Government Inaction on Australia’s Housing Affordability Crisis is Indefensible

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Melbourne is a perfect case study for this report.

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

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

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Download Speculative Vacancies 7.

Read past reports

Related media:

(Footnotes)

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

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

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

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

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

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

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

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Skyscraper Hubris – Pride Before A Fall

By – Catherine Cashmore

“Bill, how high can you make it so that it won’t fall down?” reportedly asked financier John J. Raskob, as he pulled out a thick pencil from his drawer, and held it up to William F. Lamb, the architect he had employed to design and construct The Empire State Building.

It was the ‘race to the sky’ and it marked the peak of the roaring Twenties. Capturing what is perhaps one of the most exciting periods in New York’s history.

“Never before have such fortunes been made overnight by so many people,” said American journalist and Statesman Edwin LeFevre (1871–1943)

While areas of the economy such as agriculture and farming, were still struggling to gain ground from the post WWI depression, and a large proportion of the population continued to live in relative poverty. Advances in technology, rapid urbanisation and mass advertising accelerating consumer demand, produced an era of such sustained economic prosperity, it led Irving Fischer one of America’s ‘greatest mathematical economists’ to famously conclude that:

“Stock prices have reached what looks like a permanently high plateau.”

“Only the hardiest spoilsports rose to protest that the wild and unchecked speculative fever might be bad for the country.” Wrote historian Paul Sann, in his publication, ‘The Lawless decade.’

“The money lay in stacks in Wall Street, waiting to be picked up. You had to be an awful deadhead not to go get some.”

Land values of course captured the gains, and between 1921 and 1929 lending on real estate increased by 179%, and urban prices more than doubled.

According to research collated by Professor Tom Nicholas and Anna Scherbina at the Harvard Business School in Boston, by 1930 values in Manhattan, including the total value of building plans, contained “only slightly less than 10% of the total for 310 United States cities (Manhattan included) during the same period.”

A staggering figure considering Manhattan at the time, contained only 1.5% of the US population.

Few raised concerns however.

It was believed the Federal Reserve Act, created in 1913 “to furnish an elastic currency” would tame the business cycle and – as the First Chairman of the Federal Reserve Charles S Hamlin put it:

“..relegate to its proper place, the museum of antiquities – the panic generated by distrust in our banking system..”

The National bank runs of the past had been exacerbated because there was ‘no stretch’ in times of crisis, or moderation in the rates of interest.

However, the bulk of lending against real estate over this period was not limited to New York, or to institutions that were members of the Federal Reserve.

Thousands of new banks were setting themselves up in outlying areas and as noted by Elmus Wicker, author of ‘The Banking Panics of the Great Depression

“..(they) were either operated by real estate promoters or exhibited excess enthusiasm to finance a local real estate boom”

It brought with it a period of high inflation, and coupled with speculation in real estate securities, produced an explosion in the value of construction that would not be equalled until the boom and bust era of the late 1980s.

NY construction(Tom Nicholas and Anna Scherbina – Real Estate Prices During the Roaring Twenties and the Great Depression)

By 1925 real estate bond issues accounted for almost one quarter of all the corporate debt supplied – and between 1925 and 1929 alone, a quarter of New York’s financial district was rebuilt and 17,000,000 square feet of new office-space added.

This, prompted the owners of the grand Waldorf-Astoria Hotel at 34th Street and Fifth Avenue to sell.

Arising from a family feud between two competing cousins, the iconic guesthouse had been built at the top of a preceding boom and bust land cycle in the early 1890’s, and as ‘the most luxurious hotel in the world’ stood 17 stories high towering above the surrounding residences.

W&A hotel

By the late 1920s however, the décor had become dated and the social elite had centred themselves much further north.

The owner’s decision to upgrade into the Park Avenue district, and build what was then, ‘the tallest hotel in the world’ allowed John J. Raskob to acquire the site for The Empire State Building for the not so small sum of $16 million.

Raskob needed a further $50 million for construction, which he achieved by way of a $27.5 million dollar mortgage, as well as engaging with a limited number of substantial backers.

“If the amounts seem considerable the backers knew that this was a money maker. The building would be the greatest showcase in the city filled with them.  And tenants would line up to print “Empire State Building” on their letterhead….” wrote Robert A. Slayton author of Empire Statesman: The Rise and Redemption of Al Smith

The location was later criticised for being too far from public transport, but no such concerns were raised at the time.

