Government Inaction on Australia’s Housing Affordability Crisis is Indefensible

The fact that Australia has an affordability crisis is not in dispute. Rather, government inaction for more than a decade must be questioned.

Since the early 2000s, there have been three Senate Inquiries to tackle Australia’s escalating land values and declining rates of homeownership, including Australia’s Future Tax System Review that made a number of recommendations on housing reform.

The first inquiry conducted by the Productivity Commission in 2004, determined that prices had surpassed levels explicable by demographic factors and supply constraints alone. They stressed that a large surge in demand had rather been “predicated on unrealistic expectations (in a ‘supportive’ tax environment) of on going capital gains.”

The second inquiry overseen by a Select Senate Committee in 2008, found that the average house price in capital cities had climbed to over seven years of average earnings and once again, they identified inequitable disparities in the overall fairness of the tax system, that had lead to “speculative investment on second and third properties.”

Australia’s Future Tax System’ review conducted in May 2010, stated that tax benefits and exemptions had been capitalised into higher land values, encouraging investors to chase ‘large’ capital gains over rental income and landowners to withhold supply.

The third and last inquiry which is currently being conducted by the Senate Economics References Committee commencing in March 2014, received a key submission from Prosper Australia examining nine chief economic measures of land, debt, and finance – and found all to be at, or close to historic highs.

Egan_Soos_01

“It took forty years from 1950 to 1990 for housing prices to double, but only fifteen years between 1996 and 2010 to double again.” (Soos, Egan 2014).

The submission demonstrated a sharp rise in the nominal house price to inflation, rent and income ratios, driven by a rapid and unsustainable acceleration of mortgage-debt relative to GDP.

The current trend dwarfs the recessionary land bubbles of the 1830s, 1880s, 1920s, mid-1970s and late 1980s that triggered economic havoc, leading Australian households to suffer some of the highest levels of private debt in the developed world.

Egan_Soos_08

Today, the investor share of the market is close to 50 per cent. Investor finance commitments are rising at their fastest pace since 2007. Sixty-five per cent of loans to investors are on interest only terms and 95 per cent of all bank lending is being channelled into real estate – mostly residential.

Yet despite these findings, policy makers and industry advocates repeatedly claim that the primary driver of Australia’s affordability crisis is a lack of supply – and that increasing the stock of housing alone, will reduce prices enough to rectify the problem without the need to address the demand side of the equation through necessary and far-reaching tax reform.

Ultimately, this is not possible because our policies work directly against it.

Investor and housing tax exemptions worth an estimated $36 billion a year, have distorted the Australian dream of owning a home into a vehicle for financial speculation.

Consequently, rising land values that impoverish the most vulnerable sectors of our community are widely celebrated – while Australia’s federal members of parliament in possession of a $300 million personal portfolio of residential dwellings, stand solidly against all recommendations from previous Senate Inquiries for meaningful and equitable tax reform.

Poli investments

“The trends in the data suggest a sizeable majority of federal politicians have a vested interest in maintaining high housing prices, particularly since most have mortgages over their own investments.” (Egan, Soos and David)

Under current tax policy, investors that withhold primary land and dilapidated housing out of use are rewarded with substantial unearned incomes due to government failure to collect the economic land rent (the ‘capital gains’) society generates through public investment into social services.

The subsequent uplift in values that comes as the result of neighbourhood upgrades and taxpayer funded facilities – further accelerated by plentiful mortgage debt and restrictive zoning constraints, capitalises into the upfront cost of land by tens of thousands of dollars year on year. Yet rental incomes, at typically no more than $18,000 to $19,000 per annum are a mere trifle in comparison.

In the 12 months to September 2014 alone, Melbourne’s median house price increased by 11.7 per cent – over $60,000. In contrast, gross rental yields at 3.3 per cent are currently the lowest in the country and the lowest on record.

ScreenHunter_4876-Nov.-10-07.41

This broadening divergence between rental income and ‘capital growth’ typifies the commodification of housing used only as a tool for profit-seeking gain.

