legislation to collect the economic rent of land, instead of levying heavy direct and indirect taxes on income, and in so doing, a politically fabricated boom in land values was underway.

In the decades that followed, the promotion of negative gearing (1985), halving of the capital gains on investors (1999), onerous levies on development and upfront infrastructure costs passed onto buyers – grants, incentives and so forth, had little to do with the delivery of affordable housing, and everything to do with escalating land prices.

It should come as no surprise then, that large landowners and the commission side of the real estate industry, shy away from any changes to the tax system. The smoke screen debates on affordability and scrapping negative gearing are just that.

So what now?

Due to China-led resilience and economic stimulus Australia, although in no way unscathed, avoided the disastrous consequences of 2008, resulting in thousands of foreclosures across the US and Europe, whilst banks were bailed and families continue to be evicted.

Not so the recession that marked the early 1990s.

Affecting 17 out of 18 comparable OECD countries, high unemployment, a large current account deficit and elevated level of foreign debt left many economists gloomy Australia would ever achieve long lasting economic recovery.

Endless debate was given to the causes and consequence, which left policy makers reassuring the community that lessons’, would be learnt! However, as the then Governor of the RBA, Ian McFarlane, later summed up in his 2006 Boyer lecture;

“Any boom built on rising asset prices financed by increased borrowing has to end.”

And considering the date this lecture was given (2006,) the following comment was insightful;

No-one though has a clear mandate at the moment to deal with the threat of major financial instability associated with an asset price boom and bust.”

It’s unfortunate that “no-one” happens to be our most influential political and economic policy makers – and indeed, we’re not alone.

After every economic crisis, there is always the promise that events will never happen again – safe guards are put in place and eventually the wreckage is cleared, however happen they do, and reforms that promise otherwise, repeatedly fail.

Significantly, globalisation, the interrelating of major economies, is adding to the volatile nature of each economic downturn.  As Wayne Swan asserted in his speech “A Future Of Promise” given at The Sydney institute in 2007;

“It is, truly, the sharpest synchronised global downturn in living memory…And it’s being inflicted on good Australians through no fault of their own.”

No cycle is exactly the same, but whilst history may not exactly mirror the past, patterns do.

There’s only one reason we have devastating house price booms and busts – the pre marker to any recession and economic disaster, and that is speculation induced in this case, through the privatisation of unearned gains.  And whilst some continue to reap a windfall from exploiting the process, we really need to pause and ask – ‘”Who is it really benefitting?”

It’s time for change.

Catherine Cashmore

A Look At The Market Through Foreign Eyes

A Look At The Market Through Foreign Eyes

I had the good fortune to meet two investors from Dallas Texas last week – visiting in part, to survey the Australian real estate terrain and in return, provide a unique opportunity to glimpse the madness of it all through foreign eyes.

A cursory look through the press paints a colourful picture for our visiting observers.  Obviously, the spectacular rise in Sydney’s valuations has come under incredible scrutiny over the past 12 months or so.

Like any upswing in the ‘property cycle,’ it’s been exacerbated by a mix of forces, culminating in a shortage of effective supply against a bull run of speculation, which all agree has an inevitable end-by-date and no doubt subsequent ‘correction’ when the tide changes.  (‘When’ being the operative word.)

The latest stats from RP Data’s capital city ‘Home value Index’ for the first quarter of the 2014 have evidenced “a near record level of growth throughout the month of March” rising in excess of 2% coupled with an “ongoing escalation in housing finance commitments.”

Sydney dwelling values are now reportedly 15.8% higher than their previous peak, some distance from Melbourne, which shows a more ‘subdued’ 4.7% ‘post peak’ increase (movements, which in industry ‘speak’ are neatly termed a ‘recovery.’)

In response, the RBA, are like ‘a read blowing in the wind,’ employing the same old wooden tools they’ve always relied upon as they warn investors in their latest Financial Stability Review, – (like last year’s review, when stating how undesirable” it would be “if households were to exhibit less prudent behaviour than they have over the past few years”) – that the;

..cyclical upswing.. cannot continue indefinitely..” and any ease in lending rates holds the “potential to encourage speculative activity in the housing market….”

