Land, Governance, and Finance – “Our Distrust Is Very Expensive”

Land, Governance, and Finance – “Our Distrust is Very Expensive.”

By: Catherine Cashmore

In June 2013, as the Senate voted unanimously to hold an inquiry into the corporate watchdog ASIC. Chairman, Greg Medcraft, gave a keynote speech to the ‘Global Investor Education Conference.’

Using the allegory of a stool, Medcraft identified three essential components needed for an “efficient and effective” financial market;

  • A robust regulatory framework that is enforced effectively
  • A competitive financial services industry that offers quality products and services, and finally
  • Investors who feel confident when participating in the market, and are able to make sensible and informed financial decisions.”

Concluding;

“If one of the legs is missing, the stool will fall over.”

However, recent findings from the senate inquiry, along with media reports exposing wide spread corruption, political lobbying, and financial fraud within the banking industry, have proved all three legs of Medcraft’s stool are missing.

The regulator is at best a totally ineffective operator. At worst, allegedly guilty under the Crimes Act for actively concealing information from victims of financial fraud.

Charged with overseeing a sector that is more than 80% owned or tied to the big four banks and AMP , the Government will now cut funding to ASIC by $120.1 million over the next five years, while also watering down recommended reforms from the ‘Future of Financial Advice’ report.

The retrograde changes will allow planners to claim they’re working in the best interests of clients, whilst still collecting ‘targeted’ rewards for pimping their employer’s products – moves that will do little to inspire confidence in the public, or improve the quality of products offered.

When asked about the budget cuts, Medcraft commented;

“What it means is that we do not have the luxury of doing as much proactive surveillance.”

But, ASIC have not been doing ‘proactive surveillance.’

They have been systematically turning away and ignoring consumer concerns, resulting in more than 1100 people losing millions, due to alleged questionable practices by advisers from the CBA and other financial institutions.

It’s hard to conceive how Medcraft concluded we have a ‘competitive financial services industry.’

Together, Australia’s ‘Big Four’ control more than 80% of domestic assets – that is, assets held by any individual, business or organisation resident in the country.

They enjoy 89% of total banking sector profits, 82.5% of the net interest income from ADIs, loans, and advances, and 83.2% of total interest income from residential mortgages.

Moreover, bankers have important privileges.  They hold the keys to the economy. Want a house?  You’ll need a mortgage. Want an education?  You’ll need a student loan.

They have the power to endogenously create (from thin air) and direct the flow of their own, and other people’s money - amplifying the inflationary and deflationary swings of asset cycles – all backed by taxpayer-funded insurance should their plans go awry.

Meanwhile, investors battling an economy tilted toward privilege, that does not allow workers on an average wage to achieve a comfortable retirement through saving alone, are charged with assessing the risks associated with an increasing array of elaborate financial products, which in itself, keeps dependence on industry ‘advice’ from sales agents whose moral judgement is subverted by the fees, commissions, and kickbacks they receive.

The system is pinned on trust and as American lecturer, Ralph Waldo Emerson once commented;

“Our distrust is very expensive.”

When trust breaks down, so do economies. It is therefore no surprise that in the latest annual survey of chief executives, put together by the Financial Services Council – ‘trust’ comes top of the list, followed by regulatory overload and sustainability, as the top three threats to industry profits.

trust fsc

“Industry leaders recognise there is a need to restore consumer confidence following global events such as the financial crisis.”

The wording in the report is mild, placing both focus and blame on the ‘GFC.’

However, former ASIC employee, lawyer and whistle blower to the recent senate inquiry, James Wheeldon, paints a picture of what is little more than a sales industry, spruiking its goods with glossy prospectuses, celebrity glamour shots, arrows pointing ever skyward, while the serious warnings are wrapped up in incomprehensible language and buried deep within the reports.

He cites the example of financial service provider RAMS, which in 2007 offered shares in its ‘Home Loan Group,’ – gifting both founder and major shareholder, John Kinghorn, $500 million – before collapsing just three weeks later as a result of a ‘major liquidity disruption.’

At the time RAMS claimed it was, ‘the victim of unforeseeable circumstances.’ 

