‘Speculative Vacancies’ – The Empty Properties Ignored By Statistics

SpecVac_poster-2

By Catherine Cashmore

There have been four housing affordability inquiries since the early 2000s.

The “First Home Ownership” inquiry by the Productivity Commission (2004). The Senate Select Committee inquiry into housing affordability (2008). The inquiry into affordable housing by the Senate Economics References Committee (2014), and the current Inquiry into home ownership by the Standing Committee on Economics (2015).

The central recommendation of each inquiry has been to increase the supply of affordable housing.

However, missing from the analysis is any mention of the number of long-term vacant dwellings held for speculative gain across Australia’s major capital cities – not for sale, and not for rent.

Because they are not publicly advertised, these properties are overlooked by current short-term vacancy statistics based on reporting by real estate firms.

Prosper Australia’s annual Speculative Vacancies report uncovers these latent holdings. Using water data as a proxy, we provide a unique insight into the number and ratio of long-term vacancies withheld from the market for a full 12-month period in Melbourne.

Stratified by postcode, the report provides a detailed study to enlighten government on sound policy recommendations to drive prosperity and assist housing affordability.

We cannot have a serious conversation about Australia’s housing supply ‘crisis’ without addressing the fundamental drivers that permit – no-less encourage – owners to lay a significant proportion of prime urban land to waste.

There are many diverse motivating factors prompting owners to leave buildings idle. Some may be undergoing renovation or awaiting demolition. Others may be derelict and in need of substantial and costly repairs.

However, the notable trend underlying the data is the large divergence between residential real estate prices and rental incomes – including both actual and imputed rents on owner-occupation.

During the 2014/2015 financial year alone, Melbourne’s median capital city land price accelerated over 14 per cent.

At just over $700,000, Melbourne’s median house price is 8.8 times median income. Yet, at just 3 per cent, gross rental yields in Melbourne are at their lowest on record.

Real net rental incomes across Australia have been declining since 2001. Between 1994 and 2013, the number of negatively geared investors dependent on rising prices to profit escalated 152 per cent. In contrast, positively geared investors have increased by a much lesser 47 per cent.

The overwhelming majority of negatively geared investors (95 per cent) chase the capital gains associated with existing stock, rather than investing into new residential construction. Australia’s housing stock has been turned into little more than a vehicle for financial speculation, placing increasing pressure on prices.

To evidence further, since 1997, the share of loans for housing has increased from 47 per cent to 66 per cent. Only approximately 10 per cent of the flow of housing finance has been for the construction of new dwellings. Meanwhile, the ratio of business credit to total credit has been declining since the late 1980s.

Credit extended for enterprise is proven to be positively associated with economic growth and faster reductions in income inequality. Household credit (principally mortgage debt) provides no such benefit. Rather, it leads to a misallocation of credit, to feed an elevated level of speculative rent-seeking demand.

It is important to note that increasing land values are not borne from any productive activity undertaken by the owner who (as the classical economist John Stewart Mill termed it) “grows rich in their sleep without working, risking or economising.”

Rather, the value of land reflects its surrounds, growing primarily through increased demand generated by government-funded infrastructure.

Rising land-values yield a special type of unearned income known as “economic rent.”

As a broad measure, land prices can be calculated by multiplying current rents by 20 years. This is known as the capitalisation rate.

It is speculation induced by the capitalisation of the rental value of land into a tradable commodity that drives the boom-bust volatility of the real estate cycle.

Withholding prime locations from the market in an unused state generates artificial scarcity, raising prices and accelerating mortgage debt.

It underpins our cultural obsession of betting on bourgeoning land-price gains and using leverage to climb the mythological property ladder.

The consequential subversion to policy reform is inevitable, as the benefits of government-funded infrastructure flow disproportionately to landowners in the form of unearned windfall gains.

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

They lead to ‘speculative vacancies.’

These are properties that are denied to thousands of tenants and potential owner-occupiers by landowners that have no motivation to generate any rental income. The result is a lowering of publicised vacancy rates, and increased land prices.

The regulatory environment provides a prime motivator for property speculation.

Landowners betting on a continuation of past high rates of appreciation are advantaged by preferential tax exemptions worth an estimated $36 billion a year.

Negative gearing coupled with the 50 per cent capital gains tax (CGT) discount for property held in excess of 12 months, have ensured high-income individuals are the main beneficiaries of rising land values. The top 40 per cent of income earners hold nearly 80 per cent of all investor mortgage debt.

First home buyer grants and other state incentives such as stamp duty waivers, owner-occupier exemptions from CGT and state land tax (SLT), changes to the superannuation laws enabling leverage into real estate (2007) – typify the commodification of property as a tool for profit seeking gain, advantaging existing owners vis-à-vis the young and the poor.

These incentives strip away any hope of a market aspiring to house people, rather than encouraging speculative greed. Policies that foster land price inflation and reward rent-seeking behaviour cannot deliver positive economic outcomes.

The IMF finds more than two-thirds of the world’s recent 50 systemic banking crises were caused by patterns of accelerating real estate prices relative to GDP.

A comprehensive analysis of historical data demonstrates a clear pattern of repeating real estate and construction cycles topping-out some 24-48 months prior to the world’s major economic downturns.

This cyclical top has been a precursor to all of Australia’s economic recessions.

Yet, it is not the recession that damages the economy. The damage arises from mounting levels of leveraged debt extended for the purpose of land speculation.

In a little over two decades, the share of investment property loans as a proportion of total debt has tripled from one-tenth to three-tenths.

Investors now account for 40 per cent of total housing loans outstanding.19 Australia is the third most indebted household sector relative to GDP in the OECD.

At just over $2 trillion,21 the unconsolidated household debt to GDP ratio sits at an eye-watering 121.5 per cent.

The burden of diverting an ever-increasing proportion of incomes to debt-servicing by both business and buyers has progressively undermined the health and competitiveness of the Australian economy.

The long-term risks to our financial system are precarious. The economic impacts for low- to middle-income Australian’s are disastrous.

Ownership for 15-34 year olds has been in a downward trend since the mid 1970s. For 35-44 year olds, since the mid 1980s.

Even those able to step onto the fabled property ladder, long-term security of tenure is not guaranteed. Significant numbers are ‘churning’ on the edges of owner occupation.

Between 2001 and 2010, one in five homeowners (22 per cent) dropped out of home ownership – for 9 per cent, this move was enduring.

For those that do purchase, there is a spike in the chances of a termination back into rental housing after just one year.

Importantly, the trend is accompanied with episodes of poor health, unemployment and financial stress.

After exiting homeownership, 34 per cent of Australian ex-home owners require access to housing assistance. Additionally, one in 10 Australians has been homeless at least once in their lives.

The incidence of housing stress for owner-occupiers declines with age, however, for long-term tenants and those under 35 years, it remains stubbornly high.

Current policy cements this demographic at the bottom of the pile.

Ineffective use of residential and commercial sites further stimulates the volatility and inequity of the real estate cycle. Land’s locational supply cannot be increased to accommodate rising demand. Buildings banked and withheld from use exacerbate this disparity.

As such, the SV rate can be likened to the unemployment rate for land.

It results in the productive capacity of the economy being ruthlessly compromised as citizens and businesses are forced to pay higher prices and commute greater distances for employment and lifestyle needs.

Prosper Australia’s Speculative Vacancies report gives a unique insight into the impact of current housing policy.

The report identifies 82,724 residential dwellings and 30,085 commercial properties in Greater Melbourne likely vacant for a period of 12-months or more.