New York office leases began on May 1st – the sooner the building was completed, the sooner it would bring in an income and notwithstanding, Raskob’s two main competitors also in the race for height supremacy – auto industry giant Walter Chrysler and investment banker George Ohrstrom – had already commenced.

Chrysler had seized his opportunity when gratuitous plans for an opulent office block designed by architect William Van Alen had fallen through due to financing.

He took over the project with clear intentions.

Adjusting the tower’s ascetics to reflect the company’s triumphs, with gargoyles, eagles and corner ornaments made to look like the brand’s 1929 radiator caps. Chrysler instructed the builders to make sure his toilet was ‘the highest in Manhattan’ so he could look down and as one observer put it, “shit on Henry Ford and the rest of the world.”

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Around the same time, George Ohrstrom, also determined to set the record, purchased the site that was to become the headquarters of The Bank of Manhattan at 40 Wall St (now the Trump Tower.)

Ohrstrom’s architect was H. Craig Severance, former partner and competitor to Walter Chrysler’s designer, Van Alen – and the bitter rivalry between the two added considerably to the dynamic.

Construction for 40 Wall St start started in May 1929 and no less than one month later, in April of the same year, fearing the competition Chrysler reportedly called his architect in frustration exclaiming:

“Van, you’ve just got to get up and do something. It looks as if we’re not going to be the highest after all. Think up something! Your valves need grinding. There’s a knock in you somewhere. Speed up your carburettor. Go to it!”  Higher: A Historic Race to the Sky and the Making of a City Neal Bascomb

Van Alen subsequently increased the height of the Chrysler tower to 925-feet and added more stories – 72 in total.

Not to be outdone however, Severance added 4 extra floors to his own design, extending the building’s height to 927-feet – only marginally taller than Van Alen’s efforts, but by this stage the steel frame for the Chrysler building had already been completed and in Ohrstrom’s mind, he had already won.

The Bank of Manhattan was finished at record speed, taking just 93 days in total – meeting the May 1st deadline and setting the record for skyscraper construction.

40 wall st

It opened with great celebration – with Ohrstrom boastfully laying claim to the title of “the world’s tallest,” while in blissful ignorance of the final trick Chrysler had yet to pull from his sleeve.

Replacing the original plans of a dome shaped roof, Van Alen enhanced the design with the addition of a 186 foot iconic spire, which was hoisted to the top of the structure in secret and assembled in a mere 90 minutes.

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This raised the building’s height to 1,046 feet, a total of 77 floors – allowing Chrysler, less than one month later to trump Ohrstrom’s record.

The battle continued long after both blocks were completed, with the consulting architects of 40 Wall Street, Shreve & Lamb, writing a newspaper article claiming that their building contained the highest useable floor and was therefore more deserving of the title.

The Empire State Building however, was to settle the matter.

Hamilton Weber the original rental manager, takes up the story.

“We thought we would be the tallest at 80 stories. Then the Chrysler went higher, so we lifted the Empire State to 85 stories, but only four feet taller than the Chrysler. Raskob was worried that Walter Chrysler would pull a trick – like hiding a rod in the spire and then sticking it up at the last minute” The Empire State Building Book by Jonathan Goldman

The solution to Raskob’s worries was to add what he quaintly termed “a hat!” – marketed as a mooring mast for dirigibles – although never utilised due to the strong winds and updrafts that circulated at the top.

This raised the building’s height to 1,250 feet, easily outstripping both Chrysler’s and Ohrstrom’s efforts, allowing Raskob to scoop the title.

Taking just 13 months to complete, 58 tons of steel, 60 miles of water pipe, 17 million feet of telephone cable and appliances to burn enough electricity to power the New York city of Albany. The Empire State building with 2.1 million square feet of rentable space opened on May 1st 1931 empty – just as the country was entering one of the worst economic depressions in recorded history.

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Dubbed ‘The Empty State Building’ – it did not turn over a profit until 1950 putting Raskob who, in 1929 had penned the famous article ‘Everybody Ought to be Rich‘ by investing in “America’s booming corporate economy,” deep in the red.

The history of this era is a fascinating study.  However as entertaining as the story is, it does not stand in isolation.

From long before the Empire State Building was completed, to the most recent example – the Burj Khalifa in Dubai – mankind’s quest to reach the heavens and demonstrate power through the imposing dominance of boasting ‘the world’s tallest’ structure has – with no notable exception – commenced at the peak of each real estate cycle and opened its doors during the bust.

The pattern is easy to follow:

Improvements in the economy are first reflected in rents, which adjust quicker to market conditions than associated expenses – insurance and utility rates for example – which are subject to contract and therefore typically rise out of step.

This in turn attracts speculative investment, pushing prices upwards beyond the cost of replacement, fuelling a cyclical rise in construction – usually for the purpose of speculation, rather than genuine homebuyer demand.

The steeper land values become, the higher the building must be in order to achieve a profitable return, this in turn increases demand to concentrate both labour and capital around what is usually a centralised core.

There is however a lag in the time it takes for high-density construction to reach the market – usually a number of years – before the extra supply can drive down both rents and values, resulting in the building boom outlasting the boom in prices, and an overhang of vacancies when the fervour dissipates.

Notwithstanding, there are limits to how high you can extend before the whole project becomes unprofitable.

William Mitchell, dean of the School of Architecture and Planning at the Massachusetts Institute of Technology, makes the following point in his 2005 publication ‘Placing Words Symbols, Space, and the City.’

… floor and wind loads, people, water and supplies must be transferred to and from the ground, so the higher you go, the more of the floor area must be occupied by structural supports, elevators and service ducts.  At some point it becomes uneconomical to add additional floors, the diminishing increment of useable floor area, does not justify the additional cost.”

In a subsequent publication he goes one-step further.

“I suspect you would find that going for the title of ‘tallest’ is a pretty good indicator of CEO and corporate hubris. I would look not only at ‘tallest in the world,’ but also more locally—tallest in the nation, the state, or the city. And I’d also watch out for conspicuously tall buildings in locations where the densities and land values do not justify it”  ‘Practical Speculation’ By Victor Niederhoffer and Laurel, Kenner

Mitchell’s warning to look for the “tallest” is not to be taken lightly.

The New York Tribune Building for example, one of the world’s first skyscrapers boasting to be “the highest building on Manhattan Island” – opened in 1874 and coincided with the 1873 financial crisis in both Europe and North America.

The Manhattan Building in Chicago Illinois and the Pulitzer Building in New York, boasting the title of “the world’s tallest” – opened between 1890 and 1891 and coincided with one of the worst economic depressions of that time (particularly in Australia.)

The Singer Building and The Metropolitan Life Insurance Company Tower in New York, boasting the title of “the world’s tallest”  – opened in 1908 and 1909 respectively and coincided with stock market panic of 1907 (the Knickerbocker Crisis.)

The World Trade Centre in New York, boasting the title of “the tallest twin towers in the world” – opened in 1973 and coincided with the 1973-75 economic recession.

The Sears (or Willis) Tower, boasting the title of ’the world’s tallest” opened in May 1973, coinciding once again, with the 1973-75 recession.

The Petronas Towers in Malay – surpassing The World Trade Centre as “the tallest twin towers in the world” – opened its doors to tenants in 1997, coinciding with the Asian financial crisis.

The Taipai 101 in China, the first to exceed half a kilometre, boasting the title of “the world’s tallest” – opened in the early 2000s, coinciding with the ‘Dot.com’ bubble and burst.

And most recently, the Borj Khlifa in Dubai, the current ‘tallest in the world’ -, opened in 2009, coinciding the sub-prime crisis, estimated to be the worst economic disasters to date.

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There are numerous examples, and rarely do these structures go up alone.

As we are seeing currently both here and abroad, the rate of high-rise construction globally, stands at unprecedented levels – funded by low interest rates and a wash of easy credit.

Matthew Guy, Minister for Planning in Victoria, has been a staunch supporter of higher density dwellings, but the risks surrounding a boom on the scale we are witnessing presently, cannot be diminished.

The small one and two bedroom apartments, funded in main by offshore speculation, are poorly designed, lack natural light, do not offer value for money, and lay out the reach of most first home buyers who face tighter lending restrictions for dwellings of this type

Notwithstanding, Prosper Australia’s Speculative Vacancies report for Melbourne in 2013, revealed many of these properties sit empty – up to 22% in the Southbank and docklands area – a figure that could well be higher today, considering the rate of what can only be termed, ‘bubble’ construction.

