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.

People Power and Housing – Centre, Left, and Right.

People Power and Housing – Centre, Left, and Right.

The protests that washed across major cities and towns a few days ago, covered a wide variety of issues, yet underlying them all is dissatisfaction with both sides of politics and the frustration in the community that ‘voices’ are going unheard.

We’ve been used to seeing similar demonstrations across the austerity-ridden countries of Europe and the USA, and political clashes such as those in Russia and most recently Ukraine

Yet since the fall out of the last economic crisis, a concentrated outcry of public anger has penetrated democratic society and it’s not limited by ‘cause’ or segregated by age and status, but generated by the incredible impact of social media enabling a wide array of ordinary citizens to vent their concerns outside of sporadic government polls and the headline sensationalism of main stream media.

The natural limitation of Government is the inability to please all, and no one would expect as such.  In a democratic society, they’re elected to enact on the policies campaigned upon – asked to lead rather than follow and ensure citizens achieve a platform that assists in advancing equitable outcomes.

Albeit, it’s a brave Government that turns its head away from large vocal demonstrations, especially in an age where – through the connectedness of social media – they can be arranged at the drop of the hat, bypassing the usual bureaucratic process of writing to a local MP to highlight community disquiets, or publishing a letter in the local paper.

You can argue back and forth about the issues surrounding this latest public protest. Express outrage at the inconvenience incurred to the daily commute. Or even question its relevance considering we have not long elected the Coalition into power.  But when a wide makeup of individuals, from all sides of the political spectrum, takes to the streets – not on one agenda alone – but an array of disgruntlements.  It is no longer merely representative of a minority that sits on the fringes of society; it signifies a clear message of distrust – a potentially destabilising force.

“Cone of Silence”

Tony Abbot’s government made it clear upon election, that they intended to control the flow of information available for public discussion.

It wasn’t only displayed in the media restriction detailing daily boat arrivals, but in a large array of research undertaken by the previous administration, which has now been firmly locked into ‘archive’ status.

This would include two I’ve mentioned in recent columns – the National Housing Supply Council, and the year long study that formed the white paper into the “Asian Century,” which outside of general criticism, remains a useful tool of reference for Australia’s future demographic makeup.

So you could say that listening to the public voice, isn’t the current Government’s priority – but then, neither was it for the last.

Little if anything came from those reports.  The were good on content, but lacking in action – and much like the “2020” summit in 2008, the results can be summed up neatly by words from biographer, Nicholas Stuart, in ‘Rudd’s Way – November 2007 – June 2010;’

“….His rhetoric inspired and enthused voters. And yet …. and yet …. nothing happened.”

“Nothing happened” – because Governments too often bend the knee to those with the ability to influence political leadership and public opinion, rather than acting ‘democratically’ for all.

Housing policy alone aptly demonstrates this.

  • The tax and transfer system values owners over renters;
  • Encourages and rewards those who use the land as a speculative investment for personal gain;
  • Advantages giant corporations over independent businesses;
  • Widens the ‘wealth’ gap between rich and poor;
  • And hampers timely development of affordable housing; (to name only a few.)

When concerns are raised, our leaders spend a few wasted millions on comprehensive enquiries to ask ‘why?’- like some clueless high school student.

“What do we want?..”

These protests, whilst not directly about land prices, were about community and social justice, of which housing forms an indivisible part.

The list includes education – and as I’ve pointed out previously, high land prices directly contribute to what’s assessed to be the most segregated schooling system out of all members of the OECD countries.

Some of the highest land values are found in the best Government funded school catchment bands, and as an auctioneer proclaimed during his pre-amble in the McKinnon High School zone last week;

“There is no ceiling for house prices in this area.!.”  A bullish spruik if ever you heard one – but not far from truth.

Record prices continue to be regularly broken, affluent buyers continue to pay a premium.  Yet the price is effectively ‘free,’ because as the zone’s future vendor’s ‘speculate’ – if they hold onto the family home long enough – they are likely to receive a ‘windfall’ in unearned capital gains.

Social Justice? Hardly.

Unwonted robbery?

The community produces the gains through the tax-funded facilities. Whilst market forces drive prices higher, the unearned profit does not flow back to maintaining or upgrading those services – which is where it arguably belongs.