Indeed, net rental incomes in Australia have been declining since 2001. Growth in both the relative and absolute number of negatively-geared investors between 1994 and 2012 has soared by 153 per cent. In contrast, positively-geared investors have increased by a much lesser 31 per cent.12

Large divergences between rental income and land price inflation thus produce an unhealthy challenge to both housing affordability and economic stability.

They lead to ‘speculative vacancies’ (SVs) – properties that are denied to thousands of tenants and potential owner-occupiers, lowering relative vacancy rates and placing upwards pressure on both rents and prices. The housing supply crisis is therefore greatly obscured by current vacancy measures that cannot identify sites that are withheld from the market for rent-seeking purposes.

The consequential subversion of housing policy is evident when it is considered that since 1996 Australia has built on average one new dwelling for every two new net persons nation wide. Yet over the same period, government legislation, politically manufactured to protect the unearned profits of a large cohort of speculative investors, has resulted in vacant median land prices on the fringes of Australia’s capital cities ballooning from approximately $90 per square metre in 1996, to over $530 per square metre today.

2014-09-19---03

Indeed, there is no better example of the astonishing escalation of land price inflation than the very recent report of a Melbourne family who purchased a 108 hectare Sunbury ‘hobby farm’ in 1982 for $300,000 and following new residential rezoning, have realised an estimated windfall gain of over $60 million.

This means of ‘creating wealth’ common in most western nations sits at the root of many of our current economic and social problems. Our tax and housing policies shift income to landowners, eroding the living standards of future generations of Australians who are required to shoulder an increasing burden of debt just to secure a foothold on the fabled ‘property ladder’.

The effect is to broaden the intergenerational divide as families are forced to live on the threshold, marginalised into areas lacking essential amenities and jobs, while 92 per cent of speculative investment into real estate pursues the ‘capital gains’ associated with second-hand dwellings, rather than increasing the stock of housing through the purchase of new supply.

Aided by a complicit banking system, Australia’s rising house prices produce wide ranging inefficiencies to the economy. High land prices damage Australia’s competitiveness with higher living costs. The resulting demand on both business and wages channels investment away from genuine value adding activities, leading to a gross and wasteful misallocation of credit to feed an elevated level of speculative rent-seeking demand.

The debilitating and destabilising effect on the economy can be evidenced clearly in a painful and rising trend of income and housing inequality that places an unsustainable strain on the capacity of the welfare state to compensate.

Australian’s like to think of themselves as a ‘fair go society –however, inequitable disparities in our housing, tax and supply policies result in an English-style class divide, evidenced in:

  • Fewer Australians owning their homes outright [i]
  • A rising percentage of long-term tenants renting for a period of 10 years or more[ii]
  • A decrease in the number of low income buyers obtaining ownership, particularly families with children [iii]
  • A drop in the number of affordable rental dwellings with a marked increase in the number of households in rental stress[iv]
  • Greater requirements for public housing.[v]
  • A rise in homeless percentages and those who drift in and out of secure rental accommodation –with ongoing intergenerational effects[vi]
  • An increase in the number of residents living in severely crowded accommodation.[vii]

As many as 105,000 Australians are currently homeless, while between the dates of 1991 and 2011 homeownership among 25-34 year olds has declined from 56 per cent to 47 per cent, among 35-44 year olds from 75 per cent to 64 per cent, and among 45-54 year olds from 81 per cent to 73 per cent.

Homelessness is often blamed on dysfunctional relationships, mental illness, drug abuse, domestic violence, job losses and so forth. But at the root lays an acute lack of affordable accommodation available for the most impoverished members of our community in need of both security and shelter.

‘Speculative Vacancies 7’ gives a unique insight into the impact of current housing policy by highlighting the total number of underutilised and empty residential and commercial properties currently withheld from market.

Melbourne is a perfect case study for this report.

• Its real estate is ranked among the most expensive in the developed world
• It has dominated Australia’s population growth, attracting the largest proportion of overseas immigrants, alongside strong immigration from interstate.