And to make matters worst, there is growing evidence the approved sites for skyscraper construction are being ‘flipped’ prior to commencement, with new owners reapplying to have height limits extended still further.

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(Developers ‘flipping’ projects for huge profits – The AGE September 1, 2014)

The next ‘world’s tallest’ will be the proposed Azerbaijan Tower in Baku, due for completion in 2019 – and projected to be 1km high.

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It coincides nicely with the completion of ‘the tallest’ residential tower in the Southern Hemisphere – Australia 108 in Melbourne – which at 319 metres, will exceed the height of the current record holder – the Eureka Tower – and unless we see changes to current policy – will mark another period of financial instability.

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Only by removing the accelerants that produce this behaviour – contained in our tax, supply, regulatory and monetary policies – can we start to address the boom and bust cycles that lay us open to economic instability, fuelling the boastful passions of financiers at the expense of the rest of the population.

It is these policies that keep us locked around a centralised core, increasing the cost of land at the margin and resulting in decades of dead weight taxes on every worker in the country being clawed back by way of preferential tax treatment for those that speculate on the rising value of land.

Every citizen in Australia would be richer by a significant margin if we collected instead, the economic rent from land, resources, banking profits, government granted licences and so forth, and used these to fund society’s needs rather than progressively taxing productivity to feed an elevated level of rent seeking behaviour.

But until such a time there is only one moral to this story.

Pride comes before a fall.

Nick Xenophon “Home affordability: a Super idea” – Really?

Nick Xenophon “Home affordability: a Super idea” – Really?

By Catherine Cashmore

Nick Xenophon (along with other groups, such as the REIA,) is advocating a policy that will be responsible for making housing affordability worst.

He is using the Canadian “Home Buyer Plan” as an example to promote a similar idea in Australia. That is – allowing first homebuyers to raid their Superannuation account – ‘sold’ under the pretext of ‘helping them get onto the property ladder.’

The theory goes that to “progress” up this mythological ladder, buyers must bet their income and in this case, future savings, on a speculative process that translates into higher house prices, without thought for the next generation of required ‘property ladder’ participants, who will no doubt fall dependant on similar schemes, to keep the tide rising.

The procedure in Canada allows eligible buyers to withdraw up to C$25,000 tax-free from their retirement fund, on the condition that they pay it back over a 15-year period.

If they fail to do this, the amount withdrawn will be taxed as per the income earner’s tax bracket. Currently, 35 per cent of Canadians fall into this category however, according to the CRA, roughly one out of two – that is, 47 per cent – contributed less than the required repayment amount over the 2011 tax year.

These means, while the Government picks up the added income revenue windfall, buyers, buoyed on by a rent seeking culture that fools the public into believing such policies are designed to be ‘helpful,’ over stretch their budget, and in weak economic conditions, are left to carry the can.

In short – you borrow money from yourself at 0 per cent interest and in doing so; lose 15 years of compounding ‘tax free’ interest with average returns in the order of 7 per cent.

It’s notable that many low to middle-income individuals have inadequate funds to draw upon, therefore even assuming the scheme were to be effective, it’s limited in the difference it can make.

But the real ‘nub’ of the issue, which Nick Xenophon has failed to acknowledge, is that the Canadian Home Buyer Plan was never intended to aid affordability.

It was promoted by the real estate industry as a temporary measure, following the recession in the late 1980’s, to stimulate land values and benefit the FIRE sector, along with it’s economic offshoots – renovations, furniture, appliances, moving costs, tax revenue to government and so forth.

The FIRE sector has lobbied to keep in place ever since and also pushed for the threshold to be raised.

This is because most Western economies have constructed their tax and supply policies, to reward real estate speculation over and above productive enterprise.

The process is assisted and abetted by a banking industry that seeks to lend against land as collateral, favouring the extraction of economic rent, over and above extending loans for the purpose of productive enterprise

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Canadian residential real estate tripled from an estimated C$1.3 Trillion in 2000, to C$3.8 trillion in 2014, however, only C$550 billion of this was for renovation projects or new home building – the rest was pure inflation.

By the end of 2011, the Home Buyer plan had been used 2.6 million times, with total withdrawals adding up to around $27.9-billion – that’s $27.9 billion of additional credit, feeding into existing house prices.

Between 2005 and 2011, Canadian house prices rose 58 per cent, while average income for 25-34 year olds, increased by just 6 per cent.