Community service groups hurriedly rush to Canberra, flagging a wealth inequality crisis, presenting yet another shandy of submissions to the ‘rinse and repeat’ sequel of the last Senate enquiry into Housing Affordability,

And as Barclay’s Chief Economist Keiran Davies sounds the alarm, reporting household debt to disposable income has hit a record “177% peak,” the public outcry against foreign investment ‘bidding up prices’ has prompted the Coalition’s conservative version – reminiscent of Kevin Rudd’s 2010 ‘1-800-I-SAW-AN-ASIAN-AT-AN-AUCTION’  debacle – to assess “what is happening on the ground” and stave off the growing concerns that seem to indicate rules are not being adhered to.

The analysis my two new friends from Texas would hear from Economists in response to the above backdrop is equally schizophrenic.

Whilst Governor of the RBA’s Glenn Steven’s is telling audiences that a modest overheating in housing markets could have “long-term negative consequences for economic growth.”  AMP’s Chief Economist Dr Shane Oliver is assuring the “normative” response to low interest rates producing a sharp surge in established house (land) prices, is “great news for the economy!”

According to Oliver;

“Housing may show an “overvaluation criteria for a bubble,” but, we’re not in one yet, otherwise “property spruikers [would be] out in a big way” or “buyers rushing in for fear of missing out!”

Obviously Dr Oliver has not been attending many auctions or property seminars of late – otherwise he’d have plenty of evidence of the above practices (at least in the two biggest capitals.)  They’re all but engraved into Australian culture.

Notwithstanding, Christopher Joye is back to the task of boosting his readership figures, evidencing the quite the opposite – warning ‘overvalued prices’ could see “unprecedented 10 to 20 per cent losses across the board” when/if the market ‘normalises.’

Grave concerns indeed, albeit, it whistles the same tune as most industry commentary regarding affordability, with anxieties only going so far as to ensure an already inflated platform can be sustained (through ‘prudent lending,’ of course) without open and strong advocacy into the policies that would stop these cyclical peaks and ‘corrections,’ which result in numerous ‘crash’ predictions, inevitable pain for new home buyers, a real wealth inequality crisis – for what seems to be for no more than generating publicity, whilst maintaining the ‘status quo.’

“Build more houses!”

Unfortunately, the assumption – both here, and overseas – remains, that the only way to make houses more affordable, is to increase the supply of new dwellings.

Building more accommodation seems like an easy prescriptive cure, with supply verses demand being a well-tested economic model – that is, until it comes to the land market.

We can’t seem to deliver this supply at normative prices for the locational price/distance trade off.

Speculative activity, further promoted by a constipated planning system, has resulted in ever increasing land values, on ever decreasing ‘lot’ sizes.

Analysis by RP Data shows vacant land prices over the past 20 years, have lifted from a median rate of $76.47 per square metre, to $507.70 per square metre, as of the end of 2013. Whilst the average ‘lot’ size has dropped from 700 square metres, to 500 square metres – and in some states, less than 400 square metres over the same period.

Obviously reforms to the planning process would greatly assist, however contrary to common belief, it would not alone provide a cure.

To truly restore housing back to ‘fair’ value, we would have to remove the level of speculation manufactured into the structural design of our housing market and this is one side of policy reform Government has repeatedly refused to address.

Speculation

To be clear, an increase in the natural price of land, is an expected result when economies are improving due – for example – to capital investment in infrastructure, as is the case in Australia currently, with Tony Abbot’s desire to be knighted the ‘Infrastructure Prime minister.’

Infrastructure intensifies the use and demand for land as the population grows, assisting job creation and collaboration between individuals.

Therefore, taken alone, rising values should be a ‘good’ thing for our country – (and economy) – or at least they would be, if the gains truly benefitted the community.

Any manufactured improvement to a location’s public amenities, gifts a beneficial trade-off to the owner, who receives a windfall in remuneration as the resulting economic impact boosts productivity.

This increase in values is what economist’s term ‘economic rent,’ although expressed rather misleadingly in popular vocabulary as ‘capital growth.’

To clarify – ‘capital’ infers something that can be reproduced through productive activity, however we know from housing data, that the true gain in “house prices” is really collected in the rising cost of land, which takes up a 4.1 trillion dollar share of our 5.02 trillion dollar housing market.