As government and real estate industry vacancy statistics are neither impartial nor comprehensive, this report adds a valuable dimension to understanding the divergence between real estate industry short term vacancy rates (the percentage of properties available for rent as a proportion of the total rental stock) and the number of potentially vacant properties exacerbating Australia’s housing crisis.

We advocate these figures should correlated along side our Speculative Vacancy findings to produce the widest and clearest measure of vacant housing supply to guide policy makers.

Read the report

… extract from Executive Summary:

....If just those residential properties consuming 0LpD were placed onto the market for rent, this would increase Melbourne’s actual vacancy rate to 8.3 per cent. If 82,724 properties using under 50LpD were advertised for rent, the vacancy rate could rise to an alarming 18.9%. (1)

Further examination of 130,610 non-residential properties across 254 postcodes over the same period identifies 7,941 or 6.1 per cent of Melbourne’s commercial stock was also vacant over 2014, i.e. having consumed 0LpD.

Government failure to address Australia’s housing affordability crisis is indefensible. Access to affordable shelter is a basic human right and underlies national prosperity.

Vacant properties impose a needless economic burden. Residents and businesses are forced to leapfrog vacancies to lesser sites at great cost, increasing commuting times and placing upward pressure on prices.

Latent supply is usually not visible without a significant downturn in economic activity. If withheld stock were put to use, it would reduce cost-of-living pressures for tens of thousands of low and middle-income families and businesses marginalised by the cost of land.

This report recommends fundamental reforms to reduce the propensity for volatile boom-bust land cycles fuelled by speculation and unsustainable levels of household debt.

Current property taxes discourage investment into new housing, inflate the cost of land, stagnate housing turnover and hinder putting property to its highest and best use.

The report advocates that profound inefficiencies could be significantly alleviated if current transaction taxes were phased out and replaced with a holding tax levied on the unimproved value of land, alongside enhanced infrastructure financing methods for new developments.

Policy makers have thus far ignored Melbourne’s speculative vacancies and their effect on property prices.

With some 4.8 per cent of Melbourne’s houses showing severe under-utilisation, there is no housing supply crisis. Rather, rising prices indicate significant distortions created by policies supporting rent-seeking behaviour.

Government and statistical bodies need to recognise this disparity and employ a more comprehensive data analysis of vacant housing stock.

Read the report

Footnotes:

[1] Residential per capita consumption in Melbourne is currently 183 LpD.

http://www.afr.com/real-estate/leaky-data-water-use-shines-a-light-on-occupancy-20151207-glhewz

http://www.bloomberg.com/news/articles/2015-12-08/nobody-s-home-australian-boom-leaves-swathe-of-empty-properties

http://www.news.com.au/finance/real-estate/shocking-number-of-melbourne-properties-left-vacant-despite-huge-housing-demand/news-story/4dc12b7033d1e43e91458b673fdabf79

http://www.domain.com.au/news/nearly-20-per-cent-of-melbournes-investorowned-homes-empty-20151209-glixgs/

http://www.businessspectator.com.au/news/2015/12/9/property/vacant-properties-soar-victoria

http://www.macrobusiness.com.au/2015/12/the-melbourne-ghost-city-revealed-2/

Also covered by “Friendly Jordies

https://www.youtube.com/watch?v=clC_vIlbtME

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.

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.”

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 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A more recent example is being alleged in New Zealand.

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

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

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

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

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

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

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

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

 

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

The Budget – The Consequence

rich paying the middle class..

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

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

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

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

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

“In the national interest.”

“The National Interest” what an outrageous statement.

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

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

Does this sound fair to you?

The country we want..

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

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

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

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

a fair go

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

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

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

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

Our relationship with land is truly unique.

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

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

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

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

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

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

(a subject I explored in part last week.)

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

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

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

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

land house gdp ratio

(Source)

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

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

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

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

He influenced the likes of;

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

He quite simply took the political world by storm.

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

“The Corruption of Economics”

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

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

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

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

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

That sounds fair doesn’t it?

‘All taxation is at the expense of Rent’

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

house tax

(Source)

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

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

Consequences

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

Is this fair?

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

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

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

Think about it.

Who benefits??

The progress of genuine innovation

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

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

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

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

Change

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

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

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

And it starts with ‘us.’

Catherine Cashmore

 

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

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

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

So ingrained is this message, that few question it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes – the Members of our Federal Government – the ‘issuers’ of our monetary supply, offset through taxing those who do have to ‘earn’ dollars before they can ‘spend’ it – whilst our Government ‘earns’ nothing – but is rather elected, and charged, to manage the budget in the best interests of its working population to promote economic growth – for which education, health, ‘back to work’ initiatives and so forth, are vital pillars.

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

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

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

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

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

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

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

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

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

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

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

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

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

Real Household Debt Per Person. ABS

household debt

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

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

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

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

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

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

Capitalism?

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

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

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

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

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

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

However, his other policy evaluations leave much to be desired

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

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

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

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

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

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

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

It’s called capitalism.

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

The Tale of One Auction – and its impact on the ‘Welfare State’

The Tale of One Auction – and its impact on the ‘Welfare State’

A few weeks ago, I attended an auction in a popular suburb of Melbourne’s inner east

The home was an attractive four-bedroom townhouse on roughly 260 square metres of land, and initially quoted at $700,000 ‘plus’ – very typical of the type of accommodation featured in the area.

As is commonly the case in Melbourne, the quote was ‘stepped up’ in the final week of the campaign to ‘$750,000 ‘plus’ – albeit, the listing agent informed me more than once he had $800,000 “covered” and a mere blink at recent comparable sales, indicated a price well in excess of $850,000, or even $900,000, considering the level of demand and lack of comparable listings being marketed.

This was confirmed during the auction, when a neighbour I’d casually interacted with, leaned over, and in little more than a whisper, told me “I know the vendor – she wants $1 Million” and considering the property didn’t reach its reserve until $900,000, I suspect she was correct.

With competition from nine bidders, the property sold in front of a crowd of 100 or so for $1,011,000, and the agent, delighted with the result, wasted no time swooping in on the ones who missed out, to share information of ‘similar’ listings currently for sale.

Needless to say, it’s a story that drives many Australian’s irate, with the focus inevitably aimed at the misleading way in which it was quoted – which is an issue I’ll explore further in another column. However, this isn’t what should drive our sense of injustice to kick into gear.

The Undeserving Poor..

Debate is currently rife in Australia surrounding the ‘relentless’ costs of our welfare system, with social services minister Kevin Andrews heralding it ‘unsustainable,’ whilst looking for ways the government can cut entitlements to the ‘undeserving’ poor.

The review has concentrated primarily on disability payments, and Newstart ‘job seekers’ allowance, which keeps the ‘income-less’ in relative poverty.

“Work is the best form of welfare!” was the statement Mr Andrews used, and considering the uptick in unemployment, with industries such as Ford, Alcoa, Qantas, SPC, Sensis, Telstra, Shell and Toyota, moving jobs and business off shore. A fall in the participation rate – due in part, to an asset rich, income poor retiring population – and a rise in part time and casual positions over that of full time, concerns are warranted.

In the 2013-14 Budget, the Government correctly stated that, “Australians value a fair society” and underlined its commitment to a tax system that provides a strong and stable funding stream for important public services such as “health, education and, Disability Care” whilst “rewarding innovation and productivity,” for economic growth.  And on an international scale, our tax-transfer system is perceived as ‘comparatively’ generous.

According to the OECD, Australia’s ‘Robin Hood’ economy redistributes more to the poorest 5% of the population than any other member country, whilst the much-criticised policies of ‘middle class welfare’ are seemingly the lowest.

We’re deemed to have the most “unique” and “target efficient” social security benefits in the OECD, apparently yielding “significant gains” to both the economy and society, and when compared to the USA which has the highest income inequality amongst the ‘rich’ nations by some significant degree, we look comparatively ‘healthy.’