Instead it is privately capitalised– soaked into what is an irreplaceable, illiquid

and unproductive asset, thereby giving free leave for mounting property prices to continue, which, under the current system, grants a ‘tax free’ unearned reward to the owner occupier upon sale

The sell off of public services was also highlighted.  This too can also be associated with high land values, which have dictated what is assessed to be the more profitable offloading of the Millers Point public housing estate, rather than retaining its use for long standing residents, which, by definition, drives social polarization and housing inequality.

It seems in the land of a ‘fair go,’ only the affluent are allowed to advantage from a Sydney Harbor view.

Are They Listening?

Yet the indicators Government use to measure their performance whilst in power are meaningless to protesters, and in many respects, a 21st century economy.

They are no measure of happiness, or signal the worrying rise of mental illnesses such as depression.

Only by ‘hearing’ community voices, gives a clue to that.

GDP – the total value of all products and services bought and sold, a basic measure of money changing hands, does not distinguish between;

  • Productive or destructive activities,
  • Show who’s getting the lion’s share of wage increases, Or
  • Assess where those increases are being invested; (Which, considering housing (land) is currently estimated to be 300% of Australia’s GDP, gives some indication.)

Equally it gives no clue to the foundations of societal health – such as environmental concerns, access to education, or wealth inequality.

Yet these are the issues community wants to address – because these are the barometers that directly impact our quality of living.

Whilst GDP is an excellent measure of the amount of arguably unneeded ‘stuff’ changing hands, it’s also not up to the task of adequately measuring intellectual property, innovation and invention for example – such as the creation of a free app.

It may be concerned with the health of the economy, but as for the well-being of our 21st century community – it’s simply not up to the task.

Equally, unemployment figures are based on theoretical estimates, formulated by way of an extensive ABS survey, which aims to correlate the percentage of the labor force not actively employed, underemployed, or ‘participating.’

They are rolled out monthly, with the widely held ‘text book’ assumption (known as NAIRU) that, regardless of how many actually want to work, should Government pro actively attempt to lower the rate of unemployment below the desired level of “full employment”  – which in Australia, is assessed to be and ‘unemployment rate’ of roughly 5% – it would unwontedly induce inflation and destroy price stability.

A purported ‘fact’ that offers no comfort to those living on the poverty line of job seekers allowance.

This is also largely due to our flawed system of taxation – which places a levy on productivity, (such as income and payroll taxes,) unwontedly impeding the supply of goods and services, which in turn raises prices, feeding inflation and increasing the unemployment rate arguably ‘required’ to lower wages sufficiently to stabilize inflation

If we instead moved toward a system – and one, which was, at least in part, advocated by the Henry Tax review, and not withstanding, numerous other submissions from community advocates such as Prosper Australia, or the Land Values Research Group to various senate enquiries over the years. And taxed the unearned gains from land (as mentioned above,) rather than the earned gains from productivity.

It would (as has been proven historically) influence;

  • A reduction of social polarization – and therefore inequality.
  • Remove the needed ‘sell off’ of public services due to high land values.
  • Boost productive investment, assisting the job market and advancing competitiveness for small business.
  • Reduce the speculative element that drives land prices ever higher.
  • Provide a steady base of revenue to invest in public services as well as affordable housing, and;
  • Ensure infrastructure is built for need – full utilization of land encouraged – and land banking reduced.

Productivity Paradox

In light of all the above – it is remarkable that back in the 60’s and 70’s, discussion in the university lecture halls was centred on the ‘productivity paradox’ – correctly assuming it only a matter of time before all mankind’s basic needs could be largely fulfilled by robots (which they has been.)

Economists were deliberating what we’d do with all our leisure time when a full working week was no longer necessary!

A stark change from the current mode of discussion, which is consumed with how long past the age of 65, individuals will need to work in order to retire mortgage free, with enough left in the pot to afford the basic necessities of life, which in most cases, is inadequately funded by super annulation alone.

If it were possible to send the dog to work, we’d have already done so.

Community

Indeed our economy is not founded on the pillars of community and social justice, of which the protests are so concerned.