As government and the real estate industry are not sources of impartial information, the report adds a valuable dimension to understanding the divergence between real estate industry short-term vacancy rates (the percentage of properties available for rent as a proportion of the total rental stock) and the number of potentially vacant properties exacerbating Australia’s housing crisis.

Screen Shot 2014-11-19 at 2.24.42 am

Download Speculative Vacancies 7.

Read past reports

Related media:

(Footnotes)

[i]ABS – In 1996/7, 42% of households owned their home without a mortgage. This proportion is now down to 31%

[ii]ABS  -A third of all private renters are long-term renters (defined as renting for periods of 10 years or more continuously), an increase from just over a quarter in 1994

[iii]ABS  – A drop of 49% to 33% between 1982 and 2008

[iv]ABS  – In 2009–10, 60% of lower-income rental households in Australia were in rental stress.

[v]AHURI 2013 – 28% increased demand for public housing projected by 2023

[vi]ABS  – Between 2006 and 2011 the rate of homelessness increased by 8% from 89,728 to 105,237

[vii]ABS  – The total number of people living in ‘severely’ crowded dwellings jumped 31% (or 9,839 people) to 41,370 from 2006 – 2011

Australia’s 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.

Untitled

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.

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

Legally Underquoting? How Agents Get Away With It

Legally Underquoting?  How Agents Get Away With It 

Anyone in who has searched though one of the online real estate websites recently, will understand the frustration experienced when price quotes are missing – and judging from Australia’s real estate obsession, it’s no meaningless amount. The REA group alone, claim to get “8.8 million unique visitors each month.”

Putting a price on a real estate, particularly with homes offered as private treaty, is not difficult.

Ideally, an assessment of the property is undertaken by the sales agent – one familiar with market sales in the immediate locality – and in conjunction with the vendor, a price is set that produces a happy balance between both vendor expectation and local comparable sales.

If interest is lagging in the two weeks following, the agent can negotiate with the vendor to reduce the range.

If sales enquiry is healthy – or an offer in excess of the range is achieved and subsequently rejected – the agent has the ability and ethical responsibility (in conjunction with their vendor) to change the quoted range to reflect the heightened level of interest.

For a proportion of agents acting within their “reasonable” duty of service, this still is the norm.

However, now it seems every second advertisement you click upon, whether auction or private treaty has “contact agent” or a similar term listed underneath the subheading “price.”

An enquiry then produces a roundabout of guessing games with somewhat wishy-washy lines totted out, such as “it’s too early to tell.”

In other words, the agent is indicating he has no idea where to place his price quote, because Joe Blogs buyer hasn’t yet walked through and in some occurrence of pure fiction, stopped to tell the agent exactly what he’s prepared to offer.

Whilst we all agree –in a free market – real estate can only be valued on what a willing buyer is prepared to pay; this is precisely why real estate agents appraise a property against recent comparable market sales in the first place.

When combined with good local knowledge, a market appraisal (not to be confused with a valuation,) will give the agent a very good indication of buyer demand – at least to the degree of being able to publish a negotiable price range that falls in line with vendor expectation at the outset.

I should pre-empt before going further that a proportion of agents I speak to will give me a realistic idea of vendor expectation upon enquiry – however, after years of complaints within the industry regarding those who still choose to lowball their ranges, or quote using a ‘+’ price, (which in today’s terms, can mean anything from 5-30%) – there continues to be an overall lack of transparency within the sector, allowing a number of agencies (particularly when advertising for auction) to continue selling buyers “false hope” with no fear of reprimand.

To give an example, I recently attended an auction in the Balwyn High School zone.  The property was quoted at $700,000 +, and later revised to $750,000+ in the final week of the campaign.

A call to the agent indicated vendor expectation was “very reasonable,” they “hoped” to get over $800,000 I was told, but “who knows?”

The comparable data told a different story.  A price in excess of $850,000 should have been expected.  This selling agent – (an expert in the area) – would have known this, and the auction merely confirmed it.

The opening bid was $800,000 – $50,000 above the price quote.

