Australia’s Empty Houses…

By – Catherine Cashmore

“The home, built in 1857, had been unoccupied for years” said the report of a dilapidated Victorian-era mansion in Sydney’s Balmain East.

Balmain East

Situated in an exclusive residential pocket next door to Balmain East ferry wharf and sporting bayside views of Sydney’s Harbour Bridge, the 457 square metre block of land attracted 200 people to the auction, 18 registrations to bid, and sold $830,000 above the reserve to a local home buyer for $2.68 million.

According to Property Observer, the site had been acquired in 1973 for $33,500 by the notable gay right’s activist and historian, Alexander ‘Lex’ Watson – president of The Pride History Group, and lecturer in Australian Politics at Sydney University, who sadly passed away earlier this year after a long battle with Cancer.

$33,500 in 1973 dollars would be $289,724 in real terms today – making the selling price of $2.68 million, a value almost ten times as great.

The location was the key of course, with planned upgrades to Balmain East ferry wharf, which will now receive services from the Parramatta River along with extra ferries to McMahons and Milsons Point, further enhancing its value.

Had the home been only a few kilometres away, a few hundred thousand could have been wiped off the price tag and the media sensation may not have been so great, even so, it is not the only dilapidated property to make the press of late.

Opportunistic buyers caught up in Sydney and Melbourne’s property boom, have snapped up a string of empty homes, selling under stiff competition while exceeding all expectations of price.

An empty hat factory on Wilson Street, Newtown, also vacant for years, sold earlier this month for $1.725 million.

A dilapidated home on 360 square metres of land in Thornley St, Leichhardt, vacant for more than 30 years, sold a few weeks ago for $1.4 million at auction.

A home in total disrepair at 19 Durham St, Stanmore, situated on 172 square metres of land, vacant for years and sold for $923,000.

And not to leave Melbourne out, an unliveable Richmond property on 726 square metres of land, also vacant for years, sold for $2.544 million – $900,000 above the price it achieved only two years ago.

Screen Shot 2014-09-30 at 2.50.03 pm The list goes on…..

Barring the last example that came with plans and permits for two town houses, these properties transacted for nothing more than their land value.  However, while the buyers purchased a location, they did not pay for the services that rendered that location valuable or, in the case of the first example, compensate the local residents for suppressing access to some of the best views in town.

Instead, reinforced by inelastic zoning constraints, generous tax treatment, and unrestrained speculative growth in dwelling finance commitments, they unwittingly rewarded the sellers with a substantial unearned gain for withholding valuable land from use and depleting the nation’s housing supply.

This means of ‘creating wealth’ common in most western nations, sits at the root of many of our economic and social problems today. It has both a debilitating and destabilising effect on the economy, evidenced clearly in a painful and rising trend of  income and housing inequality that burdens the capacity of the ‘welfare state’ to compensate.

Interestingly, Lex Watson, the prior owner of the Balmain East property cited above, was purportedly greatly influenced by the writings of John Stewart Mill whose work was said to be: “the touchstone of his life and later activism.”

Born in London in 1806, John Stewart Mill is remembered as: “the most influential English-speaking philosopher of the nineteenth century.”

Inspired by his father James Mill, who tutored his nine children with daily lessons in Latin, Greek, French, history, philosophy, and politics, John Stewart Mill was a leading economist – a prolific logician, who dedicated his life to championing the causes of liberty and equality, while advocating ‘radical’ ideas, such as the abolishment of slavery and equal rights for women.

In 1848 he published the most prominent textbook on economics in the 19th century: Principles of Political Economy – critiquing systems such as communism and socialism and cementing Mill’s reputation as a leading public intellectual.

Extending on the ideas set out by Adam Smith and David Ricardo, Mill employed concepts that that have been written out of today’s economic narrative, that conflate land and capital – virtual opposites – while failing to distinguish between income that is ‘earned’ and the economic surplus that disproportionately flows to those that “love to reap where they never sowed.” A process best set out in Mason Gaffney’s book, “The Corruption of Economics.”

Writing on the moralities of taxation in Book V, Chapter II of ‘Principles of a Political Economy’ Mill commented:

The ordinary progress of a society, which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing.”

From this Mill concluded that the government should collect society’s economic rents in lieu of taxes that impede productive labour and industry, including taxes on the improvement and the transfer of property, (stamp duty) which he said, should rather be: “distributed over the land generally, in the form of a land-tax.”