Yet, despite its many reforms, and varying degrees of success, shaped in part by demographic changes (more women entering the labour force for example,) and a small reduction in high end salaries during the GFC – widening disparities between incomes have continued unabated since the mid 1990s, and as the labour market struggles, there’s nothing to suggest the trend will stop.

Mind the Gap..

There are all sorts of reasons to narrow the gap between the rich and poor, and prevent an ever-widening chasm – significantly, the way that income is invested into the economy and the roll over effect to society.

Income inequality and economic growth can only work hand in hand, when individuals are enabled to strive for greater heights from a foundation of equal opportunity – the basis of which is education.

As economist and inequality expert Andrew Leigh commented late last year;

“Education is the greatest force that we’ve developed, not only for boosting productivity, but also for making Australia more equal” ensuring “the circumstances in which you’re born don’t determine the circumstances in which you die.”

Yet our schooling system is becoming increasingly segregated. The correlation between poor performance and social disadvantage are stronger here than any other comparable western nation.  If our tax and transfer system were meant to offset this, you’d have to assess its been an abject failure.

Why?

Australia has enjoyed a period of economic prosperity, which over the last 23 years has been nothing short of remarkable.  According to Credit Suisse ‘Annual Global Wealth Report,’ we’re the “richest people in the world,” with a median wealth ‘each’ of US $219,500.

Over the past year alone, Australia added an estimated 21,000 millionaires to the population. Yet, contrary to what the textbook version of economic theory would have you believe – household savings, reaped from an economy surfing the wave of a commodity boom, have not flowed into business investment, or nurtured productivity and education standards in the young.

As noted in the Credit Suisse assessment, our ‘riches’ are “heavily skewed towards real assets” a manifestation of “high urban real estate prices” acquired and generated through the destructive cyclical impacts of a property market, which, as I emphasised last week, sees the gains from income growth and investment, flow directly back to the land.

Both homeowner and speculator..

Home ownership is seen as one of the great pillars of our collective culture.  It’s assessed to improve health and school performance in children, activate social engagement as well as reduce local crime.

However, the way we go about promoting ownership, is to nurture a system that teaches rising land values – outside of any productive activity such as renovation or effective utilisation of the resource – is due reward for having saved hard and got onto the ‘ladder’ in the first place.

Our tax system is skewed toward ownership, with policies, that according to last year’s Grattan report, provides potential benefits to homeowners worth $36 billion a year, or $6,100 on average per ‘household’ through items such as capital gains and pensioner eligibility test exemptions. Investors (or those choosing to rent and invest) reap $7 billion a year, or $4,500 on average ‘each,’ by way of negative gearing rules and the capital gains discount introduced in 1999. Whilst renters, one in four households, see no gain – unless their income is low enough to require welfare assistance.

In effect, we’re an economy that relies on ever-rising values of irreplaceable fixed assets, to fund the individual wealth of its nation – and this is only achievable if policies are in place to ensure values remain high and climbing, and debt levels ‘affordable.’

Capital growth..

Speculation and investment are two sides of the same coin. When we assess a good business model for example, we speculate that the productive activity that flows from that investment, will build on a growing base of demand, and through competition and diversity, go onto produce a profit.

Yet the ‘Capital Growth’ in land values does not occur by way of some abject force of nature. Everything that makes our cities ‘liveable’ comes from the collective ‘investment’ of our taxpayer dollars – which we ‘grudgingly’ pay in the first place, to provide the social amenities needed to form the base from which we can all progress.

This would include, community services such as, transport, parks, roads, trains, trams, medical facilities, and most importantly, schools.

Yet, it is also these facilities that produce the needed demand for real estate that pushes values upwards.  Not through the efforts of the individual homeowner, but the productive efforts of the taxpayer – renter, homeowner and investor alike.

Housing on its own is worth nothing without the infrastructure that surrounds it and rising land values are ‘reward’ for nothing other than unwontedly buying into a system that – under the current structure – promotes inequality and forces social polarisation.

Unlike our business model above, we can’t ‘make’ more land in a particular location to fulfil the demand produced from the facilities our tax system both funds and maintains.  Therefore effective utilisation of the resource is vital.

However, the speculative process alone, along with the added impact of a tax system that impedes turnover by way of stamp duty at one end, and capital gains at the other, simply feeds a process of hording.

This is because most advantage best from investment into housing through the process of “buy and hold” – leveraging the ‘equity’ to produce needed funds, rather than selling. A system that drives underutilisation and ‘land banking.’

But land is fixed in location; therefore we must always ‘hop’ over it to find the next predicted ‘hot spot’ to raise our families, until this too becomes out of reach through the process described above – like a cruel game of musical chairs.

Back to the beginning. 

Let’s go back to the case study I cited at the start of this article.  The reason the four-bedroom townhouse attracted such strong demand in the first place, is because it’s located in a top government school zone.

Only high-income earners can afford to live in this zone, and no doubt they feel – through their income tax contributions alone – they pay their fair share toward facilitating the opportunity for their children to obtain that higher education. As the OECD said, our tax and transfer system is high progressive – the “rich” pay more.  Or do they?

Allowing for stamp duty, the new owner who purchased the townhouse would have paid $1,066,605 yet despite two years of effectively ‘stagnant’ growth in 2011/2012, the median price in the suburb has escalated close to 60% from $850,000 in December 2009, to $1,355,000, therefore they probably assess it a ‘worthy’ investment.

As for those who arrived early in the process, to paraphrase what one homeowner relayed to me some time back – she has earned more from the ‘capital growth’ of her home over the past 10 years or so, than she has in earnings.

Outside of a ‘crash’ or the demise of the education facilities provided, there is nothing to suggest prices in this school zone will drop. From the tight zoning regulations alone, and rising population of immigrants and local buyers looking to advance their children’s education, the very ingredients to attract a consist source of buyer demand are set in place – and rents will rise accordingly.

The taxpayer continues to subsidise the school, whilst the gains are capitalised in rising land values, which flow directly to the individual homeowner not the school or community, keeping values high and placing further pressure on the public purse to fund additional services, whilst underfunded schools, in the over populated ‘fringe’ suburbs, start to produce an English style education ‘class divide.

Under such a system, we are not subsidising the ‘poor,’ we are ‘paying’ the wealthy.  Yet, it’s clear, if we’re to navigate the structural changes ahead and keep unemployment low, whilst at the same time, reduce the projected burden on the ‘welfare state,’ our economy is reliant on maintaining a highly skilled work force, and for this to occur, an elevated level of tertiary education and business investment is vital.

A better model of ‘Welfare..’

Notwithstanding, the correct way to fund local schools would be via broad based and effectively administered land value taxation, which in its purest form – as advocated by the Classical Economist, Henry George – would result in a single tax on the unimproved value of land to replace all other taxes, which hamper productivity – significantly income tax.

George’s ideas won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman as well as other influential figures including Winston Churchill, Adam Smith, and more recently, Chief economics commentator at the ‘Financial Times’ Martin Wolf, and author and economist Fred Harrison – aalthough, notwithstanding, a single tax would be unlikely to hold water in current political circles.

The Henry tax Review commissioned by the Government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases” proposing that stamp duty (which is an inconsistent and unequitable source of revenue) be replaced by a broad based land tax, levied on a per-square-metre and per land holding basis, rather than retaining present land tax arrangements.

Whilst arguments over school funding will likely continue, centred in the political battle over funding of the suggested Gonski reforms. Unless we narrow the gap in education, we’ll never narrow the broadening gap in income, and consequently, the growing burden on our welfare state.