The property did not reach its reserve until $900,000 – $150,000 above the price quote.

With competition from 7 bidders, it finally sold for $1,011,000 – but not before a neighbour I’d been casually chatting to, leaned across and revealed the ‘wish’ price, when she whispered; ‘I know the vendor, and she wants a million.’

It’s time we valued the ethical side of our sales industry with a little more seriousness than pricing an item on e-bay – with a “quote ‘em low, watch ‘em go” mantra.

The continual problem with different methods of quoting – or lack thereof – runs to the very base of mistrust most buyers have against the real estate industry as a whole – and it’s a brush that tars us all.

Even in a buoyant market, recent data will give a good pinpoint of expectation for the agent to advise their vendor’s of an appropriate reserve at the outset – should market forces take over once the property has reached that reserve, so be it – it doesn’t change was should be a simple exercise.

It seems silly to point out the obvious, but no buyer likes to play guessing games when it comes to putting a price on an advertised listing – and neither should they have to.

Everyone understands real estate is a negotiated asset, however, the verbal game playing that now surrounds the sales industry is often laughable – ranging from “we don’t know yet” to “properties in the area are selling in the $400,000 and $500,000 range” – information a simple Internet search could reveal.

When an enquiry is made regarding price, the one bit of information buyers require, is an accurate ‘ball park’ indication of vendor expectation.

Whether it’s too high, or at a reasonable level for market demand doesn’t matter – the vendor is signing the contract and therefore interested buyers need evaluate if it falls in line with their own budget constraints.

As for an assessment of value – if we were operating in an ideal world, buyers would ignore price quotes altogether and do their own research to establish market value, prior to spending hundreds on a pest and building inspections or solicitor fees chasing an unobtainable dream. However, despite recent improvements, closely comparable sales data is not always readily available.  In Victoria, many are still listed with undisclosed prices.

Computer-generated “estimates,” are just that – and more often than not, hopelessly inaccurate at providing the depth of information buyers require for effective negotiation.

Suburb reports are equally unhelpful, and while median data will give a clue of the dollars the majority market is spending, they are no help when evaluating individual property prices.

Using a buyer agent who has access to such information is all well and good – however, agents should not have a monopoly on data, and it’s reasonable to suggest buyers deserve a “hint” of vendor expectation by way of an accurate price quote before wasting time and money chasing a dream.

A handful of agencies dealing with the more volatile luxury end of the market, in which interest is discretionary, understandably choose to sell via ‘expressions of interest.’ However, the decision to drop the quoted range all together, from a large percentage of real estate advertisements seems, in a good number of cases, to have been employed as “self-protection” from accusations of “underquoting” – a policy designed to protect the sales agent – and not one that’s necessarily in the best interests of their client.

Vendor expectation can often be inflated.  It’s made worst by the commission-based competition between real estate agents and their respective agencies – which can promote the need to “buy” a listing through selling false hope, or risk missing out to a competitor who promises they can achieve more.

Quoting low ‘legally’ is not difficult. In Victoria – which has fallen under more scrutiny that any other state – if the vendor does not disclose the reserve on the sales authority when assigning their listing to an agent, (which is the general practice and advised by most) the quote does not need to reflect vendor expectation.

Instead, an agent must provide a written estimate of market value, which if a range, should be no more than a 10%.  This range is theoretically based on comparable data, but finding near by results to establish a lower price is not difficult – should that be the intention.

For example, in the story I highlighted above – comparables on nearby streets outside the schools catchment area would have placed the listing closer to the quoted range.

Similar applies within the suburb – if you’re not familiar with the good and bad streets, which attract different levels of demand, the price differences can be stark.

Albeit only by quoting below the agents written estimate of market value on the authority is officially “underquoting.” Therefore, under current legislation, the written estimate does not necessarily need to reflect vendor expectation.

It may not be admitted as such, but when agents list a property it is common practice to encourage the vendor to withhold their reserve price. This enables a conservative estimate of value – as either a verbal or published quote range – to glean as much buyer enquiry as possible.

