As published in Online Opinion 18/04/2013

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.

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The Melbourne City Council has been urged to apply differential rates “to sites defined as vacant or derelict” by its Future of Melbourne committee.

They name to shame the Savoy Tavern on Spencer Street, the Argus building on Latrobe Street and bare land at 567 Collins Street as examples of developer-owned blight.

Councillors loathe these freeloaders, and you should too.  Vacant or derelict sites diminish civic activity and amenity.  Rather than put them to their best and highest use, the landowners prefer to leave them unused in the hope of rezoning or better times ahead.

This landowner abuse isn’t academic – it kills people. Three young people died on 28 March 2013 when a poorly supported wall on Grocon’s long vacant land at Victoria and Swanston Streets collapsed onto the footpath.

The Age thundered: “The loss of three lives has raised questions about how a prized city site could have been left to wither over almost thirty years – and about the dangers that come with such neglect.”

Local government is pressured to give in to developer demands by the obvious neglect and neighboring properties are tainted by adjoining carelessness.

The MCC already charges differential rates: 3.9 per cent of the Net Annual Valuation of residential property and 4.6 per cent on non-residential. The key element is the NAV. This is five per cent of the capital value of residential properties and the annual rent of commercial properties.

The unused Savoy, the asbestos-riddled Argus and vacant 567 Collins Street would be deemed to generate minimal rent and pay very little in rates, hence the councillor anger.

There is a better way – Site Value Rating, which is based on the market value of the land.  The Savoy and the Argus would pay as much in rates as the 30 story building next door. Their civic blight would simply vanish as the owner scrambled to put them to good use. Too late for the three dead students. The removal of similar hazards elsewhere cannot happen soon enough.

This is not rocket science.  Just do it, MCC.

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We are proud to announce our new office is up and running.

We have moved to 2/22 Punch Lane, Melbourne, located at the Spring St end of Little Bourke St. The Shark Fin Inn is on the corner of Punch Lane and Little Bourke St. Parliament Station is nearest for train.

Our new phone number is 9077 0999.

We will be announcing our office launch party date soon. In the meantime it is back to defending the public interest in our common wealth.

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by Bryan Kavanagh

reposted from On-line Opinion

I’m constantly told Australia’s land prices are astronomically high because of our high rate of immigration and the shortage of supply of residential allotments

So, it seems the price of a block of land has simply been reduced to an issue of supply and demand. However, in over 40 years as a real estate valuer, I’ve seen there’s much more at play than supply and demand in determining the price of a block of land. Don’t get me wrong.

The rate of immigration and the amount of available residentially-zoned land certainly do bear upon the cost of a site, but these are basically third-level issues.

There is an abundant supply of suitable land, but residential developers’ drip-feeding of allotments onto the market can create an exaggerated impression of shortage, a shortage in which we’ve seen potential purchasers willing to camp out overnight on a subdivision rather than miss out on the opportunity to buy a lot in the release of the next stage of the estate on such-and-such a date. Creating this impression of scarcity is a marketing function which should not be confused with the price of a block of land, however.

Statutory development costs, once repaid over a period in rates or taxes by the purchaser of a site, are now required by authorities to be paid upfront by the developer, and this has also added more than supply and demand considerations to the cost of allotments.

The most important factor in the price of a block of land, by far, is the extent to which governments capture the economic rent of sites via municipal rates or state land taxes.

From a valuer’s point of view, it’s arguable that if state governments were to introduce an all-in land tax struck at sufficiently high level, the price of land could actually drop towards zero, as little would remain of its annual rent to be privately capitalised into a price. One is left to wonder why this point is rarely taken into account in addressing the increasing problem of housing affordability. In whose interests but banks are constantly-inflating land prices?

Our skyrocketing land prices are exacerbated by the extent to which investment in real estate has been given favourable tax treatment – and by the banking industry’s readiness to advance any amount of credit against the “market” value of a piece of land.

I put the word market between inverted commas because land price has proven to be ephemeral, especially when the multi-facets which create land price conspire to generate a bubble, such as has been allowed to develop in Australia under the Howard, Rudd and Gillard governments since 1996. Was it also “undersupply” which created the 1973 real estate bubble? The 1981 bubble? The 1988/89 bubble? No, rather a tax system which gives the green light to investors/speculators–at the expense of our youngsters–such as to generate an over-enthusiasm for real estate which then elicits a repetitive cycle of boom and bust.