As admirable as numerous recommendations made to various senate enquiries into issues of inequality, affordability, finance, and environmental concerns have been, nothing has changed, because we have a lopsided economy, built on a $5.02 Trillion housing market ($4.1 Trillion of which is land) – and on this, and many other matters alone, a new generation of enlightened folk have clearly had enough.

High land values have played an important part in all the issues of social inequality highlighted above, of which I’ve provided ample evidence in previous columns.

Our major cities now exhibit what’s considered to be a very ‘non Australian’ style ‘English’ cultural class divide – as polarization between the asset rich and income poor expands.

The roll on effect impacts the environment, employment, education, and mental illness – as residents are forced into areas lacking in essential amenities – once again due to a flawed system of finance and housing policy.

To Conclude..

And so, when you start to see what is so beautifully highlighted using the maps below, which show where the affordable property was located in 2001 for low and middle income buyers, compared to 2011 in our major capitals, which hold the lion’s share of population.

(The yellow patches being affordable, and blue patches unaffordable.)

Sydney SP Brisbane SP Melbourne SP

And you read quotes from a long standing resident advocates, at the soon to be forced out Millers Point public housing facility, who rightly question;

“The government says their core business is not housing. But surely their core business must be communities….?!”

Then you start to get a grip on the central issues this protests represents;

March in March

And I would suggest – (as expressed on their website) – it really is “only the beginning.”

Catherine Cashmore

By Catherine Cashmore, a market analyst, journalist, and policy thinker, with extensive industry experience in all aspects relating to property. Follow Catherine on Twitter or via her Blog.

“The Marginal Buyer Of Sydney And Melbourne Real Estate Has Changed”

“The Marginal Buyer Of Sydney And Melbourne Real Estate Has Changed”

Investment bank ‘Credit Suisse’ couldn’t have coined it better when they asserted;

“The marginal buyer of Sydney and Melbourne real estate has changed, as have the drivers of property prices.”

The words are taken from their recent report on international investment into the Australian residential real estate sector, with the intention to highlight potential opportunities for future speculation.  And the statement is correct.

Anyone, who is in the business of buying or selling property, is acutely aware how the push and pull of both supply and demand in our property markets, has been markedly shaped by both a change in the local demographics of our nation, along with international competiveness in recent years.

The roll over influence on values in concentrated regions of our largest capital cities has, in some cases, been significant. And whilst it remains the subject of much angst for those priced out, I have yet to meet a seller who did not welcome this increased competition, or stage some sort of active public protest.

However, heated debate in the main stream media, around what has long been known in the industry, as little more than a ‘tick box’ formality, designed to detract from what remains a largely unaudited system of ‘non resident’ investment in Australian property – residential or otherwise – by the Foreign Investment Review Board, has been going on since 2008.

As property editor, Robert Harley recently pointed out in the AFR;

“…even the ‘experts’ find the FIRB annual report…. tardy, lacking in meaningful detail and hard to reconcile with their own experience… “

And as the fictional character “Chodley Wontok” discovered last year, claims in the foreign policy document that applications are reviewed against the “national interest,” on “a case-by-case” level, do not go so far as a mere passport or visa check!

However, the sheer hysteria around this subject needs to be bought under control.  And if we’re to make sure policies are correctly regulated and work in the national interest as ‘spruiked,’ the blame needs to be carefully targeted to areas of influence – namely, policy

Something the Government has to date, repeatedly failed to do.

A policy disaster.

Following the 2008 crisis, when Kevin Rudd decided to put in place measures to prevent any major deleveraging of household debt, one of these was to openly advertise ‘relaxed’ regulations around the acquisition of residential real estate for temporary residents, companies, and developers selling solely to overseas buyers.

Whilst the wisdom of such a move was debatable, what followed was a truly disastrous state of affairs

Attempts by Walkley Award winning journalist, Chris Vedelago, to obtain accurate data under the freedom of information act, to monitor the level of increased demand being widely asserted by industry advocates – was repeatedly frustrated.

According to the then Assistant Treasurer, Senator Nick Sherry, any effort to establish a greater understanding of the FIRB’s compliance system, was not in the public’s “best interest.”