Once again I stress, that each agent has different ethics. I am talking generally across the industry – and unfortunately, there is enough evidence of the above practices to pollute an overall impression of the whole.

Furthermore, if one agent quotes low, and another in the same suburb quotes at a level more reflective of reality – guess which listing gathers the greatest enquiry? A catch 22 for agents working to turn over business, in a very competitive commission based sector.

The only time an agent is required to adjust the range higher, is if a written offer in excess of the published figure is received. However, what typically happens in this scenario, is the number – (should there be one) – is removed altogether.

The above process of ‘quoting low,’ is sold to the vendor via an explanation of the “buyer pyramid” – it works a little like step quoting – get the lower priced bidders to build momentum during the auction, to fuel those bidding with healthier bank accounts to step in at the end.

In this scenario, during which emotions are strong, buyers tend to bid to win, rather than bid to buy. In a heated market, rational thinking is generally not employed, especially when competition is fierce and ‘fear of missing out’ ensues.

Without the lower budget bidders, auctions can pull up short lacking the usual frenzy that has – in our boom eras of growth – significantly contributed to pushing medians to unsustainable levels and exacerbating upward swings in the market cycle.

Furthermore, any gaping hole between the quote and reserve can be waved off with the excuse that the vendor ‘changed their mind’ – or ‘upped’ expectation.  Hence why it is so easy to get away with purposefully placing the price range below the level at which the vendor will sell – and when that quote is verbal, it’s arguably easier still.

To suggest that a property owner’s expectations fluctuate to such an extent so as to not be represented in the price quote is highly questionable. Having worked as a sales agent in previous years, I can categorically say there was never a time where I didn’t know my vendor’s approximate reserve well enough in advance of the auction, to place a reasonable quoted range on a listing from day one.

Furthermore, vendors are not without blame. Assuming the price quote is a estimate based on “recent comparable sales” and the vendor isn’t in the dark when it comes to the price quoted on his or her vendor-paid advertising, why would he or she agree to list the property and quote at a level they would not be willing to sell for in the first place?

In such instances, I would suggest this is a pretty good example of what should officially be termed “under quoting” – conservative at best, deceitful at worst.

There are many solutions to this puzzle, which would not be difficult to legislate.

Some states have suggested banning quotes altogether – either verbal or otherwise – but this does not take us closer to an effective solution for buyers. Additionally, it makes it very hard for a good sales agent to interact with buyers to enable them to modify their vendor’s expectation as the campaign progresses.

With this in mind, I would suggest, it’s time vendors were required to take shared responsibility (with the agency) for their own paid advertising campaigns and ensured their reserves – or ranges in which they’re prepared to negotiate within – are published at the outset and provide an accurate indication of a price they are willing to consider.

If minds are changed, quotes should be changed, but leaving such a large question mark for buyers, who are increasingly frustrated at having their time, money, and energy wasted, is damaging for all concerned.

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

Empty words as FHBs sold out on housing policy…

Since I started writing about housing policy and citing the growing concerns many are having with the rising price of accommodation, it’s been somewhat heartening to see a greater array of individuals acknowledge an undeniable widening gap between existing owners, and a growing pool of ‘wannabe” renters.

Most recently, ALP member for McMahon in New South Wales, Chris Bowen, was reported saying “”I can see the difficulties for young and first home buyers of getting into the market,” citing an ‘affordability crisis’ to be a“serious national issue”.

Whilst many parents would recognise the struggle first homebuyers face and wish for an easier path to enable their children, to gain a foothold into what’s too commonly termed the ‘property ladder’ – as if it’s something to be conquered – emphatic remarks such as those offered above are easy to make when decision-making is out of party hands.

Yet, it was only a few months ago, when challenged over affordability on Q&A, and lacking any real policy initiative going into the federal election, that Chris Bowen remarked:

“There (are) two big things that we can do to help with housing affordability. That’s keep unemployment as low as possible. Because you have got a job, that’s the best thing you can do to get into the housing market. And also to keep interest rates low and interest rates are as low as they’ve ever been in Australia”

No one would doubt keeping unemployment numbers low is an important component to a steady housing terrain – however, as for low interest rates, they have done little more than inflate established property prices and speculation on financial markets, which is scant benefit to those facing rising yields, or paying an inflated cost to secure a property at the offset.

