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.

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“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.

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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.

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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.

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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.

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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.

Balmain East

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

He was not the first or last to do so.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“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.)

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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.

Australia’s City Centric Culture and Failure to Decentralise

What Did The Recent Grattan Review “Mapping Australia’s Economy” Really Reveal?

By Catherine Cashmore

“Too many workers live too far away to fulfil our cities’ economic potential”

– is the conclusion of a recently published study by the Grattan institute.

The report maps the dollar value of goods and services produced by workers within a particular area of Australia’s biggest cities. Demonstrating a disproportionate 80% is created on just 0.2% of the nation’s land mass.

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It mirrors findings highlighted in a recent speech by Luci Ellis – Head of Financial Stability at the RBA, who collected the addresses of people’s work places from the 2011 Census, to construct a picture that is particularly striking if directly contrasted with where employees actually live.Job to worker ratio

“Inner areas have become even greater job magnets in recent years; some middle and outer areas added people, but not so many jobs, so their job-to-worker ratios actually declined.” 

Places with ratios well above 1 are employment centres. They pull in commuters across the city even from outside its borders.

While the very pale fringe areas, attracting the largest population growth due to pressures of affordability, are the ‘commuter districts,’ dormitory suburbs, where jobs and community infrastructure have failed to follow through.

The picture is one of increased social polarisation – fringe localities; tend to face higher crime rates, elevated levels of unemployment, along with reports of depression and mental illness.

Poor supply policy and delays zoning pockets within the urban boundaries for residential development, means a typical house and land package on a compact 450sqm site, transacts for no less than $400,000.

Instead of a sensible system of bond financing, where residents pay back proportionally over a lengthy period of time, or a broad based land value tax to replace other taxes as advocated in the Henry Tax Review, funds for the provision of essential infrastructure are loaded onto the upfront cost of housing and promptly passed to the buyer.

Yet Councils can wait years for the finances to arrive. The funds are only payable upon subdivision and with no control over the development or release of newly zoned land; buyers can often pay for services they may never receive.

The Grattan report is subtitled “Cities as Engines of Prosperity” and charts Australia’s evolution from a country that “made things,” into one that is now reliant on centrally clustered “knowledge-intensive and specialised services.”

City centric culture

Together, the cities above, account for 15% of Australia’s economic activity but despite declining job-to-worker ratios in the outer suburbs, along with increases in the price-to-distance trade off for home buyers, only 8% of Australia’s employed population actually work in the central hubs of each major capital.

In Melbourne for example, over 50% of jobs in are located more than 13km from the inner core, with fewer that 20% of jobs in the CBD itself.

These are not high paying jobs however, which leads the authors to imply we need to move closer in and –“Minimise barriers to highly productive activity in CBDs and inner city areas”

They suggest this would provide industries with a “wider range of potential workers to choose from.”

“Australia’s cities are the backbone of our economy, with CBDs and inner city areas critically important to the nation’s prosperity….The more highly skilled and specialised a job, the greater the need to find the best person to fill it.”

Knowledge based and specialised services cover a diverse area, including industries such as, finance, insurance, real estate, and business services, as well as cultural, media, communication, and education facilities for example.

They are gaining predominance across the globe, due to a technological boom that is powering us forward in an expansion not unlike the industrial revolution.

3-D printing is lowering the cost and logistics of production. Advances in the research of solar and renewable energy have paved the way for homeowners to store electricity overnight and possibly disconnect from the grid completely.

Companies such as ‘Uber’ and ‘Lyft’ have created innovative ‘apps’ to provide cheaper transport options for consumers and ironically, changes in the way we interact and communicate have allowed people and jobs to disperse over a broader footprint and successfully collaborate across international borders.

However, this is not where Australia excels.

Moves to take advantage of the innovation revolution have been continually hampered by Government intervention, winding back tariffs and scaling down their 2020 Renewable Energy Target, acting to protect the cartel of the Taxi industry’s ‘licensing’ monopoly, and cutting funding to organisations such as the CSIRO.

No – the predominant sector that yields the most “knowledge intensive” gains in Australia comes from the FIRE industry (finance, insurance, and real estate)– which has its infrastructure webbed like a parasite on the back of the great Australian housing boom.

Growth of Finance insurance

At a global banking conference in 2013, the question was asked ‘Why the hell are Australian Banks performing so well!?’ – it was in response to a chart showing a decade rise in market capitalisation on the global banking index, from 2 – 14%.

The answer was obvious; the banking sector makes its money by creating debt – mostly mortgage debt and our highly leveraged ‘too big to fail four’ are the world’s most heavily exposed to residential and commercial real estate, capturing 88% of the mortgage market alone.

To be clear, the FIRE Economy is not a value adding economy; it profits by extracting economic rent from the debt on rising land values, impeding areas of productive enterprise, and trading the interest in a multi trillion-dollar derivatives market to advantage those sitting at the top of the financial pyramid.

To survive, the FIRE sector must sell the illusion that the economy and its participants can achieve economic prosperity through speculation on rising property values.