He was not the first or last to do so.

He followed a long line of influential activists, from Thomas Paine, who in his 1797 publication Agrarian Justice stressed:

“Men did not make the earth…. It is the value of the improvement only, and not the earth itself, that is individual property…. Every proprietor owes to the community a ground rent for the land, which he holds.

To most recently, Dr Ken Henry, who chaired Australia’s ‘Future Tax System Review’ and noted: “… economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”

The classical economists recognised that unless profits from the ‘enclosure of the commons’ – land, water rights, minerals, and so forth – were effectively collected and shared for the benefit of the community, all productive gains, every improvement in society and the economy, would be capitalised into rising locational land values, enriching those that owned the assets but more so, those who created the credit and traded on the debt.

This is equally applicable to reductions in the cost of construction.

For example, news that high-density apartment towers close to public transport in Sydney, will no longer require parking facilities, delivering an estimated saving of $50,000 – $70,000 in development costs, will do little to ease affordability.  Rather it will simply leave more funds available to bid up the price of land and this is precisely what we are seeing in Australia – sky rocketing land prices requiring ‘super tall’ structures to provide a viable return on investment.

While the small one and two bedroom units may be spruiked as affordable, when calculated by cost or rental value per square metre of floor space, they are remarkably expensive.

Mason Gaffney expanded on the theory, coining the acronym ATCOR – “All Taxes Come Out of Rent.” Showing that whether renting or buying, total tax liabilities from whatever area carried by the consumer, deduct from the cost of a site to the extent they limit the amount a buyer is both prepared and able to pay.

It follows that the removal of all taxes would naturally wash up into higher prices for real estate, which in theory leaves the resulting rise in the economic rent of land ‘just’ enough to replace the forgone revenue. (For more, see Fitzgerald (2013) “Resource Rents Of Australia”)

When that liability falls on productive industry, deadweight losses occur. For example, 90% of our taxes are distortionary, adding 23% to prices of goods and services.

However, when the burden falls on land and monopoly rents – minerals, fuels, the broadcasting and communications spectrum, patents etc. The reverse is the case.

In respect of land, a higher tax rate levied on the unimproved value would discourage leaving dilapidated homes vacant for years while we struggle with an assumed housing shortage - suppressing the speculative element that adds to the volatility of the market cycle.

Furthermore, when the gain is collected and used to fund the expansion of infrastructure in order to service a growing population, the tax base is expanded without a subsequent lift in rates.

In the 19th century, nature’s ‘free lunch’ was largely limited to the aristocracy of the great landed estates, today monopoly profits are absorbed by the financial sector which wields significant political leverage from lending ‘endogenously’ created credit against real estate collateral, with the compounding interest disproportionately increasing levels of household debt. As I pointed out previously – Australia will increasingly feel the effect of this as we move into 2019.

Our current tax system is crooked. It allows large companies to jump through loop holes in legislation and ‘cook the books,’ shipping profits offshore, leading to an estimated $1.6 billion in tax revenue forgone, while land on the other hand, is used by investors as an effective tax haven.

In a recent post by Dr Gavin R. Putland of the Land Values Research Group, he notes:

“No matter how high your gross income may be, you can make your taxable income as low as you like, simply by buying enough negatively-geared properties. Such artificially reduced taxable incomes are used in ATO statistics on negative gearing, which are then trotted out by the property lobby as “proof” that most negative gearers aren’t rich — as exposed, for example, in Michael Janda’s article “The myth of ‘mum and dad’ property investors” (The Drum, 24 September 2014).”

Enlightening the disparity of our tax laws further, Putland includes a citation to a series of exchanges posted in the comments section of Michael Janda’s article in The Drum:

“AE:

… Deductions for expenses incurred are a fundamental of our and every other economy. Show me one society where you cannot deduct expenses incurred.

Gavin R. Putland:

How about *our* society? The cost of commuting to work is manifestly a cost incurred for the purpose of earning your wage or salary, but you can’t deduct it against your wage or salary (or anything else) for tax purposes. QED.

Mitor the Bold:

That’s an ATO commandment, but theoretically you should be able to.

Overit:

Actually, Mitor, it predates the ATO by about 200 years, and is derived from a pre-industrial-revolution House of Lords ruling which said that if tradespeople choose not to live in or over their business premises, then they should not be able to deduct the cost of travelling to their work.