On the same program, Joe Hockey’s comments took a similar stance – except he did touch on the issue of supply:

“..the fact is you’ve got to increase the supply. I mean it’s a market. There is plenty of demand and increasing demand but what are we going to do for supply? I have some plans on that which we’ll be talking about before the end of the election.”

When making these comments, it’s unclear whether Joe Hockey had prior awareness of the Coalition’s plan to abolish the National Housing Supply Council, which was established specifically to identify gaps between housing supply and demand.

Apparently, the council’s activities are ‘no longer needed’ and will be ‘absorbed’ into other departments which aren’t entirely transparent, as Scott Ludlum found when questioning as such. Whatever the reason, it’s clear the current government does not hold supply policy high on the priority list.

As it is, saving hard on an average wage is no longer a guaranteed ticket into the breastfed dream of home ownership – especially if you live anywhere close to Sydney.

Martin North Principal of Digital Finance Analytics demonstrated this on a recent blog entitled “The Truth about House Price and Income Growth” charting house prices compared to average disposable income across the NSW market back to 2002.

ScreenHunter_509 Dec. 03 07.20

Whilst the higher quartile’s income has kept pace with house price inflation, the other quartiles have only seen their wage grow marginally, his study clearly demonstrates that prices are now outpacing earnings for the larger proportion of residents and therefore effective solutions need to be found.

Of course, each state faces its own challenges, and some are fairing better than others. But presently first homebuyers are clashing budgets with an equal to larger proportion of investors and downsizers and therefore targeting similar stock against those who have an existing equity stream to tap into.

Unfortunately, aside from some tinkering around the edges of housing policy with schemes such as the NRAS, which quickly became over subscribed and jumped upon by SMSF spruikers, it remains a reality that neither political party has yet seen past burdening new buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask the rising cost of accommodation under the false premise that they’re doing ‘something.’

And Australia faces challenges ahead – with a falling participation rate due to an aging population, fewer full-time positions coupled with a rise in part-time work inflating the ‘underemployment’ figures – job creation is not keeping pace with increases in our working age population.

This was outlined in the freshly released Productivity Commission paper entitled “An Ageing Australia: Preparing for the Future” which projected:

“Australia would have four million more people aged 75 years or older by 2060, with 25 centenarians for every 100 newborns, compared with one centenarian for every newborn in 2012.”

Not only will aging Australian’s have to work to the age of 70, to bridge a shortfall in savings, but the report suggested retirement should be funded in part through a house value ‘equity release scheme,’ claiming:

“House prices have risen over time in real terms, a trend that is likely to continue. Against this backdrop, even under conservative assumption allowing households aged over 65 years to easily access their home equity to help fund health and aged care costs could have a significant impact on reducing fiscal gaps”.

However, under such schemes, not only do Governments have a vested interest in keeping house prices high and rising, they are pinned to the necessity of such to fund future budgets.

Balancing an economy for an aging demographic is not unique to Australia. However, if house prices weren’t as burdensome, requiring an increasing proportion of savings just to enter ownership, not to mention the longer mortgage terms needed to pay down the loan, it would be possible to invest a greater proportion of the household budget into areas of productivity and small business development, as well as channeling savings elsewhere for retirement without the need to use the principle place of residence as a sole equity fund.

In this respect, Australia differs little from its closest Neighbour, New Zealand, where the costs of rising accommodation also bites a good way into a household’s budget for new buyers.

In an article in the New Zealand Herald concentrating on an increasing difficulty accessing ownership following a sensible requirement on lenders by the RBNZ to maintain an 80% loan to value ratio, a young couple were highlighted as a somewhat typical case study.