This has been assisted by tax, housing, and monetary policy, resulting in Australian’s holding some of the highest levels of private debt in the developed world

Tax withholdings or exemptions given to land holders for example, result in an increase of unearned monetary gains (economic rent) available to be capitalised at the current interest rate into the upfront cost of land.

This was aptly demonstrated in a recent release by Moodys’ Analytics, estimating how the tax policy of negative gearing, has acted to inflate Australian house prices by no small degree.

NEG GEARING LOSS

Supply policy has further assisted.

Inelastic responses to market conditions have allowed professional land-bankers to squat on sites at low cost and secure windfall gains when the sites are later rezoned for residential development.

Allowing the uplift of land values to capitalise year upon year into the cost of housing, may be gift-wrapped with corporate spin, to suggest it somehow benefits the community, when a cursory analysis reveals the exact opposite to be true.

It raises the cost of living for every single household, increasing welfare costs, and leaving less to invest in sustainable industries that contribute to the county’s real ‘value adding’ economy.

As demonstrated by the British economist and historian Fred Harrison in his book “The Great Tax Clawback Scam.”

The pull of the centralised core, where property values and wages are highest, results in decades of progressive taxes on every worker in the state being clawed back by a few, as inner city land values benefit from higher incomes, increased demand and improvements to social infrastructure and transport arterials to do precisely as the Grattan review suggests – and keep us locked and reliant on a small pocket of land for our economic gains.

The benefits for homeowners can obviously be substantial.

It brings with it the theory of urban consolation – reduce sprawl and force residents into apartments, however doing so can have the adverse effect of increasing sprawl, as lesser industries ‘hop’ the middle ring, in search of cheaper options, and their employees move out further still.

If we were living in ancient Rome where walking was the general mode of transport, you could understand the need to stay centrally located, however we are not.

We’re in an age of mobility where global research is being poured into innovative modes of transportation such as solar roads and electric cars.

If a buyer is able to travel to the supermarket, park and any other amenity on the priority list within a 30 or 40-minute period, the distance from the CBD is not an imposing factor.

The decider is the time it takes to drop the kids off to school in one direction, and travel to work in the other.

Since the 1970’s, successive governments have poured millions into incentives to try and decentralise and boost regional localities. However, all attempts have failed, because the both the funding and supply mechanisms are flawed.

Decentralisation requires affordable land for both business and buyer, which is not unduly inflated due to policies that promote speculation, as well as growth enhancing infrastructure and flexible supply policy that responds in a timely manner to homebuyer (not speculator) demand.

The Henry Tax review was not slow to point this out, when it suggested slowly phasing out a vast array of ‘bad taxes’ (deadweight taxes) that impede productivity and reduce mobility (stamp duty, payroll, insurance, vehicle registration, and so forth, as well as phasing out those that ‘reward’ speculation) and instead, collecting more of the economic rent from a broad based tax on the unimproved value of land and natural resources/

According to research undertaken by Paul D Egan and Philip Soos, in 2013 we lost a staggering $73 billion of output stemming from deadweight losses of taxation, yet, economic rents, which exhibit no deadweight loss, are a significant component of the Australian economy, comprising 23.6% of GDP.

When extensive research was carried out by ‘Prosper Australia’ on the “Total Resource Rents Of Australia,” it was recognised that almost half of all government revenues could be delivered by channelling the property boom to more productive purposes.

However, while the example is useful for policy reform – even a small shift in the tax base to provide a steady source of revenue in lieu of stamp duty, would assist in reducing speculation and aiding mobility (As economist Leith Van Onselen has repeatedly demonstrated.)

With less reliance on income tax, land value taxation would also act to shift economic power back to state and local government, thereby giving them more control over spending and in a very minimal way, it may also act as a natural countercyclical force.

For example, when land values depress due to a drop in consumer confidence, buyers would have less tax to pay, and therefore more discretionary income to spend into other areas of the economy – Government would reap any fall in revenue back when the reverse is the case. (Albeit, there are many variables that could affect this and other points to discuss.)

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. 

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 collect 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.)

A similar concept is recognised by owners of apartments.

When buyers purchase a unit, they expect to pay a yearly corporation fee for maintenance and improvement of community services.

In doing so, it reduces the up front cost consumers are willing to pay as they configure the fee into their budget, yet it is also recognised as an investment, as the benefits and any subsequent improvements help attract future purchasers.

A broad based land value tax is essentially no different.

In markets that have similar policies – a change in the tax mix, with higher taxation on land in lieu of those on productivity in order to fund related infrastructure, coupled with good supply policy, enables a process of decentralisation and increased affordability to follow through.

Both reforms work hand in hand.

The prosperous economy of Texas in the USA is a good example of this.

Since June 2009, about 48% of all jobs created in America have been in the state.

It has booming population growth, high levels of disposable income, low house prices and has been termed “The Texas Miracle.”

This is because with no income tax employees get to keep more of their earnings while higher property taxes used to fund community infrastructure and stem speculative inflation, along with good supply policy, help create a truly decentralised city, with only 7% of jobs located ‘downtown.’