The Royal Bank of Canada reports that detached housing now requires more than 80 per cent of the median household income for mortgage payments in some of the country’s major cities.

Household debt to disposable income in Canada is currently 163.2 per cent, up from 129 per cent at the peak of the boom in 2006 and sitting only a few degrees lower than the recorded level in Australia.

SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME in Australia, Canada, France and Italy. (ABS)

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Mainstream economists like to focus on Government debt as a barometer of the heath of the economy. However, high and rising levels of private debt, as a consequence of such policies, constrain demand and eventually exceed the income and economic activity they helped create.

Nick Xenophon cites the Demographica Housing Affordability Report in his press release, however it’s clear he has not read it.

If he had, he would know that like Australia, Canada’s largest major markets are also rated as “severely unaffordable” – and by studying the ‘affordable markets’ such as Texas, or areas of Pittsburgh for example, Mr Xenophon would have a better understanding why these states avoided the harsh consequence of the GFC, and continue to generate healthy levels of economic growth.

Significantly, both cities have land tax and liberal supply policies that deter speculation – helping to keep real estate affordable, while investment is channelled into other areas of the local economy.

While, Australia rewards speculation, allowing the geo-rent (the unearned gains) from rising land values to capitalise into the land price, year upon year, taxing income earners, instead of resource rents, which by design, distorts economic activity, housing supply policy, and subverts social justice. Screen Shot 2014-08-07 at 3.43.20 AM

(Ninety per cent of taxation revenue has distortionary effects, pushing up prices 23% higher than need be, while economic rents from land and natural resources have no such deadweight loss.)

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

At some point the productive capacity of the economy can no longer support the boom and the consequence, particularly for first homebuyers, can be particularly severe, as Australia’s history of land induced financial crises reveal.

However, when you appreciate how lucrative and wide spread this activity can be, it is very easy to see how policy fails us, and it’s additionally easy to see, why, a country with a plentiful supply of land like Australia, submits its younger generation to a life time worth of debt slavery, just to get onto the ‘property ladder.’

Australia’s City Centric Culture and Failure to Decentralise

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

By Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

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

City centric culture

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

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

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

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

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

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

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

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

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

However, this is not where Australia excels.

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

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

Growth of Finance insurance

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

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

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

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

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

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

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

NEG GEARING LOSS

Supply policy has further assisted.

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

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

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

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

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

The benefits for homeowners can obviously be substantial.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This was in no way detrimental to the property owners.

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

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

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

A similar concept is recognised by owners of apartments.

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

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

A broad based land value tax is essentially no different.

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

Both reforms work hand in hand.

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

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

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

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

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

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

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

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

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

By – Catherine Cashmore

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

But our Governments are turning a blind eye.

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

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

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

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

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

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

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

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

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

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

Neo-liberal policy made matters worst.

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

It promised to lead to efficient markets and lower unemployment

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

GDP+Wages

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

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

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

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

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

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

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

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

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

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

Milton Friedman meanwhile tutored that societies are structured on greed.

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

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

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

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

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

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

Bubble FIRE

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

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

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

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

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

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

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

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

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

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

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

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

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

You will never be told the system can fail.

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

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

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

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

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

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

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

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

Banks remain disturbingly under-capitalised.

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

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

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

HTR

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

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

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

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

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

It was onto something important.

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

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

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

 

 

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

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

By: Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

click image to open in a new window

Source: Philip Soos

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Who are rising property prices good for?”

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

The Budget – The Consequence

rich paying the middle class..

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

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

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

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

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

“In the national interest.”

“The National Interest” what an outrageous statement.

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

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

Does this sound fair to you?

The country we want..

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

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

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

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

a fair go

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

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

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

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

Our relationship with land is truly unique.

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

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

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

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

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

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

(a subject I explored in part last week.)

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

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

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

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

land house gdp ratio

(Source)

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

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

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

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

He influenced the likes of;

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

He quite simply took the political world by storm.

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

“The Corruption of Economics”

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

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

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

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

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

That sounds fair doesn’t it?

‘All taxation is at the expense of Rent’

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

house tax

(Source)

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

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

Consequences

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

Is this fair?

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

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

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

Think about it.

Who benefits??

The progress of genuine innovation

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

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

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

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

Change

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

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

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

And it starts with ‘us.’

Catherine Cashmore