Land Prices Vs Property

Land cannot be reproduced because it can’t be moved, it’s fixed in supply, and therefore any financial benefit derived from improving the surrounding facilities, is merely soaked into the ground

This is why ‘land banking’ is promoted within the industry as a popular ‘investment strategy’ – although to be clear, it’s not investment at all.

Investment implies the creation of wealth, whereas speculating is a zero-sum game; the wealth is not created, the landowner does nothing – and for the homeowners in Australia, lucky enough to be situated close to the best seats in town, it’s a generous tax-free unearned windfall.

Unwontedly or not, land bankers who hold their under-utilised plot in lieu of ‘capital gains,’ are ‘free loaders’ on the economy, and building activity does not respond to demand, but is only boosted when values are assessed to be on an upward trajectory.

Policies such as negative gearing, depreciation, capital gain exemptions, the encouragement to acquire properties and gear against them in self managed super funds, as well as the use of the family home as a wealth reserve for retirement, enforces speculation into the foundational makeup of our property market.

Land Cycles

But I’m not informing Australian’s of anything they don’t already know.  People have become acclimatised to property being ‘expensive,’ and our housing has become expensive because its value is derived from its accumulated and speculated future ‘capital gains’ – correctly termed economic rent.

According statistics, homebuyers typically move every ten years or so. The price they are prepared to pay, is balanced against the price they expect to achieve, minus expenses – and in all my years assisting buyers, (barring the odd downsizer) I have never met a single one who calculated otherwise.

This is why property ‘cycles’ – this is what promotes speculation.

The banking sector, which has a monopoly on this process (after all, how many can purchase a property without a mortgage?) increases the volatility of this cycle markedly, however banks, lending, money (credit) creation, lack of regulation does not cause the cycle, (or stop the cycle.)  Speculation does.

We had land booms and busts before the evolution of our modern banking system – and without a change to the structural makeup of our housing market, we’ll continue to have them.

Lending restrictions can mitigate risk, but due to the vested interests of banking system, it will not remove it to the degree needed to stop the cyclical impacts.

Easy Earnings..

Notwithstanding, for those homeowners and investors who purchased over the last decade or so, making money through buying, holding and acquiring property (land) has been a far more effective in accumulating ‘wealth’ by way of earning income and channelling it it into productive activities.

The BRW rich list is littered with examples, and for those who are not involved in the business of property, land is where they invest their dollars.

Of course, for the first homebuyer on a single wage ‘priced out’ – the mantra resumes that we just need to build more dwellings, the process of which contains just as much speculative activity in its design (including how we fund for infrastructure) so as to exacerbate the problem.

But how does it look to our Texan friends?

Well let’s just say, they’re not rushing to move here.

Texas is one of the top locations for interstate migration in America.

As with Australia, the economy has been super charged by way of a commodity boom, but unlike Australia, industries such as tech, manufacturing and business services are thriving and hiring in droves.

The expansive list my new Texan friend’s reeled off, highlighting the number companies moving their central operations into the state (rather than ‘offshore’ as they do here) is impressive, and when I asked how much they would spend purchasing a ‘home’ I was told that “3 times annual earnings” would buy the ‘best’ in town, which was summed up by the comment “like the house my parent’s own.”

Most of the units and condos in Texas are rentals – owned by large investment funds for example, and used as a hedge against inflation and source of positive cash flow.

There are less family sized rentals (detached dwellings) albeit, because housing is ‘affordable,’ there is also less demand.

Devoting earnings to building a property investment portfolio isn’t a consideration for most Texan residents.

The state didn’t experience a housing bust, because it didn’t experience a housing boom.

Texas vs Cali

The subprime crisis didn’t hit, because speculation was removed.

This was in part due to liberal and well funded supply policy, which ensures housing is built on demand, and essential infrastructure funded by way of a ‘deductable’ Municipal Utility District tax, administered by residents, funded by a bond, and payed back proportionally over a lengthy period of time.

The additional key however in what’s been termed the “Texas miracle” is low taxes on productivity, lack of state income tax and a good regulatory environment, offset by higher than average property tax.

It’s not perfect – Texas does not remove other taxes, such as sales tax, which has a destructive impact on commerce – and property is taxed as well as land (where as ideally, in a truly productive environment, only the unimproved value of land – the economic rent – should be subject to a tax, which is far easier to accurately assess than the total capital improved value.) However it makes the point.

