MELBOURNE:- The federal budget initiative to omit conveyancing Stamp Duty for retirees down-sizing to a smaller home acknowledges just how destructive and behavior-distorting this vile tax is, says Prosper Australia.
“This is a disgusting, economically dishonest policy,” David Collyer Campaign Manager Prosper Australia said today. “Again, the baby boomer generation is being treated as a special class above everyone else by a government seeking their vote.
“Stamp Duty is a big nasty tax stick that traps people in their houses or excludes them from home ownership. It is a cruel barrier to labor mobility and a financial disaster when people have to give up their homes due to unemployment, sickness or family breakdown.”
“Stamp Duties inevitably lead to an inefficient use of our housing stock. Empty nesters occupy large homes with multiple spare bedrooms and young families are trapped in small apartments.
“If government truly wants to use housing more efficiently, it should abolish Stamp Duty altogether and fund this by abolishing the principal place of residence exemption from State Land Tax. Instead, it merely benefits one segment of society (retirees) at the expense of another (young growing families).
The change to this equitable and economically efficient tax base is easier than many observers imagine. Landowners could be credited with any Stamp Duty they have paid, offset by the hypothetical land tax they would have paid from date of purchase. Asset rich, cash poor retirees could accumulate their land tax liability, with the bill payable on death or when the house is sold, via a HECS-type scheme.
“Replacing Stamp Duty with a broad-based land tax would transform the provision of housing. People would be free to move to homes that best meet their needs.
“It would discourage land banking and land vagrancy, and prompt owners to put assets to their best and highest use. This would profoundly alter the supply of land, to the great benefit of all.
“Infrastructure would become self-funding as some of the uplift in land values from new roads and schools would return to government.
“Australia’s land price bubble has excluded an entire generation of young adults from home ownership, except on the most onerous terms. The put-upon must demand both a land price re-set AND tax reform.”
Media comment: David Collyer 0413 248 193
About Prosper: Prosper Australia is a tax reform lobby group and think tank that is now 120 years old. It seeks to move the base of government revenues from taxing individuals and enterprise to capturing the economic rents of the natural endowment, notably through land tax and mining tax.
MELBOURNE:- Yesterday’s federal budget highlights again Australia’s unbalanced reliance on wage and salary taxation for government revenues, says Prosper Australia.
“Taxation discourages. That is why we tax gambling, alcohol and tobacco. Unfortunately, it has the same effect on work. We tax it so heavily it must also be a very bad economic element,” David Collyer Campaign Manager Prosper Australia said today.
“Discouragement begins at the effective rate of at least 20.5 per cent of further income as soon as individuals earn $20,542 a year (disregarding the major welfare traps in the withdrawal of income-tested benefits).
The Australian Government will take $175.4 billion from individual’s income taxation in its $387.7 billion, a very heavy 45 per cent of total revenue.
“Wage taxation remains a government vice. Somehow, individual taxpayers have been convinced government is more deserving of the fruits of their labor than they are.
“There are much better tax bases available to government that do not weigh on workers or upon business, and all sides of politics know it.
Australia’s Future Tax System recommended sweeping changes to what we tax and who pays it. It names Land Value Tax and a Resource Super Profits Tax as ideal tax bases that do not impact economic activity, merely capture some of the naturally-occurring economic rents.
The failure to embrace the urgent reforms Dr Ken Henry outlined deters us from realising our potential. Somehow, our political leaders prefer we underperform.
Media comment: David Collyer 0413 248 193
About Prosper: Prosper Australia is a tax reform lobby group and think tank that is now 120 years old. It seeks to move the base of government revenues from taxing individuals and enterprise to capturing the economic rents of the natural endowment, notably through Land Value Tax and Mining Tax.
Land prices are falling across Australia. Yet the politico-housing complex strains at every sinew to hide this from first home buyers and jolly them into making a life-long commitment at the very worst time in eighty years.
Problem is, the buyers know. They are very, very aware land prices are ridiculous and we are in for a crash. Low interest rates, cruel government incentives and builder discounts don’t matter one bit when prices are falling.
Committing for thirty years to an outer urban slum-in-the-making with no transport, no community facilities and surrounded by cow paddocks is not the only option available to first home buyers.
First home buyers can rent and save. The gap between the cost of renting and the mortgage repayments needed to buy an equivalent property is enormous.
They can migrate and buy in countries where prices have already corrected. They can build personal wealth in the share market. Eventually, they will be able to buy a home at a fraction of today’s cost and save again.
And that’s the rub – the excluded are not going to buy until prices reset. Those that jump in now are being laughed at behind their backs. Eyes are rolling.
The graph of house prices by Philip Soos from Stapledon and ABS data – adjusted for the effects of inflation and quality – shows Australian prices were aiming for the stars.
Not everyone has been trained to read charts, so let me explain what this means with a metaphor. Imagine a flying airplane on full power. It turns up. Up harder. Up harder, until its flight is almost vertical. Eventually it will run out of air for the propellers to thrust. It must then fall like a brick – tail first. A skilled pilot can turn the plane to one side into a dive and re-engage with the air. But he will lose a lot of altitude (price).
Bubble markets are the same. Price change becomes exponential, but eventually speculators cannot afford more debt or banks discover caution or the sheer folly of the times becomes obvious.
The Economist has a useful typical profile of what bubbles look like (below).
Prices don’t simply go up then down. The phases of market emotion are easily identified.
Does Australia’s price path match this universal bubble graph? Oh, yes! Beautifully.
The land market is the slowest moving of all tradable goods. Only around four per cent is sold in any year. The abrupt ‘Blow Off’ above is imminent and will take around four to five years to complete.
There are a lot of losers in a land price correction all the way up the food chain: builders, developers, estate agents, banks, government, second home buyers and investors. Falling land prices drive the heavily indebted into negative equity. Sales volumes collapse – no one wants to catch a falling knife. Everyone saves like mad. Demand plummets. A debt-deflation recession (the very worst kind) begins.
So very many people face personal financial destruction because of their speculative debts it is impossible to say the unmentionable out loud – it would seem like shouting ‘Fire!’ in a crowded cinema. Even though the price reset will destroy the finances of many. Even though an early retreat would minimise the harm. Australia’s big secret is, everyone KNOWS.
The Victorian government is becoming addicted to property taxes, which will raise over $6 billion in forward estimates for the 2013-14 Victorian State Budget.” [My emphasis]
The phrase “becoming addicted to property taxes” is hardly a sober assessment. Whose barrow is being feverishly pushed here?
The API has apparently got to the stage where the organisation, founded by statutory valuers in 1910 mind you, now joins the ranks of urgers and touts – like the Real Estate Institute of Victoria – in agitating against land-based revenues.
If the author was agitating against that vile instrument conveyancing Stamp Duty, I would instantly add my support.
But bundled with Stamp Duty in ‘property taxes’ is one of the most economically efficient and least distorting of all the revenue tools available to government: State Land Tax.
Of course, I was impelled to reply as follows:
“THE Victorian government is becoming addicted to property taxes, which will raise over $6 billion in forward estimates for the 2013-14 Victorian State Budget.”
An institute purportedly representing valuers— it was after all founded in 1910 by Commonwealth Taxation Office valuers — should know the case for reforming and extending the current State Land Tax was made by Dr Ken Henry in Australia’s Future Tax System. The words “becoming addicted” above disgraces the person who wrote them and diminishes the professional standing of the API.
This is the professional institute of which I was once proud to be a member. Previously known as the Australian Institute of Valuers, it is rapidly becoming indistinguishable from just another branch of the property lobby.
MELBOURNE: – Victoria’s new Treasurer Michael O’Brien taunts first home buyers with a cruel hoax today, announcing grants for new build and targeted stamp duty concessions. He confirmed their role as a patsy for every property-based parasite in Australia.
“First home buyers are being bribed with their own money,” David Collyer Campaign Manager Prosper Australia said today.
“These grants and the extra borrowing power they create were capitalized into land prices by sundown. It is already too late for home-buyers to take advantage of this offer.
“Estate agents and property developers are now toasting Michael O’Brien in champagne.
“Not one cent of this gift will end up with builders or the modest citizens who simply want a home of their own.
The economic fallacy of first home grants is clearly explained by Prof. Steve Keen at:http://tinyurl.com/br7t8o5
“If this has the intended effect of inflating real prices, then it will set a new, higher peak from which an even bigger crash will occur. Our towering private debt burden will likewise increase.
“Inexpensive land should be an explicit civic objective, not the maintenance of high prices by rationing and government intervention.
If the Napthine government genuinely wanted to help young adults become full citizens in this property-owning democracy, it would lower the price of land, not act to drive prices higher. The Napthine government should:
• Instruct Places Victoria to accelerate the release of subdivided land and price competitively.