However, I agree that theoretically you should be able to. Which is why the novated vehicle lease business has grown so rapidly, because that effectively enables people to deduct the cost of travelling to their chosen place of work. Bad luck for all of us who travel by public transport.

JoeBloggs:

The cost of travelling from your home to work is not a work related cost. It is the cost relating to your choice where you live, a personal aspect of your life. No worker, contractor or business can claim as a deduction ‘personal’ costs. QED.”

As Putland points out:

“So there you have it, proles: The industrial revolution never happened. You always have the option of living at your place of work. If your place of residence is somewhere else, that is a “personal” choice on your part, and the cost of travel between the two is a ”personal” expense, not a work-related expense. If you want a big deduction against the wages of your labour, you’ll have to gear up and speculate on assets.”

Australia’s economic narrative is more concerned with suppressing wages than high land values.

Joe Hockey has unashamedly stated that any rise to the minimum wage “will cost jobs” and “reduce competition,” while remaining notably silent on the average CEO pay, which sits at an estimated 63 times average earnings (as at 2013,) as well as showing scant regard for rising land values, which increase the associated costs of running a business, while discouraging growth in productive industry.

It uncovers a damaging Neo-Liberal agenda, which will do nothing to raise the living standards of Australians struggling to make ends meet.

Meanwhile in Germany, the house price-to-income ratio has fallen by almost a third nationally since the early 1990s, yet residents enjoy low unemployment and some of the highest wages per capita in the world – including the highest minimum wage in the world. Germany weathered the 2008 depression better than any other country in Europe by maintaining its focus on value adding growth.

(The Economist - German house price to average income.) 

Screen Shot 2014-09-30 at 5.37.01 pm

130508_-_Wages_and_salaries_growth_rates_in_Germany__total_economy

The public needs to recapture the debate and push for a better set of democratic tools, that let the people decide directly on the benefits that can aid their communities, rather than the current state of affairs which is coloured with vested interest, polarising voters with false promises and flawed economic thinking.

The rise of citizen’s juries, where a diverse and representative group of people are randomly selected and given the information and training needed to deliberate together on matters of policy – for the benefit of all, not just a few –  limiting the power of corrupt government officials, may take us one step closer to achieving this.

Top of the agenda should be every citizen’s right to affordable access to land and shelter.

 

A Political Game of Smoke And Mirrors – Supply Verses Demand

By Catherine Cashmore

(Written for Property Observer – September 2014)

The only explanation offered to Australia’s low-income residents over the past few weeks, expected to take on a colossal amount of private debt just to put a roof overhead in our rentier economy, is that Australia is suffering from a ‘housing shortage.’

Speaking at the 2014 Bloomberg Economic Summit in Sydney, where the investor share of the market is close to 50 per cent and finance commitments have sky rocketed some 44 per cent higher than July 2013. Treasurer Joe Hockey, denied that prices were ‘credit fuelled’ because:

“….fundamentally we don’t have enough supply to meet demand (and) that doesn’t suggest a bubble.”

His views were supported by David Cannington, senior property analyst at Australia & New Zealand Banking Group Ltd (ANZ), who referenced an apparent shortage of ‘300,000 homes,’ while at the same time welcoming an elevated level of foreign speculation: “as adding about $4.5 billion every quarter to total dwelling construction.”

The shortage Cannington refers to, is derived in part from research put together by the National Housing Supply Council (NHSC) established in May of 2008, just prior to the last Senate inquiry into housing affordability, yet promptly disbanded by the incoming Abbott Government who are now only too willing to use its findings to support their populist view.

Using ABS data, the NHSC assessed what is known as ‘underlying demand’ – that is, the amount of extra housing needed per annum over the last decade for all residents in Australia (not just active buyers,) ‘IF’ we had continued to produce enough homes for an increasing population based on existing household composition figures.

The supply side findings of the report were hotly debated and justifiably so.

Planning for population growth is not an easy task, it is predictive in nature and makes many assumptions and revisions along the way.

However, this was not the NHSC’s only role.

It was also commissioned to produce a comprehensive evaluation of Australia’s affordability problems, which included the status of those impacted most – homeless, renters, first homebuyers, low wage families, and tenants in the public and social housing system, which helped clarify its findings.

The NHSC reports showed utility costs such as electricity, gas, water, and sewerage, have been increasing at more than 10 per cent per annum – yet they are not typically calculated as part of current assessments of housing affordability which tend to concentrate on mortgage serviceability rates alone.