Whilst Texas boosts and attracts productivity with lower taxes, discouraging speculation in the areas that destroy it, Australia leans to the opposite

We’re not immune to real estate crashes and there is plenty of evidence to prove their increased severity when prices are allowed to escalate. But, the best way to mitigate the risk, and protect against volatility, is to encourage the industries that advantage the working population most (manufacturing for example,) and take the air out of those that advantage land speculators the most.

Catherine Cashmore

Inequality and economic growth…

Inequality and economic growth…

To a limited extent inequality and the ‘rich/poor’ gap is tolerated within society because economists have historically seen it as a necessary platform to stimulate ‘economic progress’ or even activate a sense of competitiveness within individuals in order to elevate themselves up the social ladder 

Certainly in the housing market this is evident.  Who hasn’t aspired to their ‘dream’ home – or visualized some improvement similar to that of their neighbours? 

It’s what the success of programs such as ‘Grand Designs’ thrive upon – the emotional aspect of ‘wanting’ bigger and better – and a proportion of home owners will stretch their budget in order to achieve their desired property of choice, taking on a larger mortgage to do so.

However, whilst a degree of inequality may be tolerated as an inevitable consequence of the benefits offered in a capitalist society, a widening gap can become disabling to ‘progress,’ or even dangerous, if items of basic need are perceived to be increasingly out of reach.

In their 2012 ‘Global Risks’ annual report, the Word Economic Forum put it like this;

“…when ambitious and industrious young people start to feel that, no matter how hard they work, their prospects are constrained, then feelings of powerlessness, disconnectedness and disengagement can take root. The social unrest that occurred in 2011, from the United States to the Middle East, demonstrated how governments everywhere need to address the causes of discontent before it becomes a violent, destabilizing force.”

The comments build on other research undertaken by Andrew Berg and Jonathon Ostry, two senior staff in the IMF’s Research Department, who found that once a country had entered a period of economic growth, the more equal the distribution of wealth over the ensuing period, the longer it lasted. They conclude  “…sustainable economic reform is possible only when its benefits are widely shared.”

Inequality in Housing

The consequences of inequality in the housing market are painful and slow. The trend is increasingly evidenced over a lengthy period of years – not in the volatility of month-to-month first homebuyer statistics – always marginalizing those at the bottom of the income stream, whilst advantaging those at the top.  

Effects include;

  • Social polarization,
  • A decrease in the number of low income buyers obtaining ownership,
  • A drop in the number of affordable rental dwellings with demand outstripping supply,
  • Greater requirements for public housing,
  • A rise in homeless percentages, and those who drift in and out of secure rental accommodation.
  • A rising percentage of long term tenants, and falling percentage of property owners, – across all demographics, – but particularly families with children. 
  • Fewer Australians – across all demographics – owning their homes outright.
  • Evidence of severely crowded accommodation…. And so forth.

The list, which names only a few of the prevailing concerns, creates a growing body of evidence that we have more than an affordability issue in Australia, which focuses overwhelmingly on first home buyer figures.

We have a growing structural problem, which, if allowed to continue, with have a societal impact, chipping away at the future growth and stability of the property market, affecting the majority – not just a ‘few.’

Why?

The reason this has occurred is down to our property cycle – or perhaps better-termed a ‘land cycle’ – which has been further accentuated by poor housing policy – restrictive planning conditions and generous tax incentives, which are ultimately destructive.

Rising prices, and the expectation of such are initially seen as a ‘good’ thing, because they drive the economy, increasing consumption (the ‘wealth’ effect,) stimulating economic growth, infrastructure investment, construction activity and demand for ‘durables.’

This in turn flows through to wages – which advantage the workers at the top of the income stream, rather than the labourers at the bottom. (See Andrew Leigh’s, The Story of Inequality in Australia (2013,) which points out, since the mid-1970s, earnings after inflation for the bottom tenth of the population has grown 15%, in comparison to 59% for the top tenth.)

The gains are subsequently capitalised into rising land values, as investors, buoyed on by inflationary expectations, easier lending conditions, and ‘fear of missing out,’ lead a bull market of speculative activity (such as we’re seeing in Sydney) – until reality eventually steps in, and the trend inevitably turns.