In reality, the ‘major liquidity disruption’ hinted at within the small print of the report, was already underway.

Investors who purchased RAM’s Home Loan shares at the time, did not see the economic collapse coming – much less so those who bought into Real Estate Investment Trust (REITs) during the run up to the peak.

This is because the advisors in the banking industry will never acknowledge how Australia’s rising land values, far from being indication of economic prosperity, bear their consequence in a gradual destabilisation of the economy.

More than half the value of household assets (54%,) is comprised of real estate. While superannuation along with life policies – a significant and rising percentage of which is also invested into property – accounts for a further 25%.

Additionally, property also makes up a large percentage of stock market value, not just in the form of REITs and housing related companies, industry studies indicate that real estate makes up more than 25% of the assets on an average corporate balance sheet.

But, while it is well accepted that a housing bubble yields disastrous consequences and should be avoided at any cost, (although, is in fact promoted at great cost.) There is far less focus on how fluctuations in market prices bear a consequential affect on business activity, which ultimately yields to the same result.

Statistician Victor Niederhoffer and Laurel Kenner, cover the subject briefly in their book; ‘Practical Speculation’ with additional updated research that can be sourced on their website ‘Daily Speculation.’

They make the point that stock market investors can gain valuable insights from studying the land cycle – dispelling the conventional belief that gains in stocks drive up real estate prices because people have more money to invest.

Using a REIT index as a general proxy for values, they note an ‘amazingly’ large correlation between changes in property prices over the course of one quarter, and the S&P 500 index, the next.

Their research demonstrates that quarterly declines in REIT prices, can forecast overall market gains at close to twice the normal rate in the following quarter – yet, when viewed in reverse;

“…the correlation between the change in stocks in one quarter and the change in REIT prices the next quarter however, was close to zero”

The research helped them conclude that it is the housing cycle that ultimately leads the business cycle – not the other way around, as is often assumed.

The authors employed their analysis to successfully predict an imminent decline in real estate values in March 2002 – receiving wide spread criticism from industry advocates who suggested their warnings belonged “in the trash can.

However, as they go on to note;

“The torrent of vituperation is instructive in many ways. As economists who study the subject invariably conclude, contradictions are likely just when developers and banks are most convinced that business conditions warrant expansion.”

The concept, ignored by most real estate advocates is simple enough to understand.

Land is the beginning of all production.

All economic activity needs land – and therefore the value of land has a powerful impact on the activities that take place above.

Lower land prices enable production to expand, assisting small businesses and innovative ‘start ups.’

On the other hand, an excess of rent – the capitalised tradable value that is locked into the price – leads to a decline in business activity, as owners and tenants are required to take on a higher level of debt, to service the associated costs.

For the lender, it’s an extremely profitable exercise.

Banks quite literally ‘mortgage the earth.’

For each new buyer that moves onto a previously paid off plot, a new contract is issued.

Buyers purchase for tomorrow’s capital gains – with rents and company profits used to service the debt rather than expand their core business and the land used as collateral.

“Once upon a time, tenants paid rent for the use of land to landlords. Today, the bulk of those rents are disguised as interest and paid to the financial sector to fund mortgages” (British economist Fred Harrision)

The process is self-feeding – property prices are valued against recent sales. The higher property prices become, the more buyers need to borrow – the more buyers borrow, the more bank created credit is lent into existence against what is now little more than a speculative premium, encouraging vendors to hold out for ever increasing returns.

The rising appraised market value of a banks’ mortgage portfolio coupled with the need to meet shareholder expectations of return, further encourages lending – amplifying the volatility of the cycle, particularly during periods of easy monetary policy.

As the air is sucked out of the productive sectors of the economy, depressing both wages and job growth, increasing the costs of welfare and compromising the ability of monetary policy to stimulate demand.  Assets inflate, while the ‘real economy’ stagnates and the sharp rise in interest rates, that typically comes towards the end of the cycle – when it is noted far too late in the game, that prices have exceeded any thread of rationality – is enough to tip the balance.

In the case of a crash, the last buyer in will be the biggest loser. The banks however, will be ‘saved.’ And with land prices now low enough to attract new investment, the stock market, which prices in recovery ahead of time, will be first to rise from the ashes.

For the elite, this system works perfectly.

It makes those at the top of the pyramid very rich.

Therefore the economic disasters that derive from this process are passed off as unforeseeable ‘Black Swan’ events. Except – they are not – they can be predicted with quite a degree of accuracy.

We have enough reliable public data to trace the land-driven boom bust cycles over hundreds of years.

Some of the older data sets include Homer Hoyt’s classic ‘100 Years of Land Values in Chicago, 1833-1933,’ which details five major crashes that affected not just Chicago, but the whole of the USA.

Real estate analyst Roy Wenzlick, author of the 1936 publication “The Coming Boom in Real Estate” produced similar research, monitoring transaction volumes, rents, values and construction into the early 1900s.

Maastricht Professor, Piet Eichholtz’s index of prices for the Herengracht canal area in Amsterdam, which begins during the 1600s, an era associated with a fall in land values of 50% – and shows a similar pattern of volatility right through to the late 1900s.

A comprehensive history of cyclical research around the globe, can be found in the work of scholars such as Philip J. Anderson, Mason Gaffney, Fred Harrison, and most recently, the publication ‘Bubble Economics,’ by Paul D. Egan and Philip Soos, which records the Australian history of speculative land crashes from the 1800s onwards.

The precursor is always a rapid run up in land price to GDP and consequently bears evidence of a marked increase in consumer debt for the purpose of lending against speculation, rather than investment into productive activities.

This has been the trigger for all of Australia’s recessions. The 1890’s, 1930’s and more recently 1974–1975, 1982–1983, and 1990–1991, and would have additionally been the trigger in 2008, had Kevin Rudd not thrown every last penny of a budget surplus (and then some,) into propping up house prices and preventing any significant private debt de-leveraging.

Soos GDP Land

(Philip Soos)

Of course, the clear and obvious link between land price volatility and the ongoing negative effects on both society and the economy, should be enough to push ministers to more than just tinker at the edges of both real estate, monetary and regulatory policy.

As former CEO of the Commonwealth Bank and head of the Financial System Inquiry, David Murray, correctly noted last week, distorted asset prices” will eventually “cause a correction” resulting in “political pressure on financial systems.” 

The type of political pressure that will ultimately fall upon the taxpayer to chip in, when the institutions that have monopolised the public rents, need to be bailed out.

The RBA is also not ignorant of these matters – they were covered in detail in their 24th annual conference in 2012, co-hosted with the Bank for International Settlements;

The crisis has challenged the benign neglect approach to real estate (and other asset price) bubbles. That approach was backed by a theoretical framework that saw the structure and behaviour of financial intermediaries largely as macroeconomic-neutral and by the belief that policy was well equipped to deal with the consequences of a bust.”

In it, Glenn Stevens noted that;

Monetary policy cannot surely ignore any incentive it creates for risk-taking behaviour and leverage. Simply expecting to clean up after the credit boom is not sufficient .. the mess might be so large that monetary policy ends up not being able to do the job”

Yet monetary policy does ignore it – as do the regulators.

Following the senate inquiry, in July 2014Greg Medcraft  was interviewed by the ‘Centre for International Finance and Regulation’ as part of a symposium on ‘Market and Regulatory Performance.’

The theme that emerged from the interview and the conference as a whole, was the need for a change of culture within the banking sector.

However when Medcraft was asked if he agreed with Governor of the Bank Of England, Mark Carney, who suggested regulation should play a critical role in changing culture, the response was telling;

“No I don’t think the regulator can change culture… it’s not about complying strictly with the law, but just making sure you pass the perception test… how would it look if this became public”

‘How it would look if this became public’ - was discovered, when Lindsay David, Paul D. Egan, and Philip Soos, published details of the dwelling investments held by our Federal members of parliament – causing outrage on social media toward what is a clear conflict of interest impeding the ability of MPs, to successfully address issues relating to housing affordability, and ultimately head off another financial crisis.

Poli investments

Yet, despite the social and ethical problems that result from the process, our politicians that own substantial investments in real estate are merely the ‘pin up’ boys and girls for an industry, born of a culture that promotes an unsustainable system of leveraged debt and rising land values as the road to both freedom and riches.