Importantly, when the locational value of land is allowed to capitalise into the price, there is every reason for homeowners and investors to object to an increase in supply.

When this gain is partially taxed away, offset by higher earnings due to lower income tax (as it is the case in Texas,) vested interests diminish and neighbourhood development may even be encouraged in response to population growth as it spreads the burden of taxation and acts to reduce the level payable for the individual owner.

We do not have to mirror another country’s policies, but it does prove the ability to create a system that provides a fairer regime for the funding of infrastructure, stops runaway land price gains as well as assisting households and commerce to move outwards.

However, in an economy that is dominated by the financial sector, and reports such as the latest Grattan review celebrating Australia’s city-centric culture, efforts to decentralise and produce a fairer system for all Australian’s are deteriorating in favour of policies that are there to benefit the rent-seeker, at the expense of the labourer.

Five years on since the US recession ‘officially’ ended in June 2009….

By – Catherine Cashmore

Five years on since the US recession ‘officially’ ended in June 2009, urban land prices are rising, the pattern of history is repeating, and this time, the players on the chessboard have changed.

But our Governments are turning a blind eye.

They have yet to acknowledge why the crisis happened, or put policies in place to prevent it happening again.

Expensive welfare systems, elaborate tax and transfer policies, and the financial ‘cures’ following the previous land induced crash in the early 1990s, did nothing to prevent the swiftest and sharpest synchronised global downturn in human history.

Taxpayers were punished, bankers got a “get out of jail free” card, and the largest real estate investment trusts spent $50 billion purchasing 386,000 foreclosed homes, to rent out to previous owners who believed and acted on the lie; “there is no bubble.”

The IMF, and policy makers are now twisting themselves in economic knots trying to pin down a ‘cure’ for the dangers of excessive house price inflation, they readily admit lead to most banking crises, with Australia featuring in the top five of each of their highlighted risk assessments.

“……our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises…..” IMF “Era of Benign Neglect of House Price Booms is Over” June 11 2014

The IMF claims the ‘neglect of house price booms is over’ but as the OECD ‘Post Mortem’ of the 2008 crises reveals, these economists can’t see

They ignore the role that rent (unearned income,) debt and the financial sector play in shaping the economy.

They have a colourful history of recurrent boom bust land cycles, all replete with rampant speculation and easy credit, spanning in excess of 300 years from which to study … and yet;

“The macroeconomic models available at the time of the crisis typically ignored the banking system…” (OECD Forecasts During And After The Financial Crisis: A Post Mortem – February 2014)

In other words, based on the aesthetic qualities of their equations, the 2006/7 bubble couldn’t exist. A story we hear repeated every year as prices continue to defy gravity and economist try and explain it away with ‘sound fundamentals.’

Neo-liberal policy made matters worst.

Less government interference protecting labour or redistributing wealth through taxing the rich, deregulation of capital markets, lowering trade barriers, reducing state influence though privatisation and fiscal austerity – was termed by American scholar Robert Waterman McChesney “Capitalism with the gloves off.”

It promised to lead to efficient markets and lower unemployment

But at the onset of the GFC, unemployment in developed nations rose above any previous recession of the past three decades, whilst wages, as a share of GDP plummeted to their lowest point since the Second World War.

GDP+Wages

“This should be a wake-up call…” concluded the UN in their annual Trade and Development report that revealed the findings;

“There must be something fundamentally wrong with an economic theory, that justifies the rise of inequality mainly in terms of the need to tackle persistent unemployment.” Annual report by the UN Conference on Trade and Development 2012, Ch 11. Section C (analysing the effects of “labour market flexibility.”)

In the UK, Bank of England has imposed a 4.5 times loan to income cap on 85% of mortgages, along with various ‘stress tests’ to please the regulators.

But the Council of Mortgage lenders show only 19% of recent London mortgages are at or above this ratio, whilst the national figure is a mere 9%.

By volume, London accounts for around a quarter of loans nationally, (Q1) so the 85% cap will do little to nothing, except perhaps eliminate home ownership for low-income groups.

But stemming inflation or deterring speculative activity is not, and never will be, Central Bank policy;

Carney – “These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank’s central view,” (i.e. up) Guardian – “Bank of England will not act on house prices yet” 27 June 2014

In the U.S.A just five megabanks and their holding companies control a derivatives market worth hundreds of trillions of dollars, in Australia the ‘Big Four’ command 80% of the market and 88% of residential mortgages.

‘These are the men who have the most economic power in the world’ wrote British philosopher, mathematician and historian, Bertrand Russell, one of the 20th century’s leading logicians; “..and they derive it from land, minerals, and credit, in combination.”

Russell understood only too well, that all productive gains, every improvement in society and the economy, would be capitalised into rising land values, enriching those who owned the assets but more so, those who created the credit and traded on the debt.

Milton Friedman meanwhile tutored that societies are structured on greed.

But greed means taking something from another, grasping for a larger slice of the pie. (see; pareto efficiency.)

Greed is not a natural feature of a well functioning community; rather it’s a feature of a dysfunctional economy that allows a country’s wealth to gravitate into an elite nucleus of financially strong hands.