In other areas of the economy that suffer from inflation, some form of substitution can typically occur, however land – and the infrastructure that gives it its value – is fixed in supply, an absolute necessity to all business and personal needs, therefore as land values rise, there is an inevitable strain on productivity, affecting job growth, private debt, small business, and unemployment (such as we’re seeing in Australia presently.)

Whilst monetary policy and the interest rate ‘lever’ are employed to moderate the damaging effects of a property cycle – at every step of the process, real estate has been used as collateral for further economic investment, a revenue generating machine for government, and ‘wealth’ fund for retirement, therefore whilst the aim is to prevent a ‘hard’ landing, the motivation is always bent on protecting existing values, rather than letting them fall.

Hence why demand side subsidies are favoured as a ‘band-aid’ to affordability, rather than cure.  

The result

Without direct political intervention to rectify the damage, the greater and more destabilising the divide becomes, not only placing pressure on the welfare system, but evidenced ‘vocally,’ as rising numbers enter the housing market later, pay far more over the lifetime of their loan, and risk reaching retirement still servicing household debt – as is the case in Australia.  

This was noted back in 2012 in a CPA study entitled ‘Household Savings and Retirement – where has all my super gone?’ And most recently by executive chairman of ‘Yellow Brick Road,’ Mark Bouris, who ‘concerned’ about lump sum superannuation payments being used to pay off mortgages, made a submission to Joe Hockey’s parliamentary financial inquiry, suggesting we can ‘solve’ the above impacts, with additional tax breaks to allow people to pay down their housing debt faster 

Needless to say, it doesn’t take much of an economist to understand that subsidies – no matter attractive they may seem – are ultimately capitalised into prices, thereby raising the entry costs for first home ownership further, and increasing the pain for the next generation of aspiring buyers. 

But then considering the line of business Mr Bouris represents, I suspect this is isn’t about ‘solving’ the crisis, so much as supporting it.

The self perpetuating cycle..

To some extent, it’s a self perpetuating cycle – after 30 years of mortgage repayments dedicated to paying off their principle place of residence, vendor’s obviously don’t want to see the price of their biggest asset drop. 

Investors are similarly motivated, an AHURI study released in December 2013, identified the typical investor, as one who expects their property to ‘double every ten years’ as a strategy to finance retirement. 

Incidentally, the same study also noted that three-quarters of the investors surveyed, do not see negative gearing as a reason to purchase – but merely as ‘an added bonus’ – thereby weighing against the myth of an ‘investor lead exodus’ should the policy be scrapped.

However a system that tries to both feed speculation, whist creating unaffordability through supply constraints, is ultimately set to fail, as low-income households are continually forced to the outskirts, whilst the higher income individuals get to purchase the front row seats.

Social polarisation…

This results in social polarisation, which is clearly visible on the Melbourne map below, taken from the REIV, which illustrates the median house price by suburb, relative to the metro median.

 REIV social polarisation

The colours coded with the darkest blue indicate house prices more than double the metro median, and orange, house prices that are more than 25% below the metro median.  (The white spaces are areas for which there is insufficient data.)  

This aligns very closely to a map constructed using data from the ABS, which ranks geographic areas in terms of their relative socio-economic advantage and disadvantage, highlighting diversities such as incomes, education levels, occupations, rent and mortgage payments, family structure and unemployment. 

 ABS socio-economic

Once again, the beetroot red and bright orange ‘fringe’ suburbs, sit well away from the affluent dark blue vicinities, which contain the top schools, medical facilities, shopping strips, high paying jobs, train and tram networks, childcare centres, social amenities, and so forth – all of which our tax payer dollars collectively fund – yet under the current structure, only the local home owners get to advantage.

This would include not just the various social benefits offered, but the additional on-flow of capital gains each property attracts from a squeeze of consistent market demand.

To emphasise, top performing government schools in Australia, do not reserve places for those showing merit, rather the families both willing and able to support the 20-50% premium, charged for accommodation in a desirable school’s catchment zone. ‘Fair go Australia.’

In case you need further convincing, you can chart how the trend has evolved using the image below, which is taken from a previous AUHRI investigation, showing how the percentage of affordable dwellings available for low to moderate-income purchasers, has changed in Melbourne, between the years of 1981 and 2006.