Instead, the Government – then panicking over the consequential effect to their ratings in the polls – came up with the incredibly smart idea of a ‘dob-in’ hotline.

The hotline was designed to enable worried locals, to report those dubious looking foreign nationals, who were cleverly disguising themselves as local buyers and naughtily ‘bidding up’ neighbourhood prices.

That would put a stop to it! *Thought Kevin*

Unsurprisingly, from the limited number of calls received (although, once again, probably not from those vendor’s who were happily selling their properties in the rapid run up to the market peak of 2010,) most turned out to be Australian citizens and long standing permanent residents.  So, it did little – if anything – to stem the core of concern still prevalent within the community.

It is therefore of little surprise, that anecdotal stories from agents, who maintain official figures, are under reported and rules are being flouted, continue to carry more weight. And a debate, which now walks a fine line between being termed racist or otherwise – continues unabated

What’s going on?

Rising property prices – the product of the plot of land that sits underneath the structure – are unashamedly promoted in most modern economies, as the key driver to boost the privatised wealth of its nation, with the hope the payoff effect will feed other areas of consumption.

They are no longer just ‘national’ affairs, but open to international speculation and investment, of which Australia is by no means immune.

When the Federal Government states in its policy document that it “welcomes foreign investment” which

 “…has helped build Australia’s economy and will continue to enhance the wellbeing of Australians, by supporting economic growth and prosperity..”

You can assume toward the top of that list, is the investment into the land market – residential or otherwise.  And as official figures show, few – if any – applications are ever turned down and real estate captures the majority interest.

The recent recessions that have occurred in other countries as a result of their own residential speculative booms, have merely accentuated these international patterns of investment and migration.

For example, following the GFC, the number of foreign-born workers leaving Britain, rose by nearly 30%, as the Government set about removing 300,000 skilled jobs from the list of positions open to workers from outside the European Union – evidently fearing political backlash from somewhat unsubstantiated claims, that this was significantly ‘harming’ British jobs, and thus not aiding rising unemployment or the economy as a whole.

At the same time, distressed nations opened their doors to opportune investors from around the globe, who were encouraged to take advantage of now uniquely ‘cheap’ real estate markets, in a vein attempt to kick off a ‘recovery’ in their own local terrains.

It was only a few years ago, stories were littering the main stream media highlighting the surge of demand for USA properties, as ‘spruikers’ made benefit of our strong Aussie dollar, to lure local investors to purchase previously owner-occupied foreclosures, and instead, turn them into investor owned speculative rentals.

None of this has assisted the home buying sector in America’s property market.

Ownership rates continue to fall, and local buyers remain priced out.

But the Government cares little – the gains in property are the ‘silver lining’ Obama needs to maintain popularity. And he had no hesitation in boasting as such when he recently stated;

”Today, our housing market is healing!” (Healing!) “Home prices are rising at the fastest pace in 7 years…”

(Faster even than incomes it seems, with first homebuyers at their lowest level since the crisis began.)

Premium localities in the cities of New York and London are openly marketed as ‘safe havens’ for the internationally wealthy.  Isolated from the local economy, as local workers are forced out, and rumours of homes laying vacant for much of year provoke neighbourhood outrage.

It’s now reported, for every minute you spend on the three Underground stops between Earls Court and Sloane Square, property prices rise by £96,647.

However, (as with Australia,) outside of half hearted central bank ‘don’t spend too much’ warnings, there little rush to limit the inflationary rises.

This pattern is always the same.  It’s allowable to let productivity and industry fail whilst small businesses suffer, but woe to the Government who allows the privatised ‘wealth’ fund of its aging population endure any such demise.

Australia’s changing landscape

Australia is internationally marketed as the ‘lucky country,’ an economic star on the world stage, from which we derive much benefit.

Population growth throughout the GFC was barely dented – and like every other country, we tow away the poor, whilst targeting skilled migrants, or those with dollars to invest.

Over the last census period alone, Melbourne’s population expanded by nearly 355,000 new residents, and continues to grow at pace of roughly 2% per year.

Additionally, its population has grown in diversity, with the traditional European migrants of Greece and Italy falling as a proportion, whilst the growing number benefitting our shores now come from both China and India.