It remains that the economy is fuelled by what is termed the FIRE sector – Finance, Insurance, and Real Estate.

The FIRE Economy is dependent on rising asset prices – on you and me buying houses – so it can extract economic rent.

The three sectors work together – they’re intrinsically linked.

The banking sector pumps a colossal amount of credit into the system by way of a home loan. Real estate businesses sell the products – some trading as REITs – insurance companies underwrite the owners debt, property, and income, and as the interest payments compound – doubling and doubling again – the debt is recycled into more lending, more borrowing, higher house prices – making those who trade on the debt in an obscure concentrated market of derivatives, increasingly wealthy.

Bubble FIRE

Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos

The Government, many members of which come directly from the industry itself, receive substantial payments from the FIRE sector.

For example, between 1998 and 2008 the banking industry spent $3.4 billion lobbying the US government.

In Australia, the ICAC investigations into Illegal donations from developers and “wealthy property tycoons” reveal tens of thousands of dollars have been used to influence decisions by local, state and federal governments.

It should therefore be of no surprise that ‘affordable housing policy’ always seems to work in reverse.

Generous subsidies are handed over to investors – all of which are capitalised into land prices.

Restraints on supply are imposed, ‘rich neighbourhoods’ are protected from over development, land on the fringes is no longer dirt cheap, acreages are banked, exempt from State Land Tax until subdivision at the owner’s pleasure.

To survive, the FIRE sector must effectively sell the illusion that the economy can grow on rooftops, that we can all take part in an orgy of economic rent.

“Only the little people pay taxes” (i.e. work for a living) – we can all become wealthy through property investment, dining out and trading on leveraged gains, perhaps donating a little to charity, or taking part in some publicity-generating event to raise funds for homelessness along the way – as our politicians are fond of doing.

Of course, first homebuyers suffering alarm at rapidly escalating costs are necessary oxygen for the system.

So their judgement is manipulated as housing affordability is now reclassified as mortgage serviceability – how far the paycheque can stretch each month rather than highlighting the upfront cost, while young buyers are encouraged to enter the market as speculators, living off their parents, until they gain a ‘foothold’ from leveraging the equity.

Banks assist with an array of financial products – offset accounts, honeymoon rates, shared equity schemes – mortgages treated like credit card payments, where all that’s required is the interest and should the market collapse with money still outstanding, they’ll collect the house too.

The result is land is now used for greed rather than need, pushing city boundaries outwards, requiring an excessive use of durable capital, which eventually leads to a shortage of loanable funds.

You will never be told the system can fail.

Instead you will hear that house prices can maintain a ‘high plateau’ – stagnate for a while until we all ‘catch up.’

However, the increase in the annual rate of growth is now part of the income that buyers pay for and lenders rely upon.

This is how real estate is sold – investors gravitate to areas that advertise ‘good capital gains,’ calculating the land’s value based on both the rent a tenant will pay plus the projected annual increase (land rent.)

Buyers live in fear of land values collapsing, yet, while prices trend higher, expectations over shoot the mark by no small degree. Landowners treat their unearned increment as income, raising consumption, lowering saving, putting to upward pressure on inflation, which eventually results in interest rates rising.

Never, throughout the course of history, has such a process been economically sustainable.

At some point the productive capacity of the economy can no longer support the boom – and as Australia’s history of land induced financial crises reveal, the end is not always as kind as experienced in 2008. Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos

“House prices don’t always go up” warned the Governor of the RBA, Glenn Stevens at a recent speech in Hobart, just as he did in March, – a message he has repeatedly reiterated since appearing on Seven Network’s Sunrise in 2010.

But Australian investors aren’t listening to Glenn – they’re reading the media headlines, covering the latest findings in the BRW Rich 200, which shows property to be the ‘single biggest source of wealth,’ and entrepreneurs “piling into property faster than ever.”

Banks remain disturbingly under-capitalised.

“I’ve had land that has doubled in value in the past 12 months,” said Harry Triguboff ……… (BRW Rich 200: Fatter profits for property barons – 27th June 2014)

But while Triguboff paid a lot for his land, but he did not make his cheque payable to the local school, park, rail network, or the array of public and community services that yield his land a healthy source of locational revenue that grants such windfall gains.

His payment went direct to the previous owner of the land, who pocketed the profit, while the funding needed for maintaining the facilities and attracting workers to the city, come from an elaborate network of taxes, which fall primarily on income and productivity – ‘the little people.’

HTR

This is the kind of rent seeking most of us have some experience of, a process that effectively punishes and disheartens the priced out sectors of the community, whilst encouraging the hoarding of land as the road that leads to riches – thereby ignoring the social and ethical problems that result from the process.

The effect is to turn us into a nation of speculators where moral judgement is subverted by the unearned yields one can receive.

Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.

No one is born into poverty or inequality – these things are not by-products of nature – in a modern society the extremes we experience that lead to protests and riots over cuts in expenditure to welfare (a requirement exacerbated by the process outlined above) are due to policy and political ignorance.

When the Henry tax Review in 2008, concluded “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”

It was onto something important.