 AUHRI

The darker areas are the ‘most’ affordable, whilst the white patches are the least.

 What of the ‘price’ ripple effect?

Even heading 45km or so away from the CBD, low-income purchasers can only acquire affordable accommodation – in the range of $200,000 – $400,000 – if the lot size is much smaller than 600 square metres, which is still deemed ‘standard’ in many middle suburban regions of Melbourne.

Further more, any hope of ‘backyard cricket’ is unlikely, as the new developments are littered with homes that have a footprint, which extends to the boarders of each block.

The graph below highlights why this is so – it was put together by a colleague, Steven Armstrong – using valuer general statistics, and it charts the extraordinary rise in land values per square metre in Hume City – an outer metropolitan growth zone in north-western Melbourne – between the years 1983 to 2012.

Graph land prices

 The remarkable escalation in prices had nothing to do with homeowners wanting the castle, when a modest suburban home would do. Rather the issues I outlined last week in regard to planning restrictions (false scarcity,) tax and infrastructure overlays, land speculation (the underlying cause of ‘all’ bubbles,) that are exasperated further by ineffective supply side policy.

It’s important to make this point, because whilst most people assume the ‘price/ripple’ effect works outwards – under the current system, the causation works both ways.

It’s the marginal price of land at the fringes of our capital cities, that sets the ‘base’ value for the better-located plots further in.

In other words – it’s not supply that ‘solves’ affordability for low-income purchasers, but the cost at which that supply can be delivered to the ‘homebuyer’ (not speculator) market.

Property Overvalued? A bubble? A concern??

In light of the information above, when I was recently asked to make comment on whether Australian real estate was overvalued or not, I sensed the intention was to take the traditional view, and instead of charting ‘why we’re here’ – assess whether job growth, population expansion, demand for credit, housing turnover, wage growth, interest rates, mid term supply and so forth, were supportive of a future sustained increase. 

However, whilst the above data will give a mid term indication over whether current process are ‘serviceable’ at existing rates, or if market turnover can maintain pace, it gives little indication as to the long-term effects I’ve highlighted above, which in my mind, present a far greater destabilising force, as we bear witness to a slow generational shift, eating at the edges of home ownership in the months and years ahead.

I’ll leave the reader to come to their own predictions on market movements as we traverse through 2014. Albeit, in light of the Government’s response to previous housing ‘affordability’ enquiries, I think the above concerns will merely worsen rather than improve – and at some point, we’ll all feel the impact.

Catherine Cashmore

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

As the deadline for the senate enquiry into housing affordability approaches, some notable submissions have thus far been made

  • Saul Eslake, One of Australia’s most respected chief economists, and previous member of the now disbanded ‘National Housing Supply Council,’ has submitted the address he gave last year at the 122nd Annual Henry George Commemorative Dinner, in which he eloquently outlines Australia’s “50 Years of Housing Failure.”  Eslake advocates the need to remove policies that stimulate demand, such as negative gearing, in favour of those that increase supply. ‘Rethinking’ infrastructure financing and removing stamp duty, in favour of a broad based tax system on the unimproved value of land, as was recommended in the 2009 Ken Henry tax review.

Any detail Eslake misses on the supply side, is dutifully covered by Senator Bob Day.

  • Senator for South Australia, a registered builder and founder of major construction companies, such as ‘Homestead Homes and Home Australia,’ Bob Day’s submission, is his May 2013 policy paper – ‘Home Truths Revisited,’ – in which he shares an intricate understanding of the history and complexities of supply side policy, which have seen land prices increase more than ‘tenfold,’ in comparison to the cost of building, which has seen ‘virtually no increase at all.’   Importantly, for my industry colleagues who ‘blog’ that price rises were simply down the increase in demand stimulants, (such as dual income households.) Senator Day notes, “while influential bodies like the Productivity Commission and the Reserve Bank focused their attention on demand drivers, like capital gains tax treatment, negative gearing, interest rates, readily accessible finance, first home buyers’ grants and high immigration rates” … the real culprit, the real source of the problem, was the refusal of state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet the demand.”
  • Other notable submissions come from ‘Grace Mutual Limited,’  – a not-for-profit entity who “designs investment mechanisms to attract wholesale funding into the social sector” – in particular -“the National Rental Affordability Scheme.”  GML outline the ‘unduly complex’ regulations that have disadvantaged investors, noting; “Large numbers of NRAS incentives (at least 4,000) were awarded for the construction of student housing,” yet “There appears little evidence that this has any positive impact on the middle to low-income families that were the target of the original policy.”
  • And the last two submissions to date (2/2/2014) come from “Home Loan Experts,” who want an abolishment of negative gearing, but predictably think that the first homebuyer grant should stay.  And an anonymous letter, with an overview of the points made by both Saul Eslake and Bob Day, noting as I did back in December 2013 that nothing has been done since the last Senate enquiry.