It has driven up the cost of housing – damaging the potential of future generations, with a lifetime worth of debt sold as “forced savings,” whilst the interest is re-packaged an into an array of obscure financial instruments, allowing the country’s wealth to gravitate into an elite nuclei of financially strong hands.

Only by removing the accelerants  that produce this behaviour – contained in our tax, supply and monetary policies – can we start to address the systemic boom and bust cycles that lay us open to financial crises.

 “Freedom to buy into injustice is not justice. The opportunity to invest in feudalism does not end serfdom.”  Adam J. Monroe Jr

Every citizen in Australia would be richer by a significant margin if we collected the economic rents from, land, resources, banking profits, government grated licences and so forth – the ‘commonwealth’ of the country –and used these to fund society’s needs rather than inflicting harsh penalties and impeding economic growth, in the form of dead weight taxes on earnings and productivity, to feed an elevated level of speculative demand.

In addition to this, we must remove all barriers that increase the cost of land at the margin, with an overhaul of supply side policy – ensuring cheap land is available for need, not greed.

It’s impossible to have a trustworthy banking system, until we first create an honest system surrounding the fundamental principles of property rights.

Ultimately, this must come by way of a collective and democratic agreement – ‘a discussion over what belongs to you, me, and critically – us.’

However, until such time, we remain subject to the self-satisfied complacency of our politicians, who continue to undermine the people’s trust.

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

canada

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)

aus canada

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 assess 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 insuranceAt 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. (Gaffney; Misallocation of Capital)

You will never be told the system can fail.

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

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

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

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

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

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

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

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

Banks remain disturbingly under-capitalised.

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

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

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

HTR

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

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

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

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

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

It was onto something important.

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

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

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

 

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

 

 

 

 

 

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

By: Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

Click image to open in a new window

Source: Philip Soos

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Who are rising property prices good for?”

Capitalism, Democracy and Land

Capitalism, Democracy and Land

By Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is clearly highlighted in the response to the budget.

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

Screen Shot 2014-06-07 at 1.38.02 AM

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

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

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

This is essentially why Clive Palmer entered politics.

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

Screen Shot 2014-06-07 at 2.21.47 AM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A more recent example is being alleged in New Zealand.

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

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

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

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

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

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

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

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

 

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

The Budget – The Consequence

rich paying the middle class..

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

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

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

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

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

“In the national interest.”

“The National Interest” what an outrageous statement.

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

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

Does this sound fair to you?

The country we want..

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

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

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

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

a fair go

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

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

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

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

Our relationship with land is truly unique.

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

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

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

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

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

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

(a subject I explored in part last week.)

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

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

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

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

land house gdp ratio

(Source)

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

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

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

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

He influenced the likes of;

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

He quite simply took the political world by storm.

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

“The Corruption of Economics”

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

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

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

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

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

That sounds fair doesn’t it?

‘All taxation is at the expense of Rent’

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

house tax

(Source)

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

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

Consequences

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

Is this fair?

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

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

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

Think about it.

Who benefits??

The progress of genuine innovation

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

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

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

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

Change

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

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

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

And it starts with ‘us.’

Catherine Cashmore

 

Economic Nonsense – ICAC investigations – And The Inevitable Consequence For A Future Generation Of Renters And Homebuyers.

Economic Nonsense – ICAC investigations – And The Inevitable Consequence For A Future Generation Of Renters And Homebuyers. 

As we approach the Federal budget, once again we have to endure another round of economic nonsense, as the Treasurer tries to convince ‘ordinary’ Australian’s that the country is ‘running out of money’ – facing a ‘budget crisis.’

So ingrained is this message, that few question it.

Instead, Talk Radio is flooded with callers; outraged at the ‘debt burden’ they imagine will be passed onto their children. A lifetime of work and servitude lay ahead – not only charged with the responsibility of paying down their own debt – but the government’s debt as well!

For an administration that wants to retain leadership through blaming the last government for the ‘mess’ they’ve reputedly left us in, it’s a convenient message to sell.