• Agree to more Precinct Structure Plans that currently restrict land-buyers to a handful of locales.
• Abolish Stamp Duty on ALL property transactions and fund this by removing the Principal Place of Residence exemption from State Land Tax.
An entire generation is currently excluded from home-ownership – except on the most oppressive financial terms. At 14.4 per cent of all buyers, first timers are at the lowest proportion of buyers since 2004 – in a market notable for its weak sales volume. They do not need incentives, they need a land price re-set.
“This initiative should be condemned by all.”
Media comment: David Collyer 0413 248 193
About Prosper: Prosper Australia is a tax reform lobby group and think tank that is now 120 years old. It seeks to move the base of government revenues from taxing individuals and enterprise to capturing the economic rents of the natural endowment, notably through Land Value Tax and Mining Tax.
The problem would be reduced by council using its rating power properly – moving from basing rates on the value of land and buildings to the land only.
There is another player in this derelict taxing equation: the Victorian Government.
Between 2004 and 2009, under the Bracks and Brumby ALP governments, State Land Taxes were cut firmly. In 2004, the top rate was 5 per cent on total land holdings over $2.7 million.
“There has been a significant escalation in property prices, probably more than we expected or any government could have expected. The majority (of people paying land tax) are at the low end (of the scale) . . . but there is a problem as some people have moved through the rates and also the valuation of their property or their investment enterprise has gone up.” Premier Bracks said in 2004.
How anyone owning over $2.7 million in taxable land – remember, principal place of residence is exempt – and enjoying significant capital gains could be regarded as deserving charity escapes me.
Students of the history of the Australian Labor Party would know the angry, steely determination of earlier labor leaders to ensure rentiers and major landowners paid their fair share of the cost of government, through eminently fair and economically efficient land taxation.
Premier Napthine’s Treasurer Michael O’Brien is looking for quality revenue sources to plug the black hole in the state’s budget. Here is one. And he could drive the development of these awful eyesores.
As published in the Economic Society of Victoria’s Ceteris Paribus.
“You have to ask, if those being duped are too naive to complain, and those profiteering are too valuable to upset, is housing affordability a problem for our politicians, or a gift?” asks Tohm Whitty (Fairfax).
First home owners are currently expected to borrow $226,000 on average (in Victoria), compared to some $100,000 in the 1990s. Over the last decade, Melbourne has increased the size of the Urban Growth Boundary by 97,000 ha and counting. This is enough land to house over 1.6 million people, yet as house prices fell last year, developers reduced land supply. This crimped prices, keeping their constituents happy.
Compounding these pressures is the $22,000 in Stamp Duty Victorian homeowners are asked to pay. This adds an extra $25,000 in interest over the lifetime of the 25 year mortgage. The Victorian State Government has moved quickly to discount Stamp Duties for first homeowners. In principle this is akin to the first homeowners grant. If everyone receives an extra $22,000 in purchasing capacity, the locational price of land and housing will increase by at least that amount. Instead of Stamp Duty money going to the government, it is now going to the seller and in turn the banks.
This is poor political economy (depending on who your constituents are).
If we are to really lower land and housing costs we must look at economic rents. The price of bringing land into production is zero. Any price charged above zero can be termed an economic rent. Therefore land can be taxed without negatively affecting supply.
The value of prime locations improves with infrastructure, education and even funky cafes. These values are created by the public but yet we choose to privatise these windfall gains whilst socialising our own hard work in the form of income taxes and the other 125 taxes we pay. If Stamp Duty was replaced with a higher Land Tax, property investment and hoarding would be less profitable.
In the 1980s investors accounted for 12% of the housing loan market. Today they account for 36%. We have private equity firms such as Blackstone Capital scouring the world buying prime real estate. Their efforts in America have pushed land prices back up, pressuring young people to buy in ‘before it is too late’.
The opportunity cost of ignoring economic rents mounts day by day. Recently we heard of a property overlooking the Mercy Hospital bought in 2004 for $197,000. Now the City of Banyule values it at $2.7 million (whilst real estate experts call it at closer to $8 million).
Proactive Planning Minister Guy has approved the rezoning for a St Kilda Road South location. The 27 story apartment rezoning gave the lucky owners a windfall gain of $12 million through the government’s golden pen tick. The property was soon after flipped to probably another middleman who will sit and wait to flip for similar gains. Once the site is finally developed, the speculative land price will be passed on to home owners. Some will scratch their heads wondering why young people are borrowing so much chasing the home ownership dream.