They gave a good statistical overview to show a dramatic shortfall in affordable rental accommodation for low-income families. And clear evidence that our housing crisis is not that we do not produce enough homes ‘per se’ – but that we do not produce enough affordable and feasible options across the sector as a whole – in both the public and private sphere.

For example – the NHSC reports noted a “shortage of housing for lower-income people (specifically families) that results from a mismatch of housing prices relative to income.”

It made a point of stressing that Australia’s supply challenges cannot be met by ‘simply adding to the housing stock.’ And further elaborated on the inability of apartment construction to meet both need and price for the majority of family residents – the value of the land and associated costs being too high, and the size of apartments being too small to adequately fulfil the task.

This places Cannington’s second comment – regarding the level of foreign investment pushing an unprecedented inner city boom in apartment construction, into context.

For individual renters, students and a small percentage of couples living downtown, the increase in high-density accommodation will assist in placing downward pressure on rents.

It cannot however assist in addressing Australia’s real housing shortage (that of affordability) or accommodating the growing number of family and low-to-middle income residents, that want to buy – not just rent – and in the face of declining wages, find it increasingly difficult to do so.

This is not because we have booming population growth and a shortage of roof space, as our ministers are fond of sermonizing. But because our tax policies work directly against it, subverting supply side policy and negatively affecting wage growth by pushing up the price of land and the associated costs of doing business

They encourage a system of false scarcity, in which land and dilapidated housing is hoarded and not effectively utilised, forcing a process of social polarisation, as low income residents are forced to ‘hop’ the middle and outer rings, in search of cheaper options further afield.

They distort the use of the nation’s savings, encouraging speculation on rising land values, negatively affecting the financing of new supply, as investors chase the capital gains associated with established stock, over and above rental income.

investor loans

The behavioural impacts are profound, amplifying the boom and bust swings of the market cycle.

The financial sector accommodates, with property prices dependent on how much ‘endogenously’ created credit a bank chooses lend, subject once again, to our dysfunctional tax system and absence of macro prudential regulation in our lending institutions.

Negative gearing, depreciation and lower land taxes, leave more economic rent available to be pledged to the banks in the form of higher prices, producing a rentier economy which prioritises ‘creating wealth’ through asset inflation and rising levels of private debt – rather than improving living standards by supporting tangible investment into value adding activities.

 NEG GEARING LOSS

The distortion that inflated values have on the economy acts to subvert housing policy as any danger of a marked decline in prices places risks financial stability.

Affluent neighbourhoods are protected from ‘over development,’ while inelastic responses to market conditions, coupled with restrictive planning laws that are often overly sensitive to neighbourhood complaints, allow professional land-bankers to squat on sites at low cost and secure windfall gains when they are later rezoned for residential development.

Stamp duty adds to the equation, placing a fine on labour mobility and the regular turnover of housing stock.

The resulting effect is illustrated on the maps below that show where affordable options were located in 2001 for low-to-middle income buyers, compared to 2011, in all of our major capitals.

The yellow patches being affordable, and blue patches unaffordable.

Screen Shot 2014-09-30 at 5.55.55 pm

(NATSEM Income and Wealth Report Issue 29 – The Great Australian Dream – Just a Dream?)

Prior to the 1970’s, infrastructure financing was funded in part, through the capture of economic rent from the land that directly benefitted from the accompanying improvements. The process had no negative effect on productivity, yet reduced the amount of rent available to be capitalised into the prices.

Now, infrastructure costs are financed through deadweight taxes on residents who derive no benefit in their own local neighbourhood, or loaded onto the upfront cost of new dwellings in fringe localities and promptly passed to the buyer.

The banking lobby loves minsters like Joe Hockey that offer no threat to their profits and instead, waft away any necessary concern over rising prices with simplified responses that fail to identify the root cause.

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

Notwithstanding, all the above points were highlighted in the last Senate inquiry into housing affordability, as well as being set out clearly in the Henry Tax review. Yet studiously ignored in a budget that surgically set about reducing the living standards of Australia’s low to middle-income earners, the most productive sectors of our economy, rather than collecting the tax revenues from resource rents and monopoly profits.

Joe Hockey has reaped substantial unearned gains from an impressive portfolio of property investments – reportedly, picking up his Canberra home “for a song” in 1997 at $320,000, and watched that land value more than triple in nominal terms to an estimated $1.5 million today.