It’s entirely arguable there’s no genuine market in land unless local government rates or state land taxes are set sufficiently high to make the owners of vacant or underused land use it or else sell it. Short of this stimulus, where is the meeting of market players when such land can simply continue to be held out of supply?

In “Unlocking the Riches of Oz: a case study of the social and economic costs of real estate bubbles 1972 to 2006” I put the proposition that the current Australian real estate bubble acts as a proxy to suggest the western world was about to experience financial collapse as national land price bubbles would begin to puncture. Six years later, it’s good that Australians haven’t been panicked by the GFC, but it’s quite wrong to assume it’s all behind us simply because Wayne Swan pumped billions into the economy to obviate a sharp economic decline. Our land prices still require substantial (hopefully gradual) deflation before the Australian economy can repair.

That Southern Californians were lulled into a false sense of security by accepting the ‘undersupply’ argument for their exaggerated land prices as late as 2006 should serve as a salutary warning for Australians whose land prices have so far barely begun to correct.

This would not seem to be a good land market in which to be a buyer.

It stands to reason that increasing land values should not accrue to land owners only. The whole community has an interest in recapturing part of the uplift in value generated by public infrastructure, but this seems to have escaped the notice of those policymakers who believe privatisation of our public highways is a valid way to fund them. John Goldberg has long been an opponent of the PPP model, and recent failures are proving him to have been correct. Maybe old ideas about public capture of land values for infrastructure aren’t necessarily bad ideas? May this not be the manner in whichcapital works projects could be made self-funding?

Land is different from commodities which become obsolete, decay or rust. We all need access to land to live and work, yet it is often held out of the market for the purpose of capital gain, the cumulative process adding to claims of shortage of supply.

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Canberra Times
March 17, 2013

Christopher Erskine (Time for a new lease on life, March 9, p7) is correct that it was the writings of American political economist Henry George that inspired Canberra’s founders to put in place a leasehold system of land tenure. It was envisaged by many, including Walter Burley Griffin, that land rent payments to the Commonwealth would provide an ever-increasing fund for the maintenance and development of a self-supporting national capital. Mr Erskine asks whether we should keep those remnants left of our leasehold system. However, we need to start with a deeper question. How can we secure equality of opportunity for our citizens?

Perhaps the most important part of Henry George’s work was his discernment of the ”Law of Human Progress”. Hereby George demonstrated that there can be no real and sustainable social progress without association in equality, which in turn necessarily requires an equal right to use and enjoy the Earth. George then famously showed how the collection of land rent in lieu of taxes on labour could establish such an equal basis for economic and social relations.

Land rent may be collected under a variety of land tenure arrangements ranging from leasehold to fee simple.

It is the rent of land not the land itself that naturally belongs to the people in common. Further reform and extension of the ACT Land Rent Scheme is one means by which Canberra could realise the original progressive ideals espoused by our founders.

Ronald Johnson,
Association for Good Government, ACT Branch

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Victoria’s new Treasurer Michael O’Brien has called for a discussion on ending Stamp Duty on property conveyances.  Prosper welcomes this opportunity to consider the quality of Victoria’s tax bases and the costs they impose on citizens.

Stamp Duty is a very bad tax and highly inefficient.  It discourages buying and selling property.  It excludes some from homeownership and traps others in the wrong houses.

Imagine a wonderful job offer with more pay on the other side of sprawling Melbourne. One could sell and move, rent your home out and rent over there, commute for 3 hours a day or decline the opportunity.

Tough choices are dictated by the near $24,000 in Stamp Duty payable on buying a median-priced home.  The costs don’t just fall on the hapless individual, they resonate through the economy.

Stamp Duty is an unreliable source of funds for government.

The significant and sustained fall in the volume of property sales and the corresponding fall in Stamp Duty receipts drove the state budget into a $349 million deficit in the first half or 2012/13.  Victoria must borrow money just to balance the books, which threatens our AAA credit rating.  While borrowing to build infrastructure and increase Victoria’s productive capacity is sensible, borrowing because we have poorly designed taxes is not.

Stamp Duty was condemned by Treasury’s Australia’s Future Tax System for its sheer wastefulness.