The recently announced $40 million GST shortfall will see the Victorian State Government forced to cut public health and education services (guaranteed productivity enhancers) rather than look at rent seeking behaviour. The absence of conservative analysis in deciphering a difference between takers and makers sets a challenge for economic analysis.
Political economy grew in popularity due to its ability to make sense of reality. Now that enrolments for economics courses are dwindling, is it time for economists to discuss why those without savings and tax breaks are prejudiced in terms of home ownership? Landownership is seen as the bedrock of democracy. If an entire generation is being out-bided by private equity funds, negative gearers and SMSF’s, will this assist the efficiency evolution? It is time for an age of economic democracy to underpin the freedom political democracy has been unable to deliver.
We propose to abolish all taxes save those on the value of land, irrespective of the value of the improvements, and the economic rent of other natural resources. What we propose is not a tax on real estate, for real estate includes improvements. Nor is it a tax on land, for we should not tax all land, only that land having a value irrespective of its improvements.
Owning a home is a fantasy without $70,000 in savings. This is simply not possible on an average wage. The debate heated up with Tom Whitty’s statement ”You have to ask, if those being duped are too naive to complain, and those profiteering are too valuable to upset, is housing affordability a problem for our politicians, or a gift?” (The Age, 05/04).
If this boom continues, finding a place to call home will not be possible without sacrifices no other generation has been forced to pay. Many young people today pay 40% of their income for somewhere to live. In the 1990s an average First Home Owner’s mortgage was barely $100,000. Today it is closer to $300,000.
The global property bubble blew the world economy apart but yet not one government has engaged in housing speculation reform.
Australia has arguably the most attractive tax system for property investors in the world.
Investors now dominate 36% of housing market loans, up from 12% in the 80′s.
The housing bubble juggernaut is set to storm ahead with the recent loophole beckoning Self Managed Super Funds to invest in housing with zero capital gains tax (in the pension phase).
Those who already own a property are already subsidised to buy their second property through negative gearing. But those battling to save for a deposit by working a second job are heavily taxed. 92% of negative gearers buy existing houses, bidding up prices. Only 8% adds to the supply of houses. But PM Julia Gillard stated on QANDA that tampering with negative gearing would ‘distort the market’.
For so long we have heard developers cry that land supply is the curse of affordability.
Recent evidence raises doubts on whether ‘supply’ really matters.
Over the last decade, Melbourne has increased the size of the Urban Growth Boundary by at least 97,000 hectares. This is enough land to house over 1.6 million people. As land prices fell last year, developers rewarded buyers by reducing land supply in the Shire of Mitchell by 30%. That’s a fix if ever there was one.
Earthsharing Australia’s study of over 1.1 million Melbourne homes found 90,000 empty last year. These vacancy trends have been calculated for 5 years, usually averaging three times the more widely quoted vacancy figures provided by the Real Estate Institute of Victoria.
In a Thatcher-like world of economic rationalism – terms such as ‘a level playing field’ and ‘a land of opportunity’ ring hollow.
However there is hope. This year Melbourne’s homebuyers are set to benefit from the completion of 25,000 apartments in the city’s largest ever apartment boom. Those renting dingy apartments for $1600 per month will be watching to see whether this supply counts. If only they had $70,000 in savings rather than that amount in student debt.
With SMSF’s and foreign investors willing to step into one of the last ponzi games alive on the planet – in ‘the world’s most liveable city’ – the housing industry’s affordability outcomes will be on centre stage.
But who can blame developers? They have a legal responsibility to shareholders. They work within a tax system virtually pleading with them to hold the locked out generations to ransom until they pay ‘what the market can bear’.
Recently we read of a property overlooking the Mercy Hospital, bought in 2004 for $175,000. Now real estate experts value this decrepit car park at closer to $8 million. This will no doubt be flipped to another middleman to game the system for more easy profit.
When the site is finally developed, the speculative land price will be passed on to home buyers who have little choice but to pay the prevailing market prices.
In a media landscape dominated by banking and housing industry spruikers paid to talk the market up, do we honestly believe the average 28 year old is being treated with respect when being forced to take out a $300,000 mortgage?
Property ownership is heralded as the bedrock of democracy. Politicians attitude to housing speculation as ‘too big to change’ hints at a sick and distorted representation of the greater good.