Therefore – when times comes that the ‘chatter’ around affordability, finally evolves into ‘real’ action – a broad based LVT should form an important part of both the debate, and solution.

Catherine Cashmore

Regular journalist, blogger, advocate, policy thinker, and well know media commentator for all things property. www.catherinecashmore.com.au, @ccashmore_buyer.

 

Inequality and economic growth…

Inequality and economic growth…

To a limited extent inequality and the ‘rich/poor’ gap is tolerated within society because economists have historically seen it as a necessary platform to stimulate ‘economic progress’ or even activate a sense of competitiveness within individuals in order to elevate themselves up the social ladder

Certainly in the housing market this is evident.  Who hasn’t aspired to their ‘dream’ home – or visualized some improvement similar to that of their neighbours?

It’s what the success of programs such as ‘Grand Designs’ thrive upon – the emotional aspect of ‘wanting’ bigger and better – and a proportion of home owners will stretch their budget in order to achieve their desired property of choice, taking on a larger mortgage to do so.

However, whilst a degree of inequality may be tolerated as an inevitable consequence of the benefits offered in a capitalist society, a widening gap can become disabling to ‘progress,’ or even dangerous, if items of basic need are perceived to be increasingly out of reach.

In their 2012 ‘Global Risks’ annual report, the Word Economic Forum put it like this;

“…when ambitious and industrious young people start to feel that, no matter how hard they work, their prospects are constrained, then feelings of powerlessness, disconnectedness and disengagement can take root. The social unrest that occurred in 2011, from the United States to the Middle East, demonstrated how governments everywhere need to address the causes of discontent before it becomes a violent, destabilizing force.”

The comments build on other research undertaken by Andrew Berg and Jonathon Ostry, two senior staff in the IMF’s Research Department, who found that once a country had entered a period of economic growth, the more equal the distribution of wealth over the ensuing period, the longer it lasted. They conclude  “…sustainable economic reform is possible only when its benefits are widely shared.”

Inequality in Housing

The consequences of inequality in the housing market are painful and slow. The trend is increasingly evidenced over a lengthy period of years – not in the volatility of month-to-month first homebuyer statistics – always marginalizing those at the bottom of the income stream, whilst advantaging those at the top.

Effects include;

  • Social polarization,
  • A decrease in the number of low income buyers obtaining ownership,
  • A drop in the number of affordable rental dwellings with demand outstripping supply,
  • Greater requirements for public housing,
  • A rise in homeless percentages, and those who drift in and out of secure rental accommodation.
  • A rising percentage of long term tenants, and falling percentage of property owners, – across all demographics, – but particularly families with children.
  • Fewer Australians – across all demographics – owning their homes outright.
  • Evidence of severely crowded accommodation…. And so forth.

The list, which names only a few of the prevailing concerns, creates a growing body of evidence that we have more than an affordability issue in Australia, which focuses overwhelmingly on first home buyer figures.

We have a growing structural problem, which, if allowed to continue, with have a societal impact, chipping away at the future growth and stability of the property market, affecting the majority – not just a ‘few.’

Why?

The reason this has occurred is down to our property cycle – or perhaps better-termed a ‘land cycle’ – which has been further accentuated by poor housing policy – restrictive planning conditions and generous tax incentives, which are ultimately destructive.

Rising prices, and the expectation of such are initially seen as a ‘good’ thing, because they drive the economy, increasing consumption (the ‘wealth’ effect,) stimulating economic growth, infrastructure investment, construction activity and demand for ‘durables.’

This in turn flows through to wages – which advantage the workers at the top of the income stream, rather than the labourers at the bottom. (See Andrew Leigh’s, The Story of Inequality in Australia (2013,) which points out, since the mid-1970s, earnings after inflation for the bottom tenth of the population has grown 15%, in comparison to 59% for the top tenth.)

The gains are subsequently capitalised into rising land values, as investors, buoyed on by inflationary expectations, easier lending conditions, and ‘fear of missing out,’ lead a bull market of speculative activity (such as we’re seeing in Sydney) - until reality eventually steps in, and the trend inevitably turns.

In other areas of the economy that suffer from inflation, some form of substitution can typically occur, however land – and the infrastructure that gives it its value – is fixed in supply, an absolute necessity to all business and personal needs, therefore as land values rise, there is an inevitable strain on productivity, affecting job growth, private debt, small business, and unemployment (such as we’re seeing in Australia presently.)

Whilst monetary policy and the interest rate ‘lever’ are employed to moderate the damaging effects of a property cycle – at every step of the process, real estate has been used as collateral for further economic investment, a revenue generating machine for government, and ‘wealth’ fund for retirement, therefore whilst the aim is to prevent a ‘hard’ landing, the motivation is always bent on protecting existing values, rather than letting them fall.

Hence why demand side subsidies are favoured as a ‘band-aid’ to affordability, rather than cure.

The result

Without direct political intervention to rectify the damage, the greater and more destabilising the divide becomes, not only placing pressure on the welfare system, but evidenced ‘vocally,’ as rising numbers enter the housing market later, pay far more over the lifetime of their loan, and risk reaching retirement still servicing household debt – as is the case in Australia.

This was noted back in 2012 in a CPA study entitled ‘Household Savings and Retirement – where has all my super gone?’ And most recently by executive chairman of ‘Yellow Brick Road,’ Mark Bouris, who ‘concerned’ about lump sum superannuation payments being used to pay off mortgages, made a submission to Joe Hockey’s parliamentary financial inquiry, suggesting we can ‘solve’ the above impacts, with additional tax breaks to allow people to pay down their housing debt faster

Needless to say, it doesn’t take much of an economist to understand that subsidies – no matter attractive they may seem – are ultimately capitalised into prices, thereby raising the entry costs for first home ownership further, and increasing the pain for the next generation of aspiring buyers.

But then considering the line of business Mr Bouris represents, I suspect this is isn’t about ‘solving’ the crisis, so much as supporting it.

The self perpetuating cycle..

To some extent, it’s a self perpetuating cycle – after 30 years of mortgage repayments dedicated to paying off their principle place of residence, vendor’s obviously don’t want to see the price of their biggest asset drop.

Investors are similarly motivated, an AHURI study released in December 2013, identified the typical investor, as one who expects their property to ‘double every ten years’ as a strategy to finance retirement.

Incidentally, the same study also noted that three-quarters of the investors surveyed, do not see negative gearing as a reason to purchase – but merely as ‘an added bonus’ – thereby weighing against the myth of an ‘investor lead exodus’ should the policy be scrapped.

However a system that tries to both feed speculation, whist creating unaffordability through supply constraints, is ultimately set to fail, as low-income households are continually forced to the outskirts, whilst the higher income individuals get to purchase the front row seats.

Social polarisation…

This results in social polarisation, which is clearly visible on the Melbourne map below, taken from the REIV, which illustrates the median house price by suburb, relative to the metro median.

REIV social polarisation

The colours coded with the darkest blue indicate house prices more than double the metro median, and orange, house prices that are more than 25% below the metro median.  (The white spaces are areas for which there is insufficient data.)

This aligns very closely to a map constructed using data from the ABS, which ranks geographic areas in terms of their relative socio-economic advantage and disadvantage, highlighting diversities such as incomes, education levels, occupations, rent and mortgage payments, family structure and unemployment.

ABS socio-economic

Once again, the beetroot red and bright orange ‘fringe’ suburbs, sit well away from the affluent dark blue vicinities, which contain the top schools, medical facilities, shopping strips, high paying jobs, train and tram networks, childcare centres, social amenities, and so forth – all of which our tax payer dollars collectively fund – yet under the current structure, only the local home owners get to advantage.