“Conveyance stamp duty is highly inefficient and inequitable. It discourages transactions of commercial and residential property and, through this, its allocation to its most valuable use. Conveyance stamp duty can also discourage people from changing their place of residence as their personal circumstances change or discourage people from making lifestyle changes that involve a change in residence. It is also inequitable, as people who need to move more frequently bear more tax, irrespective of their income or wealth.”

Treasurer O’Brien has mentioned higher GST and higher Income Tax as alternative revenue sources. The GST is regressive and hurts the poor.  And while Income Taxes are progressive, they penalise wage-earners and deter people from working. There is a better base, one entirely in the hands of the Victorian government: removing the principal place of residence exemption from State Land Tax.

 AhURI modelled the consequences of a change from Stamp Duty to State Land Tax for Melbourne. Their research shows most Melbourne homeowners would benefit mightily from such a change.

It must be understood the issue is not the size of government or its spending – which is fertile territory for another day – but rather where it takes its revenues and the effect this has on our lives and economic activity.

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A fact-free defence of urban planners in The Conversation yesterday has left me fuming about how this group is immersed in process and blind to The Game being played around them.

The Game boosts land prices, creates serviced land shortages and impoverishes all who need shelter.

Planners are proud to quickly turn around conforming applications.  And they eagerly engage in futile debates around ‘red tape’ which miss the point entirely.

Let us start somewhere else by considering the role of vacant land in urban areas or held ‘englobo’ nearby ahead of subdivision.  Withholding vacant land from use displaces activity and drives up land prices – to the profound benefit of existing landholders.

Housing is madly expensive for only one reason: land prices. Buildings come and go, but the long-term value of property lives in the land and endureth forever.

I recently wrote about the ASX listed developers and their giant landbanks, here and here.

There is another devil deliberately driving up land prices.  When historians later write about The Great Australian Land Bubble, Melbourne chapters will be filled with the deeds of this sinner: the Victorian government.

As migration swelled the population of Marvellous Melbourne, government expanded its planning boundaries – a gift to lucky or well-informed landowners. This process is not unique to Melbourne.  It goes on under all governments who like to control things but are challenged by rising populations.

In September 2012, the Victorian government expanded Melbourne’s Urban Growth Zone by 90,000 lots. Citizens could reasonably expect this to add to the supply of land and therefore lower its price.  Sorry, but that just isn’t true.  The freshly zoned land is not what will be offered for sale in, say, the next decade. 

Why?  The Victorian government. Only farming and some limited development activities are allowed on UGZ land until a Precinct Structure Plan is created.  This lays out schools, parks, arterial roads, sewer trunks and commercial centres.

All very reasonable, until you look at the map of Melbourne’s completed and incomplete PSP’s.  The UGZ is huge; the PSP’s mere postage stamps. Note that only the areas colored blue are completed and approved.  For government, there is deep logic in restricting development to a few zones and limiting the infrastructure costs to government.  Schools, roads and sewers would cost more if development was allowed anywhere.  Heavy restrictions contain government costs even more, so heavy restriction it is.

Limiting buyer options to a handful of PSP’s has a profound effect on land prices.  Developers know buyers have nowhere else to go and exploit their market power mercilessly. 

But wait! Landowners blessed by inclusion in the UGZ get steak knives too!

One would expect government to claw back some of the gift to landowners, the uplift in asset values from the right to subdivide for residential use.  The economic theory says State Land Tax obliges landowners to put their land to the best and highest use.

But the Baillieu government deemed land recently included in the UGZ as being used for primary production and entirely exempted it from State Land Tax, despite the massive capital gains forcibly thrust into landowner pockets.  They don’t even have to graze a sheep.

So englobo holders are both exempt and issued a get-out-of-jail card. A landowner can argue they are trapped outside the PSPs and cannot realize what they think the land is now worth.  Rural land values are suddenly irrelevant. They have joined a speculator oligarchy. There is no incentive to sell at current values for present uses.   The planners’ X years of supply just shrank dramatically.

Meanwhile, the net present value of rezoned land is determined by current subdivision lot prices less development costs and time. The price skyrockets – yet supply remains constrained.  Owners have every incentive to withhold land from use and speculate on future price rises. These misplaced inducements mean raw land in the UGZ trades for a million dollars a hectare, not $20,000.

This unaffordable market is limited to new housing lots of 330 m2 at twice the price of an equivalent house in an affordable market on 5,000 m2.

All this distortion, all this financial pain for homebuyers, just so englobo holders may play The Game and be spared a useful and positive tax responsibility.

Simon Tilford, chief economist at the Centre for European Reform puts the argument for tax reform clearly:

“A land tax would involve property owners paying a percentage of the value of their land in tax each year. If the value of their property rose, so would the amount of tax paid on it. This would achieve a number of things. First, local authorities would have a financial incentive to change land from agricultural to residential (and commercial) use as they would profit from the increased value of the land this would cause. Second, it would make it more expensive to speculate on future rises in land values, and some of those gains would be captured by the government. Third, construction companies would not be able to sit on large amounts of land (so-called land banks), and drip feed the market, maintaining prices at artificially high levels. Instead, land would have to be developed or sold, which together with the increased availability resulting from the freeing up of greenbelt land, would bring down the price of developing land and with it the cost of housing, commercial property and infrastructure. Lower land costs would also increase competition by reducing barriers to entry to the construction sector.”

Dr Ken Henry offered us a bargain: remove 125 very bad taxes and introduce just two – a Resource Super Profits Tax and a Land Value Tax.  The Rudd then Gillard governments were fools to pass over this fabulous opportunity.

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7 March 2013

Prosper Australia today issues its update of ‘Englobo’ holdings of listed property developers (attached), as revealed in their audited half year accounts recently released to the Australian Stock Exchange.

Based on last year’s sales – the current pulse of activity – listed developers hold an average 20.4 years supply, up from 18.4 years a mere six months earlier,” David Collyer Campaign Manager Prosper Australia said today.

Lend Lease holds a remarkable 33.7 years supply. Developer land holdings by time extend well beyond government planning time frames, the classic definition of ‘Landbanking’.

“Sharemarket-listed developers are a minority of developers.  Their lot sales last year were around a tenth of building approvals, but unlike private developers their behavior is publicly visible – and instructive.

This straightforward equation has been criticised by the industry as ‘simplistic’.

“The complexities of land development change nothing,” Collyer said.  “This is their work-in-progress. It is a robust and valid measure.

“Withholding vacant land from use displaces activity and drives up land prices – to the great advantage of all existing landowners.  While developers can rightly argue they are constrained by government planning controls, their complaints are like Brer Rabbit saying ‘Please don’t throw me in dat briar patch!’

“Developers have responded to the falls in sales volumes by further reducing the size of lots and offering non-cash incentives like new cars to maintain consumer ‘anchoring’ to peak prices.

Previous land price downturns have been characterized by developer bankruptcies as banks made margin calls on this traditionally highly-geared industry.

“I note the relatively low borrowing by listed developers, likely secured on their income-producing commercial and industrial properties.  They should withstand a major price correction, though shareholders equity will shrivel mightily.

In the last half, Mirvac wrote down the value of their residential land holdings by $273.2 million and Stockland by $306 million, citing persistent weakness in the residential property market.

“Land in Australia should be dirt cheap.  Outstanding access to land ought be a national advantage, generously conferred by a loving government upon its people.  And it could, with a decent Land Value Tax.

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 and

Listed Developer Land Holdings December 2012

Source: ASX Company reports

Listed Developer Land Holdings June 2012

Source: ASX Company reports

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Governments in China, Hong Kong and Singapore are acting to curb property speculation. Zero Hedge comments:

The reason for this “hot money” phenomenon is the easy money policy adopted by all the world’s central banks (except for the PBOC of course, which is forced to stick with reverse repo-based ultra short-term money injections), coupled with the anti-foreign capital stance adopted by Switzerland, making China, Hong Kong and Singapore as the go to targets for “excess global cash.”

HK and Singapore have taken the wrong turn by lifting their property sales taxes. It is a populist move to increase the tax rate on luxury apartments:

The Hong Kong government last week doubled sales taxes on property costing more than HK$2 million ($258,000) and targeted commercial real estate for the first time as bubble risks spread in the world’s most expensive place to buy an apartment.

This fails on two fronts. Wealthier people live in better locations. The locational value will be higher than those living in slums, so they will already be paying a higher nominal amount (land value x property tax percentage). The real issue is the holding time for real estate. Doubling the sales tax will only deter turnover (in order to cover the new higher sales tax). This will increase the holding time and thus amplify price movement.