Rinse and Repeat

To emphasise – The 2008 Senate report, entitled “A good house is hard to find: Housing affordability in Australia”

  • Made the same points regarding Australia’s tax policies, such as capital gains tax and negative gearing, which impact affordability and market activity.
  • It made the same points regarding each states planning laws, overviewing the construction industry’s future skilled labour workforce, the impact of urban boundaries on land prices, and the funding of community infrastructure.
  • It made the same points regarding the need for a diverse range of accommodation suited to both young and old alike, advocating greater competition within the building industry.
  • It made the same points in relation to both the both the public and private sector, addressing tenancy laws, and renters rights.

It was both comprehensive and detailed in content, and yet – 5 years later – at every level – both state and federal government have failed.

Failed to provide a ready surplus of ‘cheap land.’

Failed to overhaul infrastructure funding.

Failed to boost a sluggish construction sector in relation to population growth.

Failed to reign in speculation.

Failed to overhaul a system that results in too few rental properties for low-income households. And;

Failed to reduce the need for social housing or raise standards in the public sector.

Instead – we’re left with a new record median house price, which sits close to $600,000 ($597,556 APM.) – Following the highest quarterly rise for 4 years – built on the back of a diminishing first home buyer sector, which is instead supported by a record number investors, benefitting from a pace of growth in Sydney, which all agree, is ‘unsustainable.’

As far as affordability is concerned, we’re simply sitting on a merry-go-round of repeated mistakes.

Housing affordability a Mystery – too complex?

This is not due to any lack of understanding on the Government’s part. There is no secret or mystery to housing affordability. The solutions are well understood.

  • They were discussed at length in the previous senate enquiry.
  • AHURI has repeatedly tacked both supply and tax  policy.
  • And this senate enquiry will do the same.

The recommendations fall in line with other countries and states that have successfully achieved a consistent correlation between gross median house price and income – and so to some degree of detail or other, share the following two points in common;

1) They have taxation system that discourages speculation, but encourages productivity. The most successful of which is well-administrated broad based land value taxation system, such as that adopted in various cities in the USA – like Pennsylvania for example – where the tax on the unimproved value of land is heavier than that of property –a process of which I explain in full here – or as in Texas, where property is taxed, yet income isn’t, reducing the level of speculative demand.

And;

2) They have created an environment in which liberal supply side policies ensure ‘fringe’ land is sold close to its agricultural value, ensuring zoning laws do not impede development, and there remains strong competition within in the construction sector.

Why we have failed.

Yet, the reason countries like Australia, the UK, certain states in the USA, for example, fail to successfully move away from the boom/bust cycle, which leaves us counting the minutes on the ‘property clock,’ until a major correction is experienced, – which ultimately offers little help to struggling home buyers, small business, or low income earners, due to consequential restrictions in lending.

Was summed up neatly in a 2007 parliamentary report entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary – in which it confidently stated;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

It’s a comment that sits right up there along with ‘saving doesn’t mean spending less’ or ‘dieting doesn’t mean reducing calories.’

If only it were so…!

To create a sustainable and affordable housing market, in line with the majority of recommendations put forward in the senate enquiry, would inevitably have a dampening effect on existing house and land values, in particular sites which are banked for ‘idle’ speculation.

Fear over falling prices justified?

The fear is understandable when you consider residential real estate is Australia’s largest domestic asset class, with an estimated aggregate value of over $4 trillion, pinned to a banking sector which has the highest exposure to residential mortgages in the world, in a country in which most Australian’s are home owners.