Lifting taxes off labour and restructuring our tax and supply policies is a good start, but alone it won’t do. Removing the power embedded in the banking industry to create credit based on their own vested interests is equally important, it would free up the creative capacity of the community and move instead toward a society and culture that is able to provide for all.

However it remains, that every effort in history to effect the changes suggested above have been fought by the establishment. In this respect, change can never come from the top down. It requires a system that can return democracy to the people through a slow process of re-education, and it’s a system we need to advocate if social and economic justice is the goal.

But until such a time, it’s business as usual, the cycle will play out the same and we have a way to go yet – but be well aware, the date for the next global financial crisis has been set.

 

 

(For information on specific timing for the current cycle please contact me direct.)

“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?”

Capitalism, Democracy and Land

Capitalism, Democracy and Land

By Catherine Cashmore

Protests that continue to erupt across the country against the Federal budget consist of two sectors.

Those who are disadvantaged through cuts to government expenditure – young people, job seekers, groups on low-incomes, the home-less – against political parties who want to exploit the situation to swing the popular vote in their favour.

It comes at a time when many young Australian’s are growing increasingly disillusioned with what politics, in a neo liberal capitalist culture is able to achieve.

The various groups opposing the current budget may not be aware of the full backdrop that sits behind the issues they dispute.

Separating the politics of envy, from the basic principles of equity is not an easy task, not only in the items we consider ‘wealth,’ but also in judging whether income is a true representation of skill and effort, or granted disproportionately at the expense of others.

Most however recognise a process that favours the rich – one where politicians subject themselves to the interests of lobbyists and promise what they need to gain a seat in power.

We’ve seen this most recently with the ICAC investigations. Tens of thousands of dollars pouring into the major party coffers from property developers all claiming to be ‘legitimate’ – yet, as we know, you don’t hand over cash without expecting special favours in return.

It would be nice to think that democracy alone could remedy this, but democracy unless underpinned by good policy, has a fatal flaw – that of short termism.

While voters will champion the environmental crisis of climate change and affordable accommodation, they will recoil at the thought of living near a wind-farm or high-rise block.

Public housing and commission homes are fine in theory, but not in the local neighbourhood, or indeed, anywhere in view.

We’ll welcome the stranger and rally in defence of the asylum seeker, but only on the condition they don’t take away our jobs or price the locals out of housing. In other words, you can come in, but just don’t join in.

No one cheers at the thought of saddling our younger population with student debt – however, when it comes to the cost of shelter, a different attitude arises. Generation Whine are instead told to shut up and save up.

While we desire a country built on the pillars of community, equity, and economic justice, it’s simply not possible in country that is pinned to the foundation of rising land values, as a necessity to fund retirement and most other lifestyle and business needs.

The social consequence that arises from this costs us millions in welfare payments throughout the year. Yet it is still advertised and promoted as the road to riches, creating a “FIRE” economy (finance, insurance and real estate) – disproportionally inflating land costs without due acknowledgement of the consequence.

Unfortunately, the web of confusion that surrounds the subject has put capitalist democracy, which has managed to free so many from the dominance of politically oppressive and controlling regimes, under attack.

Yet, capitalism, which in its truest form is simply a free market system of competing goods and services, is not what we have presently.

Today, faulty economic thinking has allowed items that are not made, or earned and by nature cannot compete; to be traded and profited from as if they were created capital. This has corrupted what should be a very good and fair system.

It’s important therefore to understand what wealth and capital is exactly.

Wealth is not the paper and numbers in our bank account. Money is simply a measurement of the resources we need, to produce the goods and services we consume (capital) for both business and pleasure.

In simplest terms – a person’s wealth is made through his/her own enterprise; whilst a country’s wealth consists of its land and natural resources.

When we earn money in exchange for our skills and labour it can’t be considered unjust or unfair.

However, when it comes though a government legislated process, of allowing some to profit at the expense of others, by trading items that are not capital or derived from any physical effort, this yields a special kind of unearned income, which in classical economics is termed “rent.”

Rent seeking can take on many forms – such as patents and government licences for example, which cripple competition from smaller industries and produce an unfair advantage.

The ‘Uber’ and ‘Lyft’ revolution is one such example.

It threatens to undermine the cartel of the Taxi industry’s ‘licensing’ monopoly, which gleans an economic rent from purposely-limiting the number granted.

‘Uber’ and ‘Lyft’ offer a cheap and reportedly safe ‘match-making’ alternative for consumers; however their progress has been repeatedly stifled by government intervention, determined to protect a monopoly and a culture of regulation evidently fearing a cut to revenue.

The most damaging of rent seeking behaviour however, and the one that yields the most gains, is trading the economic rent of land.

An increase in the market price of land is an expected result when economies are improving along with capital investment in infrastructure. Therefore, of all rent seeking behaviour, owning a plot of land in path of this progress yields not only the greatest windfall of passive gains, but is also used as a significant source of territorial and political power.

This is not surprising when you consider all the goods we consume come from it. Our oil, natural gas, timber, coal, and water reserves are the product of it.