“Fiscal responsibility” is the catch term of the day, cuts to health services, education, welfare, job seekers allowance, wages, and proposed ‘back to work’ assistance for those ‘laid off ‘ from the car industry – you name it, it’s on the table.

Everything that is, except the ‘golden egg’ of speculative windfall gains that can be gleaned from the game of ‘Monopoly’ – or to be more accurate – the increasing value of land

Unlike countries such as Germany, which have historically managed to divert speculation away from residential real estate, with the focus being on productivity instead. Here, we’re all subject to an economy, built on the retirement ‘wealth egg’ of land – our personal economic leverage for all lifestyle and business needs.

It used to be called ‘Monopoly.’ Today its termed – ‘Getting onto the Property Ladder.’

The rules of the game are simple. The player uses as much debt as they can borrow – to ‘buy and hold’ as much as they can – and those who ‘got in’ at the beginning of the lending boom, securing the ‘best’ plots available, win the game.

In relative terms, the ordinary homeowner doesn’t advantage much, but what else can they do? Retire still renting? Or become a contestant and hope their house yields enough ‘appreciation’ to support them when they retire. (But not so much that their children can’t get a foot onto the first ‘rung’ of course, and leave home before the age of 40.)

Our lives are therefore spent working to pay off a mortgage – or two. (That is, unless you’re an unlucky tenant who doesn’t have the funds to buy, in which case you play a game called ‘The Rental Trap.”)

The question we ask however is; ‘At what expense?’ – or perhaps “At whose expense?”

As demonstrated by a recent HIA report – land values continue to skyrocket – with the weighted median across all capitals during the final quarter of December 2013, rising to the;

“Highest level on record… a 22.3% increase on the final quarter of 2012.”

Screen Shot 2014-05-09 at 2.17.44 AM

Or perhaps it can be better illustrated on a graph Wendell Cox (author of the “Annual Demographica Housing Affordability Survey”) constructed which cuts through the usual measures used to convince readers that ‘housing has never been more affordable,” with overwhelming focus on mortgage serviceability rates alone.

Instead, it demonstrates the speculative nature shaping the property cycle, which affects not only established house prices, but building activity as lot sizes reduce, whilst land price per square meter, outpaces income growth considerably.

Screen Shot 2014-05-09 at 2.20.16 AM

As I said in my last column, whilst citing the political motivation behind housing policy; “The smoke screen debates on affordability and scrapping negative gearing, are just that” smoke screens. Something that was subsequently confirmed upon release of the Government’s Commission of Audit, which ruled out any consideration of a change to housing policy – better to tax income instead – easier for the top 10% to avoid it, whilst low to middle income earners suffer the shortfall.

Importantly, the Commission of Audit’s terms of reference was to concentrate on direct government expenditure – such as grants and transfer payments rather than tax expenditure – rebates, exemptions and so forth (such as negative gearing, capital gains.)

We ‘all’ have to shoulder the burden, tighten belts, work harder – pensioners included!

‘All’ that is, except those imposing the ‘rules’ – whose ‘entitlements’ are immune from any ‘fiscal responsibility.’

Yes – the Members of our Federal Government – 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 manage the budget in the best interests of its working population to promote economic growth – for which education, health, ‘back to work’ initiatives and so forth, are vital pillars.

There is no evidence and no economic wisdom, that indicates running a surplus under current conditions, would be good for the economy, especially if that surplus is to be achieved through the measures suggested. Rather, the Henry Tax review set out a framework of good economic management and this is what we should be moving toward.

Steve Keen in a recent lecture given in Sydney, does an excellent job of demonstrating the inevitable consequence to GDP when Governments attempt to pay down their own debt, whilst ignoring personal debt.

Economic orthodoxy, which stubbornly imposes austerity measures through the impost of onerous taxes on its working population, are foolhardy responses to a budget ‘crisis’ that that should have been learnt following the Great Depression in the 1930s.

There is nothing new about this – indeed, Australia’s oldest PhD at 93 – Dr Elisabeth Kirkby – has just written a 100,000 word thesis on it. And whilst valuable lessons reaped from the grains of history are ignored, the patterns that led to our greatest economic disasters are repeated.