This would include not just the various social benefits offered, but the additional on-flow of capital gains each property attracts from a squeeze of consistent market demand.

To emphasise, top performing government schools in Australia, do not reserve places for those showing merit, rather the families both willing and able to support the 20-50% premium, charged for accommodation in a desirable school’s catchment zone. ‘Fair go Australia.’

In case you need further convincing, you can chart how the trend has evolved using the image below, which is taken from a previous AUHRI investigation, showing how the percentage of affordable dwellings available for low to moderate-income purchasers, has changed in Melbourne, between the years of 1981 and 2006.

AUHRI

The darker areas are the ‘most’ affordable, whilst the white patches are the least.

What of the ‘price’ ripple effect?

Even heading 45km or so away from the CBD, low-income purchasers can only acquire affordable accommodation – in the range of $200,000 – $400,000 – if the lot size is much smaller than 600 square metres, which is still deemed ‘standard’ in many middle suburban regions of Melbourne.

Further more, any hope of ‘backyard cricket’ is unlikely, as the new developments are littered with homes that have a footprint, which extends to the boarders of each block.

The graph below highlights why this is so – it was put together by a colleague, Steven Armstrong – using valuer general statistics, and it charts the extraordinary rise in land values per square metre in Hume City – an outer metropolitan growth zone in north-western Melbourne – between the years 1983 to 2012.

Graph land prices

The remarkable escalation in prices had nothing to do with homeowners wanting the castle, when a modest suburban home would do. Rather the issues I outlined last week in regard to planning restrictions (false scarcity,) tax and infrastructure overlays, land speculation (the underlying cause of ‘all’ bubbles,) that are exasperated further by ineffective supply side policy.

It’s important to make this point, because whilst most people assume the ‘price/ripple’ effect works outwards – under the current system, the causation works both ways.

It’s the marginal price of land at the fringes of our capital cities, that sets the ‘base’ value for the better-located plots further in.

In other words – it’s not supply that ‘solves’ affordability for low-income purchasers, but the cost at which that supply can be delivered to the ‘homebuyer’ (not speculator) market.

Property Overvalued? A bubble? A concern??

In light of the information above, when I was recently asked to make comment on whether Australian real estate was overvalued or not, I sensed the intention was to take the traditional view, and instead of charting ‘why we’re here’ – assess whether job growth, population expansion, demand for credit, housing turnover, wage growth, interest rates, mid term supply and so forth, were supportive of a future sustained increase.

However, whilst the above data will give a mid term indication over whether current process are ‘serviceable’ at existing rates, or if market turnover can maintain pace, it gives little indication as to the long-term effects I’ve highlighted above, which in my mind, present a far greater destabilising force, as we bear witness to a slow generational shift, eating at the edges of home ownership in the months and years ahead.

I’ll leave the reader to come to their own predictions on market movements as we traverse through 2014. Albeit, in light of the Government’s response to previous housing ‘affordability’ enquiries, I think the above concerns will merely worsen rather than improve – and at some point, we’ll all feel the impact.

Catherine Cashmore

 

 

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

As the deadline for the senate enquiry into housing affordability approaches, some notable submissions have thus far been made

  • Saul Eslake, One of Australia’s most respected chief economists, and previous member of the now disbanded ‘National Housing Supply Council,’ has submitted the address he gave last year at the 122nd Annual Henry George Commemorative Dinner, in which he eloquently outlines Australia’s “50 Years of Housing Failure.”  Eslake advocates the need to remove policies that stimulate demand, such as negative gearing, in favour of those that increase supply. ‘Rethinking’ infrastructure financing and removing stamp duty, in favour of a broad based tax system on the unimproved value of land, as was recommended in the 2009 Ken Henry tax review.

Any detail Eslake misses on the supply side, is dutifully covered by Senator Bob Day.

  • Senator for South Australia, a registered builder and founder of major construction companies, such as ‘Homestead Homes and Home Australia,’ Bob Day’s submission, is his May 2013 policy paper – ‘Home Truths Revisited,’ – in which he shares an intricate understanding of the history and complexities of supply side policy, which have seen land prices increase more than ‘tenfold,’ in comparison to the cost of building, which has seen ‘virtually no increase at all.’   Importantly, for my industry colleagues who ‘blog’ that price rises were simply down the increase in demand stimulants, (such as dual income households.) Senator Day notes, “while influential bodies like the Productivity Commission and the Reserve Bank focused their attention on demand drivers, like capital gains tax treatment, negative gearing, interest rates, readily accessible finance, first home buyers’ grants and high immigration rates” … the real culprit, the real source of the problem, was the refusal of state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet the demand.”
  • Other notable submissions come from ‘Grace Mutual Limited,’  - a not-for-profit entity who “designs investment mechanisms to attract wholesale funding into the social sector” – in particular -“the National Rental Affordability Scheme.”  GML outline the ‘unduly complex’ regulations that have disadvantaged investors, noting; “Large numbers of NRAS incentives (at least 4,000) were awarded for the construction of student housing,” yet “There appears little evidence that this has any positive impact on the middle to low-income families that were the target of the original policy.”
  • And the last two submissions to date (2/2/2014) come from “Home Loan Experts,” who want an abolishment of negative gearing, but predictably think that the first homebuyer grant should stay.  And an anonymous letter, with an overview of the points made by both Saul Eslake and Bob Day, noting as I did back in December 2013 that nothing has been done since the last Senate enquiry.

Rinse and Repeat

To emphasise – The 2008 Senate report, entitled “A good house is hard to find: Housing affordability in Australia”

  • Made the same points regarding Australia’s tax policies, such as capital gains tax and negative gearing, which impact affordability and market activity.
  • It made the same points regarding each states planning laws, overviewing the construction industry’s future skilled labour workforce, the impact of urban boundaries on land prices, and the funding of community infrastructure.
  • It made the same points regarding the need for a diverse range of accommodation suited to both young and old alike, advocating greater competition within the building industry.
  • It made the same points in relation to both the both the public and private sector, addressing tenancy laws, and renters rights.

It was both comprehensive and detailed in content, and yet – 5 years later – at every level – both state and federal government have failed.

Failed to provide a ready surplus of ‘cheap land.’

Failed to overhaul infrastructure funding.

Failed to boost a sluggish construction sector in relation to population growth.

Failed to reign in speculation.

Failed to overhaul a system that results in too few rental properties for low-income households. And;

Failed to reduce the need for social housing or raise standards in the public sector.

Instead – we’re left with a new record median house price, which sits close to $600,000 ($597,556 APM.) – Following the highest quarterly rise for 4 years – built on the back of a diminishing first home buyer sector, which is instead supported by a record number investors, benefitting from a pace of growth in Sydney, which all agree, is ‘unsustainable.’

As far as affordability is concerned, we’re simply sitting on a merry-go-round of repeated mistakes.

Housing affordability a Mystery – too complex?

This is not due to any lack of understanding on the Government’s part. There is no secret or mystery to housing affordability. The solutions are well understood.

  • They were discussed at length in the previous senate enquiry.
  • AHURI has repeatedly tacked both supply and tax  policy.
  • And this senate enquiry will do the same.

The recommendations fall in line with other countries and states that have successfully achieved a consistent correlation between gross median house price and income – and so to some degree of detail or other, share the following two points in common;

1) They have taxation system that discourages speculation, but encourages productivity. The most successful of which is well-administrated broad based land value taxation system, such as that adopted in various cities in the USA – like Pennsylvania for example – where the tax on the unimproved value of land is heavier than that of property –a process of which I explain in full here - or as in Texas, where property is taxed, yet income isn’t, reducing the level of speculative demand.

