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

 

 

 

Legally Underquoting? How Agents Get Away With It

Legally Underquoting?  How Agents Get Away With It 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore.

 

 

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

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

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

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

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

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

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

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

“Cone of Silence”

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

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

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

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

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

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

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

Housing policy alone aptly demonstrates this.

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

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

“What do we want?..”

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

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

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

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

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

Social Justice? Hardly.

Unwonted robbery?

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

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

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

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

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

Are They Listening?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It would (as has been proven historically) influence;

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

Productivity Paradox

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

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

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

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

Community

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

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

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

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

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

To Conclude..

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

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

Sydney SP Brisbane SP Melbourne SP

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

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

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

March in March

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

Catherine Cashmore

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

A policy disaster.

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

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

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

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

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

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

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

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

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

What’s going on?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Australia’s changing landscape

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

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

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

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

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

Vic migration census period

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

.nsw migration census period

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

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

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

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

No Kidding!

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

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

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

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

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

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

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

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

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

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

Claims, which now seem laughable.

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

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

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

‘Mugs’ we are.

But what about land?

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore