The Reserve Bank of Australia’s monetary policy objective is to encourage:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
However, in light of the strong statements made yesterday in Reserve warns on house prices, we will try to dispel some of the policy contradictions in our current two dimensional economic system:
The Reserve’s head of economic analysis, Tony Richards, said there was a risk of ”undesirably strong growth” in house prices unless construction caught up with a surge in demand.
‘When the price of housing rises, higher-income households tend to benefit at the expense of lower-income households,” he said. ”As a nation, we are not really any richer when the price of housing rises.”
Let’s repeat that (and remember it) – As a nation, we are not really any richer when the price of housing rises. Rising property prices are dominated by the land component. No one person created that upkick in land prices. Why should it be privatised? That is the first issue to be recognised.
Higher income households benefit due to the capital gains that in boom years can deliver a capital gain sufficient to subsidise a lifetime’s taxes. Such households benefit disproportionately due to the the higher land value – a fixed percentage will deliver a greater nominal gain.
Infrastructure projects are more likely to be built in well to do areas. With the RBA’s stated aim of ‘the economic prosperity and welfare of the people of Australia’, this admission reflects a compromise that wealthy people can become prosperous at the expense of the poor.
Dr Richards said one reason for the housing shortfall was the difficulty and cost of developing land – typical lots on city fringes cost more than $150,000.
This is where the Policy Dilemma Matrix raises it’s head. Throughout this speech, Dr Richards mentions that supply is lower than it should be. The usual suspects are rolled out – poor state taxes, as we have often commented. Victoria’s GAIC is another one-generational slug that could be more fairly spread over the lifetime of the infrastructure provision via effective council rates (SV, not CIV).
With an October interest rate rise in need due to the property bubble, how will this effect the RBA’s policy goals? Often the RBA raises interest rates at precisely the wrong time. This could be avoided if an understanding of the role of land turnover on business cycles was incorporated.
Higher interest rates will hurt FHO’s, reducing their spending power at the local shops, leading to more business closures. Any small business with a loan will also be hurt. Higher interest rates will push our currency even higher, making exports less effective. All of these outcomes hurt the RBA’s 3 stated policy objectives.
Investor’s however, will able to use their higher interest rates to expand their negative gearing allowances.
The RBA’s policy toolbox must be expanded.
He said governments should do more to improve public transport and infrastructure to encourage development.
The conundrum though is that if infrastructure is built, the locational value of nearby properties will skyrocket. Thus, the current system continues to shoot itself in the foot. Affordable housing cannot be built near infrastructure. Lower income people are the one’s who most need public services.
Land speculators understand the value of infrastructure, but governments refuse to adapt policy to accept this.
Just like the FHOG being a generational subsidy rather than an affordability policy, the role of state government taxes is again taking the easy option by slugging Gen X & Y. Why? Firstly, in deference to the power of the property lobby. Secondly, due to the poor understanding of the important role of property taxes.
The current system sees that land speculators can work less to profit more. Scarcity breeds profit.
Nowhere in the Richards speech (PDF) is the role of speculation investigated. At the height of the property boom, it was reported that ‘investors’ were spending 91.7% of money borrowed for housing on speculation. Barely 8% of all money borrowed was used to build housing.
Richards is in effect (above and beyond all the issues raised above) saying that the RBA would prefer greater sprawl (the need for infrastructure funding) rather than utilising existing sites with greater density.
‘Land is the mother of all monopolies’ said Winston Churchill in 1909. All policy prescriptions, tax-payer funded efforts and voluntary enterprises result in higher land prices. These activities make communities more attractive, leading to higher land values.
Additionally, unsustainable population growth rates gives land speculators an unfair advantage over all other business activities. Our tax system gives these ‘entrepreneurs’ a head start when you consider the blood sweat and tears of running a retail shop compared to buying and selling land.
Higher land prices flow through to higher land rents. New leases are re-negotiated. A woman I spoke to yesterday on Collins St is in negotiation with her landlord over a proposed 53% increase next year. With the RBA refusing to address this by switching taxes off our wages and onto land, the landlord has the monopoly right to charge wheat he wants. ‘Pay what I say or move the boondocks.’
With such rental increases, business folds. Then the crash.
There are nearby vacancies, but the issue is that rents there will be set at this new 53% higher rate.
A Resource Rental system would ensure that all property is rented out. As per our vacancy reports, this is the real supply issue. With holding costs increasing, scarcity cannot be enforced by land owners. Wouldn’t it be useful if we could quantify the length of time it takes for a development to sell, from the time of the first lot until the last. Findings could well show that the length of such time would compare to the delays in re-zoning applications. A Resource Rental system is a time based system, so the longer you withhold, the greater the cost.
A genuine analysis of affordability pressures would include the role of land speculation made possible by our refusal to collect the naturally increasing price of land. Land values are like an open bank safe that gets replenished every year, but will be there for the taking if society ignores its potential.
By ignoring this, the RBA is complicit in constraining the very objectives it is legislated to achieve on behalf of all Australians. Help us all escape the monopoly matrix.
Prof Michael Hudson will be discussing these issues through the prism of debt and the financialisation of capitalism in his rapidly approaching tour.