And;

2) They have created an environment in which liberal supply side policies ensure ‘fringe’ land is sold close to its agricultural value, ensuring zoning laws do not impede development, and there remains strong competition within in the construction sector.

Why we have failed.

Yet, the reason countries like Australia, the UK, certain states in the USA, for example, fail to successfully move away from the boom/bust cycle, which leaves us counting the minutes on the ‘property clock,’ until a major correction is experienced, – which ultimately offers little help to struggling home buyers, small business, or low income earners, due to consequential restrictions in lending.

Was summed up neatly in a 2007 parliamentary report entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary - in which it confidently stated;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

It’s a comment that sits right up there along with ‘saving doesn’t mean spending less’ or ‘dieting doesn’t mean reducing calories.’

If only it were so…!

To create a sustainable and affordable housing market, in line with the majority of recommendations put forward in the senate enquiry, would inevitably have a dampening effect on existing house and land values, in particular sites which are banked for ‘idle’ speculation.

Fear over falling prices justified?

The fear is understandable when you consider residential real estate is Australia’s largest domestic asset class, with an estimated aggregate value of over $4 trillion, pinned to a banking sector which has the highest exposure to residential mortgages in the world, in a country in which most Australian’s are home owners.

However, please don’t fall into the trap – once again as many of my industry colleagues do – of thinking just because a large number of homeowners in Australia own their own properties debt free, it prevents a potential ‘crash’ in prices – because the level of commentary on this matter is really very low.

A huge portion of private debt for the appropriation of business and commerce is secured against residential real estate.

A lack of active buyers in the market – (which produces an atmosphere in which price falls are inevitable) – stagnates turnover, prevents those who need to ‘fund’ their retirement through an equity release from doing so. Prevents those that need to move state to find employment else where, from doing so. It locks people into their homes – unable to downsize or upsize – and the effects are felt across all demographics.

Businesses which run into financial trouble are unable to reach into their house ‘ATM” and secure additional funding, and as a result, industries close, lay offs are invoked, investment ceases – the list goes on.

Importantly, it does not prevent a major economic crisis.

It did not prevent it in Ireland, America, or other countries in Europe, which also had a large proportion of owners, who owned outright.

We are not immune from a major downturn – no market, which exhibits land cycles is – and be assured, when it does happen, it won’t matter whether the banking system is ‘wiped out’ or not (as suggested as another reason we cant ‘crash’) – the Government will rush to their assistance – leaving ordinary people to suffer their debt consequences alone. As has been demonstrated repeatedly on an international scale.

Rising house prices or a stable market?

An economy that relies on high and rising house prices is one that’s ultimately set to fail.  It’s a symptom of poor housing policy and can only supported over the longer term, by making debt ‘ever more affordable.’

Therefore the best protection from such, is political reform, which ensures stability across gross price to income ratios – and if managed proficiently in line with the two points outlined above;

  • It would assist productivity,
  • Boost the construction sector,
  • Aid infrastructure financing,
  • Keep prices accessible for new homeowners and business – which need to buy or rent land to compete with established players.
  • Ensure tenants are not subject to ever increasing yields.
  • Weather the unwanted impact of real estate ‘booms and busts.’
  • Protect vendors from plummeting property values during an economic crisis – (whenever that point in Australia’s future is) – and;
  • Reduce inequality between the asset rich and income poor.

Land speculators would not advantage from it – but ordinary taxpayers would love it.

What the Senate & Government must agree to allow, prior to commencing its enquiry.

Thankfully, we don’t need to have an initial debate with the senate, over whether the market is or isn’t affordable – as has been the case with various commentators across the mainstream media.

Instead, we need collaborative assurance from the government, that any outcome from yet another Senate enquiry, will allow land prices to reduce – the process of which would have an gradual roll-on effect across the established real estate sector

Once - and only once, we have an affirmative answer to that question – can we begin the debate over how this can be achieved – and once we do, it must ensure the following.

1)   That fringe land is immediately available for residential development, overriding existing urban boundaries and zoning requirements that render it otherwise, and ensure it remains close to its agricultural value.

2)   Increase competition within the construction sector, simplifying the planning process, and eliminating ‘upfront’ infrastructure costs.  Additionally, a review of the many ‘hidden taxes’ such as development overlays, application fees, stamp duties and so forth, that are charged through the planning and development process, must be reduced to ensure they are ‘fair and transparent’ as advocated by the HIA.

3)   The removal/phasing out of policies such as the first homebuyer grant and tax incentives, that reward speculation into the established sector, and rely on housing inflation to stimulate demand.

4)   Reopen the discussion to abolish stamp duty; moving instead toward a broad based land value taxation system. Following practices across the world where it has been deployed with success, and noting that the ACT is adopting such measures, over a slow transitional 20 year period. And;

5)   Ensure we build for homebuyers, not just investors – paying particular attention to the needs of an ageing population, for which downsizing into apartments is not the preferred, or readily adopted option.

The above recommendations would assist the rental sector, but additionally, the Government should work closely with organisations such as Shelter and the Tenants Union, to satisfy that the quality, provision and standard, of both rental and public housing, is improved and maintained, along with an overhaul of tenancy laws for long-term tenants.

Conclusion.

The details on how to achieve this will be overviewed in another column, however, if both state and federal government refuse to let land prices drop, acting reactively to affordability issues, rather than proactively. I suggest you use whatever vote you have wisely – ignoring both major parties – and instead, place it behind smaller players, who act in the best interests of community, and not their ‘back pockets.’

Catherine Cashmore

Australia Day traditionally flags the end of the real estate ‘vacation’ period – but what of the road ahead…. ?

Australia Day traditionally flags the end of the real estate ‘vacation’ period – but what of the road ahead…. ?

Australia Day traditionally flags the end of the real estate ‘vacation’ period with the long weekend being the last chance most agents have to take a breather before the auctions begin, and weekly clearance rates once again come under intense scrutiny.

Predictions for the remainder of the year are generally undivided. Most conclude the upward trajectory to continue – with particular focus on some of our largest capital cities, Sydney, Melbourne and Perth (with the first and last already past their previous peaks in non-inflationary terms.)

Whilst the pace of growth will differ for each capital with a correction expected in 2015, it’s a conclusion I generally agree with – despite the talk of a sooner than expected rise in rates.

The momentum that has built up throughout 2013 has come primarily from investors, driven in large by local speculation.

In Sydney, where city supply has been hampered by stringent planning requirements, allowing larger developers with a greater financial capacity to hold the upper hand, – the shortage of stock to cater to the needs of a market share of over 50% investors, has resulted in a spike in prices which has diverged considerably from other states, and continues to drive the herd mentality.

Louis Christopher, managing director of ‘SQM Research,’ suggests Sydney will have its strongest start to the year in more than 15 years, and even assuming the prediction is too bullish, it’s unlikely to be far from the mark.

The extra boom of apartment supply will assist in cooling demand and boosting the number of rental dwellings, but it will take more than one interest rate hike before we see the evidence translate into lower median values, hence why the run will last the duration.

Whether you celebrate or commiserate news of a continued increase in house prices will obviously depend on circumstance, – with investors benefitting most. However, the higher entry cost will continue to impede first time buyers and low-income earners, and with no immediate solution by way of a structural reform to housing policy, the debate won’t move far from headlines.

I made clear in my column last week, why we have an affordability problem and how that translates across the different demographics, and see little advantage detailing the evidence once again, which to any reasonable mind should be overwhelmingly obvious.

In our most populous capital cities, house prices have gone from three times median income to nine times, and the impact on low-income families – in particular those renting, or teetering on the edge of ownership due to divorce or job loss – is particularly disturbing. In Melbourne alone, from 1991 to 2011, metropolitan housing CPI rose by 50%, compared to 188% for rents across the LGA.