However, please don’t fall into the trap – once again as many of my industry colleagues do – of thinking just because a large number of homeowners in Australia own their own properties debt free, it prevents a potential ‘crash’ in prices – because the level of commentary on this matter is really very low.

A huge portion of private debt for the appropriation of business and commerce is secured against residential real estate.

A lack of active buyers in the market – (which produces an atmosphere in which price falls are inevitable) – stagnates turnover, prevents those who need to ‘fund’ their retirement through an equity release from doing so. Prevents those that need to move state to find employment else where, from doing so. It locks people into their homes – unable to downsize or upsize – and the effects are felt across all demographics.

Businesses which run into financial trouble are unable to reach into their house ‘ATM” and secure additional funding, and as a result, industries close, lay offs are invoked, investment ceases – the list goes on.

Importantly, it does not prevent a major economic crisis.

It did not prevent it in Ireland, America, or other countries in Europe, which also had a large proportion of owners, who owned outright.

We are not immune from a major downturn – no market, which exhibits land cycles is – and be assured, when it does happen, it won’t matter whether the banking system is ‘wiped out’ or not (as suggested as another reason we cant ‘crash’) – the Government will rush to their assistance – leaving ordinary people to suffer their debt consequences alone. As has been demonstrated repeatedly on an international scale.

Rising house prices or a stable market?

An economy that relies on high and rising house prices is one that’s ultimately set to fail.  It’s a symptom of poor housing policy and can only supported over the longer term, by making debt ‘ever more affordable.’

Therefore the best protection from such, is political reform, which ensures stability across gross price to income ratios – and if managed proficiently in line with the two points outlined above;

  • It would assist productivity,
  • Boost the construction sector,
  • Aid infrastructure financing,
  • Keep prices accessible for new homeowners and business – which need to buy or rent land to compete with established players.
  • Ensure tenants are not subject to ever increasing yields.
  • Weather the unwanted impact of real estate ‘booms and busts.’
  • Protect vendors from plummeting property values during an economic crisis – (whenever that point in Australia’s future is) – and;
  • Reduce inequality between the asset rich and income poor.

Land speculators would not advantage from it – but ordinary taxpayers would love it.

What the Senate & Government must agree to allow, prior to commencing its enquiry.

Thankfully, we don’t need to have an initial debate with the senate, over whether the market is or isn’t affordable – as has been the case with various commentators across the mainstream media.

Instead, we need collaborative assurance from the government, that any outcome from yet another Senate enquiry, will allow land prices to reduce – the process of which would have an gradual roll-on effect across the established real estate sector

Once – and only once, we have an affirmative answer to that question – can we begin the debate over how this can be achieved – and once we do, it must ensure the following.

1)   That fringe land is immediately available for residential development, overriding existing urban boundaries and zoning requirements that render it otherwise, and ensure it remains close to its agricultural value.

2)   Increase competition within the construction sector, simplifying the planning process, and eliminating ‘upfront’ infrastructure costs.  Additionally, a review of the many ‘hidden taxes’ such as development overlays, application fees, stamp duties and so forth, that are charged through the planning and development process, must be reduced to ensure they are ‘fair and transparent’ as advocated by the HIA.

3)   The removal/phasing out of policies such as the first homebuyer grant and tax incentives, that reward speculation into the established sector, and rely on housing inflation to stimulate demand.

4)   Reopen the discussion to abolish stamp duty; moving instead toward a broad based land value taxation system. Following practices across the world where it has been deployed with success, and noting that the ACT is adopting such measures, over a slow transitional 20 year period. And;

5)   Ensure we build for homebuyers, not just investors – paying particular attention to the needs of an ageing population, for which downsizing into apartments is not the preferred, or readily adopted option.

The above recommendations would assist the rental sector, but additionally, the Government should work closely with organisations such as Shelter and the Tenants Union, to satisfy that the quality, provision and standard, of both rental and public housing, is improved and maintained, along with an overhaul of tenancy laws for long-term tenants.

Conclusion.

The details on how to achieve this will be overviewed in another column, however, if both state and federal government refuse to let land prices drop, acting reactively to affordability issues, rather than proactively. I suggest you use whatever vote you have wisely – ignoring both major parties – and instead, place it behind smaller players, who act in the best interests of community, and not their ‘back pockets.’

Catherine Cashmore