In light of the above evidence, it can only be assumed that Hockey’s comments are based on a vested interest to protect his own back pocket and seat in power, rather than the urgent need to invest in Australia’s future by eliminating the losses inflicted by our current system of taxation, that force up the cost of land and levels of private debt.

Skyscraper Hubris – Pride Before A Fall

By – Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

Few raised concerns however.

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

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

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

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

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

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

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

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

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

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

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

W&A hotel

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

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

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

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

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

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

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

He took over the project with clear intentions.

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

garg

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

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

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

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

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

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

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

40 wall st

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

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

chrysler

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

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

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

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

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

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

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

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

ESB

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

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

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

The pattern is easy to follow:

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

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

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

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

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

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

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

In a subsequent publication he goes one-step further.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AT

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

Aus108

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

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

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

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

Pride comes before a fall.

 

 

 

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

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

By: Catherine Cashmore

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

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

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

Concluding;

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

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

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

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

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

When asked about the budget cuts, Medcraft commented;

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

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

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

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

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

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

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

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

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

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

“Our distrust is very expensive.”

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

trust fsc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, as they go on to note;

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

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

Land is the beginning of all production.

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

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

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

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

Banks quite literally ‘mortgage the earth.’

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

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

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

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

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

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

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

For the elite, this system works perfectly.

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

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

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

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

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

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

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

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

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

Soos GDP Land

(Philip Soos)

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

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

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

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

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

In it, Glenn Stevens noted that;

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

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

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

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

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

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

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

Poli investments

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

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

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

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

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

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

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

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

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

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

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

By Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

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

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

canada

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

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

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

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

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

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

aus canada

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

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

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

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

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

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

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

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

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

 

 

Australia’s City Centric Culture and Failure to Decentralise

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

By Catherine Cashmore

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

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

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

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

Job to worker ratio

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

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

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

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

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

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

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

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

City centric culture

 

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

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

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

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

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

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

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

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

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

However, this is not where Australia excels.

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

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

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

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

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

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

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

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

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

NEG GEARING LOSS Supply policy has further assisted

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

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

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

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

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

The benefits for homeowners can obviously be substantial.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This was in no way detrimental to the property owners.

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

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

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

A similar concept is recognised by owners of apartments.

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

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

A broad based land value tax is essentially no different.

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

Both reforms work hand in hand.

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

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

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

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

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

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

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

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

 

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

By – Catherine Cashmore

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

But our Governments are turning a blind eye.

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

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

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

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

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

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

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

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

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

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

Neo-liberal policy made matters worst.

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

It promised to lead to efficient markets and lower unemployment

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

GDP+Wages

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

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

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

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

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

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

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

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

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

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

Milton Friedman meanwhile tutored that societies are structured on greed.

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

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

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

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

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

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

Bubble FIRE

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

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

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

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

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

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

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

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

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

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

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

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

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

You will never be told the system can fail.

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

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

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

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

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

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

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

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

Banks remain disturbingly under-capitalised.

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

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

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

HTR

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

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

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

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

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

It was onto something important.

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

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

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

 

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

 

 

 

 

 

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

By: Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

Click image to open in a new window

Source: Philip Soos

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Who are rising property prices good for?”

Capitalism, Democracy and Land

Capitalism, Democracy and Land

By Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is clearly highlighted in the response to the budget.

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

Screen Shot 2014-06-07 at 1.38.02 AM

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

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

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

This is essentially why Clive Palmer entered politics.

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

Screen Shot 2014-06-07 at 2.21.47 AM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A more recent example is being alleged in New Zealand.

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

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

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

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

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

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

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

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

 

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

The Budget – The Consequence

rich paying the middle class..

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

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

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

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

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

“In the national interest.”

“The National Interest” what an outrageous statement.

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

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

Does this sound fair to you?

The country we want..

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

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

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

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

a fair go

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

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

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

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

Our relationship with land is truly unique.

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

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

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

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

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

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

(a subject I explored in part last week.)

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

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

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

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

land house gdp ratio

(Source)

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

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

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

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

He influenced the likes of;

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

He quite simply took the political world by storm.

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

“The Corruption of Economics”

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

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

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

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

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

That sounds fair doesn’t it?

‘All taxation is at the expense of Rent’

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

house tax

(Source)

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

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

Consequences

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

Is this fair?

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

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

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

Think about it.

Who benefits??

The progress of genuine innovation

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

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

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

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

Change

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

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

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

And it starts with ‘us.’

Catherine Cashmore