The swell of concern coming from the ground up is the best chance we have to push significant reform forward, and therefore it’s encouraging to see results from a recent Ipos poll, conclude that most Australian’s disagree that rising prices are a ‘good thing.’

Notwithstanding, a huge portion of private debt for the appropriation of business and commerce is secured against residential real estate. It’s Australia’s largest domestic asset class with an estimated aggregated value of over $4 trillion, pinned to a banking sector, which has the highest exposure to residential mortgages in the world.

From homeowners counting on their principle place of residence to fund retirement, to Governments chasing the popular vote. The sensitivity to maintain high prices is evident not only in the NIMBY style practices that protest at all attempts to either increase density, or assist development, but also in the inability politician’s have to move ahead with structural reform to housing policy.

Consequently, Governments tend to treat affordability issues reactively rather than proactively. Words always mean more than the actions, demand side policies are favoured, and when supply is released, it’s done in such a way that it feeds a monopolist culture – designed to maximise profit over the delivery of land at ‘affordable’ prices.

To illustrate the point – economics ‘101’ suggests the most effective way to reduce prices is to simply increas supply, and in Melbourne, planning minister Matthew Guy was joyful last week, in announcing the city has “decades worth of land” more than “400,000 potential house lots in growth areas” of which 5 new precinct structure plans have been approved for development (amounting to 19,000 ‘potential’ bocks,) and a “potential” 180,000 apartment blocks (more than enough keep all our off-shore investors happy.) Clearly – we’ve got supply in spades!

Furthermore, broadly speaking, population growth in the outer suburbs of Greater Melbourne – predominantly in the newer greenfield developments to the west, north and south-east – continues to be faster, and larger, than anywhere else in the greater Melbourne districts – so demand in theory, should not be lacking.

But what Mr Guy fails to mention, is, in a five-year period from 2006 to 2010, the median land price in outer growth area suburbs jumped from $136,000 to $212,750, a difference of $76,750, according to Oliver Hume Real Estate Group, and with the typical starting price for a house and land package on a compact 450sqm block of land, now transacting for a little over $400,000 – where is this cheap supply?

Of course, it all comes down to the development process. As soon as the urban boundary was implemented speculation began; existing landowners were able demand a premium for land now potentially available for residential purposes. Of those who decided to cash in, hectares were duly auctioned off to the highest bidder – resulting in a massive inflationary boom in values,

Precinct structure plans must be finalised before construction can commence – a process of which takes 2 to 3 years.

Funds for the provision of infrastructure – arterial roads, kindergartens, child health centres and so forth, are passed onto the buyer (initially the developer, who simply factors it into the final cost.)

However, there is no timetable for the construction of this infrastructure. Councils can wait years for the funds to arrive because they are usually only payable upon subdivision, and notably land within PSPs can be held by landowners, who have little incentive to bring it to market unless it’s financially beneficial to do so. The result is homeowners pay for infrastructure, which they may never receive.

Any areas of land a developer unwittingly acquires which is subject to ‘biodiversity conservation’ must be set aside. Ten precent of their land must be donated for ‘community open space.’ Add to this GST, along with sales and marketing, costs – and you begin to get the idea of why supply does not immediately equate to lower prices.

Developers with a desire to maximise profits, time their releases carefully. A process over which the government has no control – in other words, the state has auctioned away any chance of a plentiful supply of cheap fringe dwellings – and in light of the evidence, Mr Guy is unable to claim otherwise.

Meanwhile, whilst inner city development may assist renters, to what extent is debatable. Of the new supply constructed, most is high-density, and there is strong anecdotal evidence from agents that off shore Asian buyers are driving the apartment pre-sale market, with rumors of random Melbourne auctions conducted in Mandarin.

Investors seem undeterred by the higher vacancy rates in Melbourne, which have hovered around 3% for the past 12 months – and we can see from work undertaken by Philip Soos at ‘Prosper Australia’ last year, that a percentage of newer units are allowed to sit vacant for much of the year – unclear whether they are being used for speculation, or as temporary vacation homes.

Building approvals data for apartments do not indicate commencement – the process of approval, to release (off plan pre-sales,) and finally completion, takes a number of years.

Charter Keck Cramer track each project from start to finish – and using the data as a forecasting tool, estimated back in July 2013 that 39,155 apartments will be added to the stock in Melbourne during the three year period of 2013 to 2015 (not including those for which subsequent planning approval has been granted.)

To maximise yield and meet financial requirements, most apartments are small one and two bedroom dwellings (no more than 70sqm in size.) Unsurprisingly, they offer little attraction to the vast majority of local homebuyers – being far more apt to meet the needs of student renters.

All in all, it’s an appalling state of affairs.

Conclusion.

Australia is now entering its 23rd year of continuous GDP growth – the history of which is outlined briefly in HSBC’s recently released global research paper “still in second gear.” And in light of the above, it should come as no surprise that, land is always the eventual beneficiary from the wealth of a burgeoning economy.

As productivity increases, jobs are created, the population grows, infrastructure is built, areas gentrify, land values increase, and owners benefit. The uplift in values finances additional development and so the speculative process continues.

From the trough of 1996 to the peak in 2010 land values have roughly doubled as a percentage of GDP – and the policies we have in place simply fuel the cycle.

There is no secret to why this should occur – in countries that have promoted home ownership both a means of ‘saving’ for retirement and valuable asset to leverage against to accumulate additional assets, along with tax strategies, and inelastic supply side policies that have encouraged speculation in rising land values (with both the monopoly and restriction of the resource stagnating effective and affordable supply) – the eventual consequence is always the same.

Until any sharp ‘correction’ is experienced (and eventually it will be,) the advantage lay with those who hold the appreciating assets above those who don’t – particularly if acquisition was early on in the cycle, as suburbs initially gentrified.

However, whilst gains over the period wax and wane spurred on by low rates or intermittent grants, the party can only continue whilst there is consistent demand at the entry level – hence why so much attention is focused on mortgage ‘serviceability’ rates, rather than the overall level of ‘affordability’ by way of calculating the gross amount borrowed.

It is possible to create a stable housing market that doesn’t subsist on ever rising prices, however, it can only be achieved by significant tax reform moving toward a broad based land tax, as was advocated in the Henry Tax Review – coupled with structural changes to the way we manage supply.

Without such reform, the social cost to our country and welfare system as a whole, will only worsen.

Catherine Cashmore

The debate over whether housing is, or isn’t ‘affordable continues…

I’m know I’m not alone in feeling an immense amount of frustration at the circular debate amongst commentators in the mainstream media, that surrounds our first homebuyer demographic, and the question of ‘affordability.’

Last week, the November 2013 housing finance data was released showing continued strong demand in the mortgage market, with owner-occupier commitments 15.3% higher than they were a year ago – their highest level since December 2009.

Unsurprisingly, demand from investors continues to increase, rising 1.5% in November, and up by 35% over the course of the year – the highest level on record – whilst on the other hand, first homebuyers remain at record lows, with a recorded market share of just 12.3%.

Whichever side of the coin you sit, “first homebuyers” like “housing bubbles” make a good headline, and therefore, instead of productive advocacy into improving the housing market so it’s equitable for all – we’re left once again battling a ‘Looney Tunes’ debate over whether housing is, or isn’t ‘affordable.’

Denalists

For those in denial all sorts of excuses are found – the most common of which is the accusation that first home buyers are just ‘spoilt and picky’ – or as was sent to me in email last week by a fellow contributor on “property Observer” – “you just have to save hard and start with a flat – isn’t that how it’s always been?