We travel on it, work on it, party on it, sleep on it, and bury our dead in it.

Wi-fi, airplanes, all forms of technology need it. We evolved from it and progress on it.

Try and think of an activity, or item, that does not include land, and you will come up short.

However, the flow of income that comes from owning land over and above the value of building on it, when capitalised into the price, leads to a monopolist culture that feeds speculation, attracting a cabal of banking and finance interests and concentrating the vast proportion of a country’s wealth in the hands of a few, above the very real needs of many.

Rupert Murdoch ironically coined it best when, in his 1994 John Bonython lecture The Century of Networking he said;

Because capitalists are always trying to stab each other in the back, free markets do not lead to monopolies.  Monopolies can only exist when governments protect them.”

This is in essence what the Arab Spring was all about.

Many mistook it as a grasp for democracy – however it wasn’t. It was a grasp for true capitalism – the freedom to prosper unimpeded by onerous regulation or rent seeking behaviour. At its essence was a desire for economic justice, equal access to opportunity – matters we look to Government to provide.

Since politician and driving force behind the early settlement of South Australia,  Edward Gibbon Wakefield (1796-1862), devised his grand plan of “systematic colonisation” – making land just so ‘sufficiently’ unaffordable as to create a willing workforce of labourers. Economists and politicians have done everything possible to distract public attention from what is nothing more than a modern day game of feudalism.

They do this by allowing people to play a dangerous game of leverage, gambling on land price inflation by borrowing as much debt as possible to maximise their ‘capital gains,’ without acknowledging what is given with one hand, is taken with the other – or more accurately, from another.

This is clearly highlighted in the response to the budget.

Whilst rich land-‘lords’ and mining magnets grow wealthy, collecting their unearned windfall in economic rent – they ironically tell the young tenant saddled with student debt “so you think the world owes you a living?” while government stretches out its hand to the low waged worker commanding they “pull their weight.”

Screen Shot 2014-06-07 at 1.38.02 AM

 Ken Henry tax review “The current charging arrangements distort investment and production decisions….. they fail to collect a sufficient return for the community because they are unresponsive to changes in profits”

It is no coincidence that whilst far from a perfect system of equitable land reform, the greatest equaliser in Australia and the one that had the most profound social and economic effect on reducing inequality, was the Mabo Judgement over land rights for the Aboriginal people.

The monopolists in the mining industry stringently and shamefully lobbied against it, as they did most recently with at mention of a resource tax, turning it into a national crisis.

This is essentially why Clive Palmer entered politics.

Each year Ernst & Young produce a business report for the mining and metals industry, highlighting the top ten risks that can affect fat cat profits, along with tips on how to avoid them.

Screen Shot 2014-06-07 at 2.21.47 AM

Featured prominently is “Resource nationalism” (sharing the gains) with the comment;

“ Miners have had to become more politically savvy” “the most successful are building strong relationships with Government” to…”educate on tax reform”

It is against this backdrop, that he ‘loveable’ founder of “PUP,” which claims to “Unite All Australian’s” has bought himself a seat in power by promising ‘peace, prosperity and goodwill’ to all men, alongside a raft of economic ‘goodies.’

When Clive comes to town, Christmas does too, “lower income tax, free education, higher pensions,’ you name it, Clive will promise it.

His policies are overwhelming ‘wishy-washy’ with no detailed assessment as to how they’ll be funded – but that doesn’t matter. Economic analysis is not the ‘PUP’ agenda.

Instead, it will act in the best interests of its leader ensuring the abolishment of any mining and carbon tax, whilst driving the cost of land higher with incentives for homebuyers.

However, the corruption of politics to favour the vested interests of leaders is nothing new.

It is no coincidence that just about every housing policy designed to increase affordability, results in quite the reverse.

This can be witnessed in any country that allows the economic rent of land to capitalise into the price, thereby becoming a tradable asset to gamble on.

All tax incentives such as negative gearing for example, simply inflate costs rather than reduce them.

Zoning policies create false scarcity by protecting affluent neighbourhoods from ‘over development’, restricting the use of fringe land with urban boundaries and onerous regulation, and advantaging existing owners by pushing up the price of marginal land – which buttresses the price of all land.

The evidence shows, the richer vendors become, the more energetic they are to restrict development near their own land holdings – unless it acts to inflate values.

Many Melbournian’s will be familiar with the historical figure of Thomas Bent for example, who became the 22nd premier of Victoria.

His corrupt dealings are well documented, not least, using his political clout to extend the railway line from Caulfield to Cheltenham, thus enormously increasing the value of his own property developments, which just so happened to fall alongside the proposed route.

A more recent example is being alleged in New Zealand.

The country is undergoing a crisis of housing affordability and has been termed the world’s ‘most over priced.’

Policy makers are tying themselves in economic knots to uncover solutions, with the central bank employing strict lending regulations to prevent exuberant speculation, while ‘up-zoning’ to increase supply is underway.

However, these ‘up zonings’ miss Auckland mayor Len Brown’s spacious lifestyle block, which conveniently falls outside the Metropolitan Urban Limit (MUL).

Mayor Len Brown who has recently purchased an American V8, whilst sporting the public face of being very ‘pro public transport,’ has uncharacteristically ‘infuriated’ his council’s transport leader, by rallying in defence of significant road projects which are reputed to have a beneficial and value enhancing effect on his own estate.

There are numerous academic studies world wide, which outline housing affordability problems, yet fail to identify the root cause and therefore effective solutions.

Economist Michael Hudson points out in USA studies, how the magnitude of land-price gains are brushed under the carpet to hide the massive unearned profits reaped by those who hoard it.

The same phenomenon is happening in Australia, not only with the ‘soft closure’ of the Australian Valuation Office and ‘rubbing out’ of First Home Buyer statistics from the RBA chart pack, but through budgetary cuts to ABS funding, which threaten to end the official “House Price Index” (considered the most reliable market indicator) in favour of private unaudited data providers, whose transparency and reliability are consistently questioned.

When you appreciate how lucrative rent-seeking is to those in power, it is very easy to see how democracy fails us – working tirelessly to silence voices by politically reinforcing faulty economic theories, while strenuously working against efforts to liberalise them.

 

The Budget – The Consequence – The Housing Market & The Next Generation

The Budget – The Consequence

rich paying the middle class..

Last week, Joe Hockey stood up in front of Parliament and on behalf of the Abbott administration, announced;

”The age of entitlement is over. It has to be replaced, not with the age of austerity, but with an age of opportunity!”

The former multi millionaire banking and finance lawyer, husband to an investment banker, and owner of several premium land holdings, (including a 200-hectare cattle farm in Malanda and mansions in Sydney.) Whose own ‘entitlements’ and that of his colleagues, remain largely untouched, went on to address

  • The single mother set to lose more than $3000 per year,
  • The newly unemployed university graduate and retrenched worker, who must live with no income for 6 months (poverty) before claiming Newstart (forgone benefits of more than $7000) – yet still have to service their rent or mortgage.
  • The low wage family with kids, who will lose $6000 a year once all changes are factored in,
  • The Hospitals and Schools – vital pillars of our society – who lose their projected funding (on the rationale that they are state responsibilities, forcing an increase to GST – a regressive tax.)
  • The bottom one-fifth of earners who will lose around 5% of their disposable income, compared to the top one-fifth, who will lose only 0.3% (modelling undertaken by NATSEM who point out the burden of this budget, overwhelmingly falls upon people in the most precarious position;)

..by telling Australian public, that they are not “to be alarmed,” because – it’s all;

“In the national interest.”

“The National Interest” what an outrageous statement.

The “national interest” is an interesting term to use for a budget, that has set about ‘plucking the feathers’ of the poor – the low and middle-income earners, the numerous small businesses, the main productive sectors of our economy – whist avoiding any direct action to the assessed $484bn total increase over 12 months in unearned capital gains (more correctly termed “economic rent”) stored in land holdings (ABS.

Or laying a finger on the licensed resource monopolies, the mineral wealth of which increased by $56bn in 2012-13 alone.

Does this sound fair to you?

The country we want..

 “It’s about the sort of country that we want to be, in the years and decades ahead. It’s about the value we impart.”

Continued Hockey – who has requested that all complaints be directed to ‘the former government’– adopting the age-old habit of passing the buck. Yet, warnings were given well in advance of this “budget emergency,” and the sensible and equitable reforms needed, laid our in the Henry tax review – which they ignored – all of them.

The ‘sort of country we want to live in the years and decades ahead’ – is an apt question to ask – albeit, it should be directed at our children.

After all, it’s our children who are set to inherit this land and it’s their future the Government is shaping. More importantly, it’s not one the Liberal administration should be dictating on our behalf, following the usual stream of failed ‘promises’ we are familiar with on all sides of politics.

a fair go

No doubt, job security and housing affordability would come top of the list – both are interdependent and serve our most basic needs.

Without land, or the ability to use it, rent it, or buy it, we’re unable to do, or produce anything.  We are by definition “poor.” 

The accumulation of all our ‘stuff’ is due to the natural resources land bestows.

It is therefore no coincidence that in both religious and ancient mythology, the first job of man was to ‘tend’ the land.

Our relationship with land is truly unique.

The quality of its location and care of its produce is foundational to our most basic human and consumer needs.

Destroy the land, or prevent ready and affordable access to it, and you destroy a population.

The consequence is as black and white as that – “Pay the rent or leave.”

And it is no surprise, that this budget ignored the role of land in its economic modelling – they have been ignoring it for years.

It’s not included in the Consumer Price Index for example – the tool the RBA use to measure inflation and reflect the cost of living, despite land prices and the size of the loans needed to service them, having an uncanny consistency of exceeding wage growth through the course of each cycle – at least for that of the average household and income earner.

And it’s easy to lay the blame of inequality or the reduction of it, on income distribution alone, either that, or confuse it with other items of ‘wealth’ – as is the case in Thomas Piketty’s book “Capital in the 21st Century

(a subject I explored in part last week.)

These are items that are easy to ‘hide’ in tax havens. You can’t do that with land.