(Settlers = skilled and family reunion migrants, along with humanitarian visas and refugees)

Vic migration census period

The same trend is mirrored in NSW – projected to reach 8.4 million by 2060. Migrations to the famous harbour town also come increasingly from both China and India, as demonstrated below.

.nsw migration census period

When, under Julia Gillard, the Government commissioned a ‘White Paper’ on ‘The Asian Century’ designed to;

“…generate a set of general propositions to guide policy development over the long-term..”

The importance and potential magnitude of Asia’s dominance on the world stage was emphasised, by Julia Gillard when in a speech she asserted;

“We are now seeing the most profound rebalancing of global wealth and power in the period since the United States emerged as a major power in the world.”

No Kidding!

Indeed, it would be hard to over-estimate the economic force Asia holds for our local economy.

It will shape the most important social, cultural, business, domestic and foreign policy implications we will face in the decades to come.

By 2025 the Asian region will account for almost half of the world’s output and also be the world’s largest consumer – and if we play our cards right, Australia is best placed to advantage.

It’s not just the 1% of billionaires seeking out safe haven’s abroad, in what’s been termed the “largest and most rapid wealth migrations of our time.” But the rise of China’s ‘Consumer Class’ – ‘middle income’ individuals, discretionary spenders, whose wealth goes largely under-reported in a  “grey economy” of illegal and quasi-legal activities.

If trend continues, in a few years, China will become the world’s richest country, and India won’t be far in its wake.

The number of Asian students studying on our shores is at record highs.

Trade flows, research and business development, education, tourism, and increased levels of migration have benefitted us significantly in recent years – and the potential to capitalise on the productive sectors of our economy remain.

Whilst the Gillard Government’s white paper – now firmly locked into “archive status,” – remains a useful form of reference.  It was widely criticised at the time, for its vague approach as yet ‘another’ study, which like a PHD paper, is good in content, but lacks any hint of direct action.

It claimed that Australian manufacturing was expected to ‘grow,’ with wishy-washy advice on how firms must;

‘”..adapt by anticipating changes in their markets, building the talents of their people and constantly innovating and lifting their productivity”

Claims, which now seem laughable.

We allowed the profits from the ‘once in a century’ mining boom to fall into private hands.

As Sydney Morning Herald’s Economics Editor Ross Griffiths recently clarified in his commentary on Abbott’s efforts to remove the ‘mining tax.’

“There is a lot of ‘unearned’ economic rent associated with the exploitation of limited mineral deposits,” and countries like Australia would be “mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.

‘Mugs’ we are.

But what about land?

Asia’s influence is marketed as positive news, however, the one area that receives the most overwhelming negativity, it its influence on our real estate market, precisely because of the some of the issues hinted in the paragraph above.

We have little, if any, understanding of the accumulated wealth being brought into the country, and recent settlers have little experience with the local market, or misleading practices surrounding real estate price quoting.

This lack of transparency and education within the industry itself needs addressing, however, it’s a subject I’ll explore further in another column.

The geographical location of land is fixed and limited in supply. Therefore we can’t all benefit from economic advantage gained from ownership of the best seats in town, without effective taxation of the resource that is.

A correctly administered broad based land value tax (as explained here – reducing taxes on productivity) would not only encourage the ‘good’ utilisation of land, but if handled efficiently, gains could be fed back into the community to assist increased investment into infrastructure and social services

This would further aid both the expansion and development of our cities, with the flow on effect ideally taking the speculative element out of the housing market, and assist in reducing its destructive influence on prices.

This alone, would go a long way to reducing the wealth inequality currently experienced in our big cities.

Presently, we’re doing a great job of building an abundance of cheap, high density, and no so inexpensive apartment blocks, full of small one and two bedroom flats, often no more than 60 square metres inside. Great for student renters – but do little to meet the needs of our biggest residential sector – family buyers with children.

Therefore, the above issues, all need to be tackled from ground up policy reform – significantly on the supply side.

Offshore investment must be solely channelled into creating new supply – and audited to ensure the conditions stated in current laws, are being adhered to.

I’m not holding my breath, but hopefully some of these will be explored in detail and ‘maybe’ go so far as being implemented following the Senate Enquiry later this year.