Well to some extent ‘yes’ – when there’s a budget, compromises need to be made. But how it’s always been? “No.” It’s not how it’s always been.

  • Whilst in the late 1990’s a typical first homebuyer’s budget would have secured a modest family home, in a reasonably facilitated suburb, for 3 times median income. Today you’d be hard pushed to find accommodation on the fringes of our capital cities for a similar expense.
  • Thirty years ago the land component of a house and land package represented 20% of the total cost – today it is more like 60%.
  • Forty years ago, housing policy ensured land was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure. Today land prices have soared; unduly inflated by constrictive urban zoning policy, with infrastructure prices, loaded onto the upfront cost.

Furthermore, a CIE study commissioned by the HIA, demonstrated how imposed taxes on developments, when added together, come to 39% of the marketed house and land price.

By the time you add “necessary” ‘energy and safety standards,’ coupled with the cost of labour on top of already inflated land values, developers find it increasingly difficult to provide ‘affordable’ accommodation whilst still making a profit.

Glenn Stephens, Governor of the RBA, summed it up best in 2011, when, he addressed a Parliamentary Committee and exclaimed how he could “not understand why a country as big as Australia seemingly had a shortage of land” and could therefore not provide ‘cheap’ housing.

Notwithstanding, ‘we don’t’ have a shortage of land – we have poor housing policy driven by vested interests to keep inner city land prices high.  I cannot find any other reasonable explanation.

Asking first home buyers to purchase into a market where, capital city house prices have been artificially inflated, from three times median income to nine times, should not leave us scratching our heads wondering why they don’t feel ‘OK” about it. It’s perfectly understandable.

Who is a first homebuyer?

According to the ABS, the average age of a first homebuyer is between “31-33 years,” and due to high entry costs, “partnering often precedes home purchase” (the majority of which already have children.)

Therefore unsurprisingly, only a relatively small proportion (19%) make up single households, and outside of those who pit themselves against stronger financial arm of the investment sector, to purchase an apartment, the options we’re currently providing our first homebuyers, fall dismally short of where that main demand centres – demand which often calls for more than tiny apartment which will last no longer than a year or so before an upgrade is necessary.

The data must be wrong…numbers can’t be this low?

Others challenge the data, with various claims that first home buyer numbers are only ‘significantly’ reduced, because a percentage are ‘slipping through the net,’ perhaps entering ownership as ‘investors’ or – due to dated brokering software – not being entered as first timers, unless applying for a state based grant or incentive.

On the latter point, I did speak to the ABS department of financial statistics directly about the notion that ‘significant’ numbers are missing, and further investigation is underway which I’ll follow up at a later date.

Albeit, currently they deny the implication, claiming it doesn’t accord with APRA’s instructions to lenders when collecting statistics – which stresses that a first home buyer, must be one in which ‘none of the borrowing parties has previously borrowed housing finance for owner occupation’ – making no distinction between an investor, or one who does, or does not, apply for the grant.

Therefore, outside of colloquial evidence, the above ABS statistics are the most accurate ‘current’ indicator we have of a downward trend in first homebuyer numbers – and for most ‘reasonable’ minds it should come as no surprise, considering we’re in an environment where the entry cost to obtain ownership is further impeded by rising prices, transaction taxes, and an uptick in unemployment raising concerns over job security.

Housing is ‘affordable’ because mortgage rates say so…

As Michael Janda pointed out in his excellent report last week – housing affordability should not be confused with mortgage serviceability.  

Mortgage rates are set up with different structures, dependant on circumstance, and subject to interest rate changes influenced by the macro environment.

  • They do not take into account the up front cost of a home and expenses incurred from associated utility costs.
  • They do not question rising rental prices, falling vacancy rates, wage growth, unemployment figures, or changes in household demographics and structure.
  • They make no distinction between the cost of building a home and the underlying value of land, or analyse constraints in supply, or make mention of the limited options available for low or single income households and families.

To assume on interest rates alone that housing is ‘affordable’ is lazy reporting and generally only applicable to existing owners

Those who fail to make the above distinction commonly come from the standpoint of vested interest – or entered ownership at the beginning of the lending boom (in the early 2000s or before,) and have benefitted considerably from a rapid period of inflation – which unsurprisingly enough, includes most of our politicians.

Housing is affordable because data from other countries says so…

Neither is it complementary to compare ourselves to international terrains which – having been through somewhat harder lessons than our own – are also battling to induce first home buyers out from underneath their ‘rental’ blankets.

Yet this is what Stephen Koukoulas attempted to do last week in Business Spectator when he ‘favourably’ compared Australia to Norway, Canada, Sweden and New Zealand.

All of these markets have suffered from large increases in levels of private debt whilst at the same time limits were placed on supply.

In Norway, Sweden and New Zealand, central banks have recently employed capital constraints in an effort to moderate demand, and Canada, with a household debt to income ratio of 163.7%, is being watched closely, as investors and economists start to voice alarm.

Letting house prices escalate, funded by a colossal amount of private mortgage debt, can be a dangerous game.

As I pointed out last week – in the USA prior to the sub-prime crisis, the median income in California was not enough to afford the average Californian home, or even a starter home.  Once the financial crisis hit, rapidly falling prices quickly eroded any equity homebuyers had achieved.

Whilst on the other hand, states such as Texas, where house prices did not deviate from three times median income, values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

….The renters that Terry Ryder rudely labelled ‘generation whine’

Renters, on the other hand, have not benefited directly from low interest rates. Roughly 33% of Australia’s housing market is made up of tenants and since, 2006, rises in the median cost of rental accommodation has outpaced both wage growth and inflation.

In Sydney, where supply is particularly constrained, APM recorded a 5.4% yearly increase to the median rental price, and according to a new report compiled by the Northern Territory Council of Social Service (NTCOSS,) the average cost of rental housing in Darwin has risen by 7.9%.

Before we get into a further debate over whether or not rents are ‘affordable,’ it’s worth turning to a previous report from the now disbanded ‘National Housing Supply Council’ to highlight the real impact demand side policies like negative gearing have, when coupled with a gradual erosion of supply.

Reports highlight that the increase of rental accommodation in the private sector has not outweighed the decline in social housing – and from the stock added, most have rents outside of the affordable threshold for lower income households.

To assess this, the NHSC broke income groups into deciles, and demonstrated of the ‘affordable’ private accommodation available,’ supply is quickly soaked up, leaving 60% of low income groups, paying more than 30% of their income on rent, and 25% paying more than 50% of their income on rent

In Conclusion

Gains from high land prices, do not trickle down they flow up. This is what the ‘National Housing Supply Council’ was trying to emphasise in their reports, and what I went to great pains to point out last week in trying to answer the questions over what exactly a ‘housing shortage’ means.

Our market is not just about buyers, it’s about renters too – and our Governments are elected to ensure that the price of land is not unduly inflated by either the monopoly of this resource, or undue restrictions placed on its development.

Worrying still – the arguments over affordability encourage us to lose sight of the real issue – which is not localised to the first homebuyer sector, but the general crowding out of low income residents across all demographics – some of which drift in and out of ownership

Reform is never easy, but there is a way to break the cycle and ensure land is fully utilized for the purpose intended, without prices blowing out to levels that can only be sustained through keeping interest rates low, or household debt high.

One way is through freeing the barriers hampering the type and supply of accommodation offered, and the other is through imposing a broad based tax on the underlying value land – of which I went into more detail here.

The focus of attack should be not those individuals who have advantaged from the system, but on the law that allows the system to operate – and in response, the commentary should not focus on defending what is plainly obvious, but advocating the policies we need to fix it, and ensure our house and land market is equitable for all.

Catherine Cashmore