What all demonstrate is, when the government tightens its belt, for what appears to be no other reason than a vein attempt to ‘spruik’ a surplus, it has the unwonted effect of withdrawing money from the economy – leaving the private sector (the working class population) to pick up the slack.

Therefore “repairing the [government] budget” with the claim it’s putting Australia “on the right track” – is not putting the fate of ‘Australian’s’ on the ‘right track.’

It is the Government’s responsibility to manage the monetary system for the needs of its population (whether surplus or deficit) – spending enough money into the economy to keep employment and productivity boosted, which by design, reduces pressure on the welfare state.

Yet it chooses instead to penalise productivity and ignore tax expenditures such as the capital gains exemption on owner occupied housing or scaling back negative gearing.

In this respect, it is economically irresponsible, is to have a growing deficit offset by tax receipts, that reward speculation and by consequence, widen the wealth gap between rich and poor.  Ironically, the very gap the tax and transfer system is supposed to narrow.

In other words, we are not burdening our children with debt – we are burdening them poor economic management

As austerity measures bite and the retirement age increases, the majority of Australian’s will be working longer and harder – and whilst the Government pays down its reputed ‘debt burden’ – private debt levels will continue to increase as families borrow to ‘afford’ the basic necessities they need, most likely leveraged against their own homes.

Notwithstanding, most of our debt (including foreign debt,) is bank created debt – arguably, a far greater concern than Government debt.

For those that need a reminder – as demonstrated in the latest ABS social trends report – total household debt was $1.8 trillion as at the end of 2013 – higher than it has been at any other time over the past 25 years.

Real Household Debt Per Person. ABS

household debt

Low interest rates aside – $1.8 trillion is a hefty figure.

To put it in some kind of context – a trillion, is a thousand billion.

The sun is set to burn out in approximately 5 billion years. A trillion is so large; it’s almost meaningless in real terms.

Total Government debt is around $542 billion (as at March 2014 – RBA) – that’s about 35% of GDP.

In contrast, our household debt to GDP ratio is estimated to be around 97% (as at December 2013 – RBA) – assisted by low interest rates and an array of financial products to ‘woo’ new borrowers into the property market (such as shared equity schemes, interest only loans, redraw facilities, offset accounts and so forth.)

Therefore instead of our current leaders asking Australian’s what they can do to assist Government debt. We should be asking the Government, what it will do to assist private debt? Particularly as we move forward over the next 12 months or so, and the lending cycle turns.

Capitalism?

Of course, this problem is not unique to Australia. Thomas Piketty’s book “Capital in the 21st Century” has just come out to great acclaim, choc full of statistics to demonstrate how income earners – the vast body of productive workers, who prop up the local economy through the taxes they pay and products they produce – are the losers, compared to those who hold stores of unproductive wealth.

The book focuses on the ‘1%ters’– advanced through gifts of inheritance – those who hold the vast majority of ‘assets.’ Controllers of the stock and bond markets – collecting their ‘economic rent’ by way of hording property, and effectively, ‘buying’ protection through lobbying seats of power

It’s an age old game, and in a world where gaining political leadership is only possible with vast sums of ‘advertising’ dollars, lobbying is crystallised into the system.

We’re currently seeing this with the ICAC investigation (link to Renegrade Economist interview well worth a listen,) as it uncovers a web of alleged political corruption, with illegal donations from property developers and other sources, funnelled into a Liberal Party slush fund.

Meanwhile, Clive Palmer has been accused of “spending money like a drunken sailor” to secure a third seat in Senate for his PUP party.

Palmer reportedly entered the leadership battle due to “poor policy decisions” by the Gillard Government – the ‘carbon tax’ in particular being highlighted, which promised to negatively impact his core business.

However, his other policy evaluations leave much to be desired

For example, Palmer’s ‘housing affordability’ plan, is to make home loans tax deductable for the first $10,000 – a move which will unquestionably push land prices higher, as future buyers factor the savings into their budget and adjust price expectations accordingly.