We can’t – and wouldn’t want to – stop migration.  But we can ensure wealth invested in our established real estate market, is utilised effectively.

Catherine Cashmore

It’s Time Australian’s were allowed to make an Educated Choice – “Questions & Answers.”

It’s Time Australian’s were allowed to make an Educated Choice 

“Questions & Answers.”

Australia – an economic ‘star’ performer…. but are we happier for it?

By any comparative measure, the Australian economy has performed remarkably well over the last two decades.

Strong gains in the labor force throughout the 1990’s, rapid population growth and a surge in the value of key commodity exports through the 2000s.

Resilient wage inflation duly capitalised into rising property prices, by way of a dramatic and accelerated run up of household debt in the lead up to the GFC.  All of which was buffered and prevented from any significant deleveraging, by the Rudd administration in 2008, when he threw sizeable cash handouts to families along with infrastructure investment to avoid plunging Australia into a technical ‘recession.’

From this alone, our economic platform is deserving of the title “The world’s ‘star performer.”

However, whilst we may stand out in the wealth stakes, we’re not a happier nation for it.

Last week Q&A featured a question from a young Australian and recent school leaver which touched on the sensitive subject of depression asking

  • What can the Government do to “fix it?”

Like every other Western nation, Australia has experienced a sharp rise in the number of people suffering depressive illness over the last decade, with the average onset of the disease moving downwards in terms of age, since the 1990’s.

Organisations such as Beyond Blue report that more than one in five Australian’s experienced depression, anxiety, or both, over last past year, and as the gentleman stressed, he was no exception.

The comments that followed were sensitive in nature – focusing primarily on individual treatment and prevention within the health system. And whilst the cause of depression is both complex and varied, the first acknowledgement on what the Government could do ‘collectively,’ came from Clive Palmer;

“We need to have some sort of vision..”  Said Mr. Palmer “Create an environment that makes people realise the world is not as bad as we think it is… if you cut things, if you cut budgets, if you take things from people, you make them more worried about the future, and more uncertain”

This was reiterated by Ged Kearny, President of the Australian Council of Trade Unions;

I get very concerned when I hear about cuts to public healththey’re just another barrier to person, particularly a young person, getting help..”

They are appropriate observations considering our rising population, skewed toward an aging demographic, which by its very nature will necessitate additional funding over the next decade into both health and education.

So, it was somewhat unfortunate, at the same time panellists were discussing cuts, Prime Minister Tony Abbott was giving a speech to the Australian-Canada Economic Leadership Forum in Melbourne, hinting at just this – as summarised bluntly by Christopher Pyne, Minister for Education;

“[The Prime Minister] said that the current growth in education and health expenditure was unsustainable, and that is true.”

What’s Tony Abbott’s ‘vision’ for economic growth?

“You can’t spend money until you’ve earned it! – Or until you have the means to pay it back!”

Was the cautionary opening statement Mr Abbott posed.

It’s a somewhat startling assertion considering it comes from the ‘issuers’ of our monetary supply, offset through taxing those who do have to ‘earn’ dollars before they can ‘spend’ it – whilst our Government ‘earns’ nothing – but is rather elected, and charged, to balance the budget in the best interests of its working population to promote economic growth – for which education and health are vital pillars.

Abbott goes onto say – the “best” way to build a “stronger economy” is for Australia to once again; “Enjoy a surplus!”

Which may lead you – (like me) – to wonder how exactly the average private household will “enjoy” this surplus, considering we have the highest unemployment rate since 2003, along with an increase in those registering as “long term” unemployed, up 13.5% since January 2013, and more part time jobs being created than full time?

In Victoria – where manufacturing industries are concentrated – unemployment is at its worst level since 2002, whilst youth unemployment – which represents the demographic driving the future of our economy – has reached a ‘crisis’ point.

Just over 12% of young people between the ages of 15 and 24 are currently out of work.

Regional localities reflect the worst – 20% in Cairns and Tasmania, 18% to 19% in north Adelaide, 17% in Western Sydney, the Illawarra, parts of Melbourne and regional Victoria – with the trade off being the increased cost of metropolitan accommodation for those “job seeking” in capital cities.

Additionally, the latest “ABS labour price index” records wage growth at its lowest level on record – climbing just below the rate of inflation for the last calendar year – whilst the cost for ‘essentials’ such as health, childcare, utility services, and petrol, in some areas, has reached record highs.

Considering our household debt to disposable income has barely deleveraged since property prices hit their peak in 2010 – the very talk of reaching a surplus within ‘3 years’ – particularly by way of cuts to essential services, or even the increased number relying on job seekers allowance – is foolhardy,

When the government tightens its belt, the private sector picks up the slack – therefore  “repairing the [government] budget” with the claim it’s putting Australia “back on the right track” – is not putting the fate of ‘Australian’s’ on the ‘right track.

Austerity, at a time of rising unemployment, does not lead to “productive” economic growth.  And from depression and unemployment statistics alone, it seems Australian’s are not ‘enjoying’ a return to surplus.

They’re are working longer, retiring later and in the face of rising unemployment, the only ‘vision’ the working population seemingly have to hold to, is more of the same.

So what are we left with?

After 30 years of demise, the manufacturing industry is in the depths of recession.

Retail is losing the battle to the “World Wide Web,” and residential construction is still struggling to pick up the cyclical slack created by the mining sector.

Abbotts “infrastructure promise” to speed up the flow of money from Canberra into the states, to upgrade road and rail projects, is positive news and sorely needed, however, remember where those gains will be most acutely felt.

Without effective land value taxation, the investment creates the ‘future speculative hotspots,’ where the improvements will be capitalised into rising land values, rather than fed back into servicing, maintaining, and further extending essential community facilities.

Land is an absolute necessity to all commercial and personal needs, therefore as land values rise; it will affect a continued strain on business and productivity, and once again, we’re stimulating the cost of irreplaceable fixed assets, rather than the employment sectors needed to underpin a longer trajectory of economic growth.

But this is what Australia is remarkably good at – creating a booming land market.  We’re right up there with the world’s best performers.

The housing bubble success story…

Following a rapid 12-month cyclical upswing of housing inflation, residential real estate prices are once again reaching their 2010 peak.

Outside of normal ‘corrective’ downturns, we’re continually lectured by an overcrowded mass of vested industry commentary, our housing market can ‘never fail’ – or certainly not to the extent suggested by personalities such as ‘Harry Dent,’ or respected Australian economist Professor Steve Keen, who are quickly bundled into the same category and labelled as nothing more than irresponsible ‘fear mongers’ for implying as such.

Our commentators waste no time offering their own economic analysis of ‘property cycles,’ which unfortunately missed any prediction of the subprime crisis – but that’s ‘OK’ because the Australian market didn’t ‘crash,’  – they didn’t predict a ‘crash,’ – credibility restored.

Albeit, housing affordability for both renters and homebuyers, has rarely escaped headline news since before the last election, and whilst to a limited extent we seemed to have progressed past the point in which rising prices are marketed as overwhelming ‘positive’ news, it certainly hasn’t destroyed the myth that they’re somehow ‘good’ for the long term health of our nation, as owners leverage off the so-called ‘wealth’ effect – relying on the unearned equity in their housing investments to fund both lifestyle and commercial activities

Australia’s biggest employer – aged related care (the health and social Assistance industries) – derives a large percentage of its funding from people selling their housing, which their children additionally hope to inherit to assist their own journey onto the ‘ladder’ – and the perpetual fear of any downturn in established values has painted the government into a corner.

Is the housing market on Rocky Roots?

Yet, fear mongering or not, we know from the above statistics alone, the estimated $5 trillion worth of wealth contained in the house and land market is sitting on rocky roots.

It’s no longer supported by the boom of productive activity and wage growth that assisted in generating the inflation during the 1990s and 2000s – producing the ‘strong’ monopolised banking sector which capitalised on the mortgage market as a population of buyers and speculative investors rapidly expanded.

Outside of future prospected wage increases, significant gains are only achievable by manipulating demand side stimulants, tapping into foreign investment, (currently driving the inner city apartment and development market,) whilst limiting effective and feasible ‘cheap’ supply – which the Government has successfully achieved to date, by way of policies such as negative gearing, first home buyer grants, and a truly diabolical record of supply side reform.