Putting aside the additional ‘useful’ tips for saving the $90,000 deposit needed for their $450,000 purchase, such as ‘take a packed lunch to work’, it seems the only way this couple were able to purchase adequate accommodation in the Auckland locality was to tap into the ‘bank’ of their respective parents, who borrowed against the accumulated equity in their own home to shore up their children’s deposit.

The couple’s take home pay is $6000 per month, therefore a weighty 50% will go toward mortgage repayments – yet the price of their accommodation is not out of step with what we expect our own duel income first timers to pay for a modest sized home which will provide adequate facility for more than 2 or 3 years.

New Zealand resident and Co-author of the Annual Demographia International Housing Affordability Survey –Hugh Pavletich – makes some sensible comments in relation to this:

“Within normal housing markets with properly functioning Local Governments that have not lost control of their costs, young Jamie Clark and Jenna Close on their household income of $70,000, should be able to buy a new home for about $210,000 with a sensible mortgage load of $175,000 requiring a deposit of about just $35,000.”

Pavletich’s comments are endorsed by Australian Senator – elect Bob Day who in reply to the comment above stated:

“For more than 100 years the average New Zealand family was able to buy its first home on one wage. As you have frequently reported, the median house price was around three times the median income allowing young homebuyers easy entry into the housing market.

As discussed in your report, the median house price is now, in real terms i.e. relative to income, up to nine times what it was between 1900 and 2000…a family will fork out approximately $500,000 more on mortgage payments than they would have had house prices remained at three times the median income.”

The demographica survey rates 337 different housing markets using a “Median Multiple” (the median house price divided by gross annual median household income) to assess affordability. The methodology is a measure recommended by the United Nations and World Bank Urban Indicators Programs and employed by Harvard University’s Joint Centre for Housing – to name but a few.

An affordable market is therefore deemed to be one with a median multiple of 3.0 or less, and whilst it’s never easy to draw an exact correlation between the complexities of international policies compared to our own, the report does provide a basis for research into precisely how other markets with rising populations and relatively healthy economies, manage to maintain their affordable nature.

Supply

The reports primary focus is on supply – removing barriers such as urban boundaries and tax overlays, and portrays the model employed in Texas, where aside from environmental compliance there are no zoning restrictions outside the city outskirts, and planners see themselves as regulators rather than interested parties in town design.

Texas is also a market, which has successfully financed infrastructure by electing local residents onto boards and providing them with access to tax free bonds, which are subsequently allocated for the provision of essential amenities.

Property rights in Texas are clearly strong in nature with limited regulation, covering little more than the land itself – therefore, housing affordability isn’t a burning concern for Texans, and judging by the number ofAmerican’s moving there, the market is an attractive one.

Tax

Secondly, as I highlighted last week, markets such as Pittsburgh in the USA, which has a median multiple below 3.0, is an example where land value tax has been successfully employed.

When land value tax is implemented – with the burden taken of buildings and their improvements ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Speculation and strong tenancy laws

Another commonality shared amongst ‘affordable’ markets is the lack of speculation that inspires the ‘get in quick’ feeling for aspiring owners. Germany is one such example where until fairly recent times; real house prices had remained stable since at least the 1970s.

Home ownership in Germany is not embedded in their culture. And as I pointed out a few weeks ago, strong tenancy laws along with liberal supply policies ensures when time does come to purchase, there is plentiful option to do so without breaking the budget.

Australia?

Whether we will ever achieve the significant reform needed to turn Australia’s housing market into an affordable one is debatable. However, with the rise of the internet and the ability of those searching for answers to delve a little deeper than they perhaps would have done before the world became a mirror of reflections, as every action and movement is recorded, posted and photographed in real time, and offered up for an immediate judgement on social media – it can only be hoped, that a majority, not minority, are taking opportunity to look past the frivolity of what I think most would agree, (whether by design or purpose) have to date been fairly meaningless and unsatisfactory open government debates on housing policy.

In the end, it will be up to the growing generation of struggling first timers and priced-out renters to vote for the brave advocates who enter politics with what are currently deemed unpalatable plans for true and meaningful reform.