But then, considering Mr Palmer’s significant land holdings, which are said to include;

  • “A six bedroom, 11 bathroom, 22 car garage property in Queensland – along with;
  • An array of golf courses. As well as;
  • “Family and associates” owning a total of “11 homes in the Sovereign Islands” on the banks of the Southport Broadwater – as well as;
  • “Other known properties at Broadbeach Waters on the Gold Coast, Fig Tree Pocket in Brisbane, Jandowae on the Darling Downs, Queensland, and Port Douglas” and notwithstanding;
  • “An undisclosed number of properties held in trust for their daughter.”

I suspect lowering land values, may not be top of mind.

The wealth tax ‘solutions’ Piketty proposes to stop the ‘gap’ widening; fail not only by the confused definition of what one would consider ‘wealth.’ (A Rembrandt painting, or luxury Yacht for example?) But also that of ‘capital.’

In modern terminology, capital is used for anything that yields a profit – which under our current system includes land. However, in classical terms, capital is a factor of production – a depreciating asset and one, which can be reproduced.

In a society built on the foundation of ‘free markets,’ factors of production flourish under competition. If one widget costs too much, an entrepreneur will find an innovative way to produce the same widget at a cheaper price

It’s called capitalism.

Land however is not a factor of production. It can’t be moved or reproduced and it’s limited in supply. Therefore the revenue stream generated from the unimproved portion alone is due to its locational advantage, and little else.

The free market activities in a capitalist society, cause land values to increase – and considering this is through no act of individual exertion on the vendor’s side, but rather the collective efforts of the community, it makes sense that most consider owning a well located plot of land, better than both money in the bank and the wages they have to ‘earn.’

This is why increasing charges on the revenue stream ensuing from the locational value of land, and recycling it back into the community – (which is where it came from, and where it belongs) – by way of a tax shift off productivity (wages) and onto our valuable and limited natural resources – was termed the ‘least bad tax’ by the capitalists Milton Friedman and Winston Churchill – to name but a few.

Rising land values harm capitalism, they increase the rent for small business owners, always benefitting the landlord but never benefitting the wage earner. Furthermore, rising land values force young people out of the market, whilst making those ‘in’ the market wealthy – and widening the gap between ‘rich and poor.’

When land prices inflate, jobs are lost as more revenue is taken away from productivity and soaked into the ground.

It’s not called capitalism; it’s called capitalizing -‘taking advantage of’ community created revenue – the total of which is pocketed by the landowner.

This is why land prices are so high – and ‘vested’ interests of policy makers always act to push them higher.

The great man Buckminster Fuller – architect, systems theorist, author, designer, inventor, and futurist – once said;

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” (H/T author of soon to be published book “Land” Martin Adams)

We live in a democracy, therefore any change to the status quo needs to come from the ground up – we will never get it from the top down.

The Henry tax review set out recommendations for transitioning our economy based on the ideas penned above.

How we get there is worthy of debate – however thankfully, due to the internet and a new age of enlightened ‘priced out’ folk, we can start that debate in 2016/17, by using our own preference and economic wisdom to vote a government which acts to widen the rich/poor divide out. By which time there ‘may’ (?) be better options to vote in.

Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The tale of a Bridge and our accumulated wealth….

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

This was in no way detrimental to the property owners.

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

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

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

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

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

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

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

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

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

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

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

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

If you thought wars were about religion – think again.

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

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

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

Change ahead?

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

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

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

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

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

Can supply policy solve it alone?

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

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

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

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

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

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

A Glance Back At Policy..

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

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

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

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

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

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

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

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

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

So what now?

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

Not so the recession that marked the early 1990s.

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

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

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

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

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

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

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

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

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

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

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

It’s time for change.

Catherine Cashmore

 

A Look At The Market Through Foreign Eyes

A Look At The Market Through Foreign Eyes

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

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

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

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

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

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

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

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

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

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

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

According to Oliver;

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

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

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

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

“Build more houses!”

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

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

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

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

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

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

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

Speculation

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

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

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

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

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

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

Land Prices Vs Property

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

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

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

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

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

Land Cycles

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

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

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

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

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

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

Easy Earnings..

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

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

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

But how does it look to our Texan friends?

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

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

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

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

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

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

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

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

Texas vs Cali

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

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

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

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

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

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

Catherine Cashmore