As mentioned in one of the most recent submissions to the Senate’s Housing affordability enquiry, by Prosper Australia, “It took forty years from 1950 to 1990 for housing prices to double, but only fifteen years between 1996 and 2010 to double again.” And whilst most will agree growth may be more ‘subdued’ as we continue, it’s imperative we highlight the destructive nature of this system, which isn’t assisting making us a ‘happy’ nation, and for a moment, stand back and take stock.

Ask yourself a Question..

Just for the moment, forget the raft of industry commentary and the prospected ‘dates’ for the next ‘crash’ predicted by Harry Dent – and ask yourself a question;

  • What will the next decade bring?

If through manipulation alone, Australia manages to achieve ‘more of the same’ and keep the housing boat afloat;

  • What will the consequential effect be on small business and industry?
  • Who will benefit most?
  • Will it be your Children who have to save even longer to get on the ladder
  • Or their Children who will need to save longer still?

Remember – if we were to have a crash, it’s not the wealthy that will suffer – it’s ordinary working families who are then left in a position where they’re unable to borrow to take advantage of lower prices.

Is the future, long-term wealth inequality?

The ‘boom/bust’ land cycle, better known as the ‘property clock’ – which we’re told by industry advocates, is the ‘best’ way to build the individual ‘wealth’ of its nation, is a system which derives its very existence from a long drawn out process, which ultimately accentuates inequality, always marginalizing those at the bottom of the income stream, whilst advantaging those at the top – as I explained here.

Nowhere is the divide between rich and poor more evident than the speculative land market, – which results in a slow process of social polarisation which in Australia, has given us a segregated schooling system where social disadvantage in education is stronger here than any other comparable western nation.

Whilst inequality in wages and business activity can be equalised through competitive activity, land – by its very nature – is ‘fixed’ in supply, and therefore the only ‘cure’ to rising prices in a soft economic environment, is the produce of ‘additional’ supply.

Meeting that demand by extending ‘upwards’ is a challenge. Land values in the inner suburbs are already high – and although it can assist the needs of apartment dwellers, investors, student renters, and to a degree, downsizers – family buyers (our largest home buying demographic) have no option but to head to the fringe if it’s affordability they’re after.

But, due to ineffective tax and supply policy, the Fringe suburbs, which capture the bulk of our city’s population growth, do not have the funding needed to facilitate ‘urban sprawl’ – hence the process of social polarisation.

They have the highest concentration of mental illness – such as obesity and depression – and prices are further manipulated by larger developers who ‘drip feed’ their stock onto the market, of which the Government currently has no control.

Not politically ‘sellable?’

From the time a child learns to enjoy a family game of ‘Monopoly,’ Australians are nurtured on a system that teaches the key to building wealth, is through the leverage of ‘capital growth’ in land values, therefore, none of this is easy to change.

To do so, requires complete structural reform of land value taxation and housing supply policy – therefore we’re told it’s not politically ‘sellable.’

The most solid prediction of the year? 

The most most solid prediction of 2014 to date, is the one that will result from the Senate’s housing affordability enquiry.

After the numerous submissions have been tabled and discussed. The question I stressed in my own submission will remain unanswered;

  • “Will the Government allow land values to drop?”

Assuming this is correct, then Prime Minister Tony Abbott has a care of duty to explain to the public directly, how the ‘propping’ up of the current status quo, will continue to erode the opportunity of future generations.

He must explain how the Government’s failure to provide effective land value taxation and supply side reform to lower land prices, will lock them into longer mortgages, a life times worth of double income debt, push more into ‘long term tenancy,’ and additionally, point out how the current system enhances poor education and health outcomes, social polarisation, and places a strain on core productivity.

Your choice!

Ultimately the choice lay with the voting population, and in a country that holds to the motto of  ‘a fair go’ – I expect clearly evidencing the consequences of our current housing market, will be a lot less ‘sellable’ than educating how we can establish a sustainable approach which – if handled correctly reducing taxes on productivity – will ultimately make each and every one of us better off.

It’s time we allowed Australians to make an educated choice.

Catherine Cashmore