But importantly, whilst the politicians who delivered the budget and the other “twenty percenters,” will only feel a modest loss to their disposable income with the newly imposed ‘wage levy.’ They will claw far more back in the increased value of their land holdings – particularly as we progress through the next phase of our cycle.

The Cause of Wealth inequality – the extreme of which is “poverty”

This is the cause of wealth inequality – a lopsided economy, built on a $5.1 trillion housing market (over $4.1 trillion of which is land.)

land house gdp ratio

(Source)

It’s a subject overwhelmingly ignored, and yet shapes every other area of housing policy – due in part to the vested interests of wealthy property tycoons who lobby our politicians to maintain the status quo. As well as politicians who don’t want to see their “investments” affected in anyway.

The “corruption of economics,” however, is not unique to Australia. It began soon after Henry George, in 1879, took the world by storm, when he successfully communicated the root and leading indicator of the massive boom/bust cycles (although he was not the first to do so,) – that being land.

His farsighted solution, whilst understanding the importance of private ownership, clearly demonstrated that recessions/depressions on a large scale, could be avoided (not by banking reform alone) but if the natural revenue from the economic rent was recycled, to provide and fund community facilities – along with the other government services we require.

This is because, it removes excessive and unwanted speculation from the market, assists home buyers, utilises land effectively, improves productivity with lower land prices, and can assist in increasing wages – which would help the workers – not the land hoarders.

He influenced the likes of;

  • David Lloyd George in England,
  • Leo Tolstoy,
  • Billy Hughes in Australia,
  • Rolland O’Regan in New Zealand,
  • Chaim Weizmann in Israel,
  • Francisco Madero in Mexico, and many others including,
  • Winston Churchill,
  • Milton Friedman and
  • Albert Einstein (to name but a very few.)

He quite simply took the political world by storm.

The people it didn’t impress however, were the large landowners and financiers, the political lobbyists, who set about a on a well-constructed and amply funded mission, to change the course of economic education – to one that moved away from the classical models which recognised the role of land and were advocating Henry George’s policies.

“The Corruption of Economics”

Mason Gaffney and Fred Harrison chart the full story in their book; “The Corruption of Economics.”

They show how the three elements of production—land (and the resources it bestows,) labour, and capital (that of the ‘industrial’ kind) were gradually reduced to two. Labour and Capital – land being “lumped in” with the latter

Capital was now no longer ‘man made’ the result of hard work and genuine innovation.

Instead, it included the stuff of nature – the very elements we need to live – allowing the increasing gains from any natural appreciation of land value (the expected result of every collective improvement we make to society) to be ‘pocketed,’ rather than shared through a proportional system of ‘land rent’ on the unimproved value alone.

It simply implied that the home-owner pay directly for the facilities they use – the amenities that give their land its value – which in the main, removes the need for other taxes which are easy to avoid – like income tax for example.

That sounds fair doesn’t it?

‘All taxation is at the expense of Rent’

As the classical economists David Ricardo and Adam Smith proved, ‘all taxation is at the expense of Rent.’

house tax

(Source)

In other words, any tax withholdings or exemptions given to land holders, result in an increase of “economic rent” available to be capitalised (at the current interest rate) into the price.

This raises the cost of land – yet does little to address the needs of our children, who must take on an every greater proportion of private debt to ‘join in.’

Consequences

The consequence results in what the current budget suggests. Collecting taxes to offset the items we require from other areas – wages, and productivity – the burden of which falls overwhelmingly on the poor – yet advantages those at the top, who see their landholdings increase, way in excess of any taxation.

Is this fair?

Well this is what the current (and previous) administrations have been enforcing and advocating for years.

Promoted widely by our nice ‘balanced’ property commentators – who teach how to get rich on ‘capital gains’ (as if it’s hard) – without stressing the consequence and burden to society and the economy as a whole.

Think about that when you’re browsing the ‘property investment’ isle in your local bookshop.

Think about it.

Who benefits??

The progress of genuine innovation

Thankfully with the birth of genuine innovation – the internet – we finally have the beginnings of a global revolt against mainstream economic teachings which cannot identify boom/bust cycles and crashes, because they refuses to see ‘land.

Not to mention their completely false understanding of money creation and debt and its role in banking – highlighted consistently by Steve Keen who is about to head the first “progressive” department of economic teaching at Kingston University in London. Our loss.

Importantly, economic students are starting to recognise their degrees are hardly worth the paper they’re written on – as the various protests show.

(Something else to ponder when you read the many “market updates” from our mainstream economists.)

Change

Changing the system is not easy when we have built a society dependent on housing wealth to fund retirement.

It requires a slow transition (such as that set out in the Henry Tax review) to gradually phase out tax subsidies such as negative gearing – offset by the supply reforms Leith Van Onselen, Hugh Pavletich, Senator Bob Day and many others have been advocating for years.

But if you want a “fair go” country, one that avoids volatile boom/bust cycles, and instead of promoting wealth inequality, provides economic prosperity along with the best we can leave to our children. Then change we must.

And it starts with ‘us.’

Catherine Cashmore