A yearly Land Tax is the preferred option. It is a holding tax – the longer a property is not earning rental income, the more pressure there is to sell it. A sales tax still allows property to be withheld from the market in order to manufacture scarcity and amplify easy profits.

China has dubbed today’s generation of home buyers as housing slaves. They should be re-named land slaves. Imagine this:

(Sheng) will repay about 4,000 yuan a month for the home, a one-hour subway ride from central Shanghai’s historic Bund that cost 16 times her annual salary, based on the apartment price and her income.

China has been a little more innovative with their property bubble. Whilst ignoring LVT, they have tightened credit requirements:

The central government has since April 2010 moved to stamp out speculation in the property market by raising the down- payment requirement on first mortgages to 30 percent from 20 percent, ordering a minimum 60 percent deposit for second-home purchases and an increase in rates for second loans. It also imposed a property tax for the first time in Shanghai and Chongqing, and enacted restrictions in about 40 cities, such as capping the number of homes that can be bought.

One imagines with the creative use of shelf companies and international borrowings, these hurdles can easily be overcome.

Like gravity is to physics, applying cheap money to a fixed land mass is destined to increase land prices. We ask, who are rising property prices good for?

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by Philip Soos

For those interested in the Australian residential property market, below are a collection of figures illustrating long-term trends. Housing prices and land values are compared to a basket of fundamental metrics. Australians are fortunate because much data on real estate and financial markets are publically available, going into depth not seen in other countries.

Comparing housing prices to inflation is one of the more common indicators in property market analysis. If the trend is fairly even over time, then there is no indication that people are favouring housing relative to other goods and services. On the other hand, if there is a wide divergence between housing prices and inflation, this tells us that people are considering housing to be relatively more important. Interestingly, every rise in real prices has led to a downturn, with the one exception of 1961-1964.

Another popular method of determining property valuation is comparing housing prices to rents. In a fairly efficient market, the costs of buying and renting should closely match each other, though due to factors such as taxes, risks, and interest rates, it is unlikely that costs will equal. Since the post-WWII boom, the ratio has unevenly decreased. Upswings in the ratio suggest the presence of a bubble: the mid-1970s, early 80s, late 80s, and today.

As with inflation and rents, housing prices have also outstripped incomes as well. Unfortunately, the Australian Bureau of Statistics does not provide a long-term median household disposable income series, so the denominator is derived by dividing aggregate real gross household income by the number of occupied households on an annual basis. This results in an unusually high HDI as averages are typically greater than medians, and is further amplified as the HDI is stacked with artefacts like superannuation which cannot be drawn upon to finance debt repayments. While the outcome is a rather low ratio, it keeps in line with that developed in Stapledon’s 2012 housing paper and shows a substantial increase from 1996 onwards. A more realistic median measure would result in a higher ratio, and the latest Demographia report shows it to be so.

It is easy to see the major cause of the Great Depression: a deflating land bubble, centred in the commercial property market. Every major rise in the ratio has resulted in a downturn, correlating with, and arguably, causing the economic recessions of the mid-70s, early 80s, and early 90s. The ratio has doubled from the trough in 1996 through to the peak in 2010. The substantial rise in the ratio during the late 1970s was likely due to an anomaly in splicing multiple land value series together, though part of the rise is justifiable because of a residential bubble.

The same story emerges when land values are compared with GDP per capita, which is arguably a better fundamental metric than GDP itself. As with the previous figure, the ratio has doubled during the same time period.

The Kavanagh-Putland Index measures the ratio of property sales to GDP. This metric is considered useful because in times of speculative fervour, investors flip properties to one another, increasing the total value of sales on an annual basis. When real estate markets tank, sales inevitably fall as potential buyers stand by the wayside waiting for further price falls. The ratio peaked in 2004 after housing prices jumped in the years previous.

 
The value of housing stock to GDP has likewise moved in the same direction as house prices to inflation and land values to GDP. It is the land component rather than the dwellings that has increased in value over GDP.

The primary determinant of the boom-bust cycle in the land market is availability of credit/debt used to speculate on rising capital values of real estate. While data on private debt goes back to 1861, aggregate land values only begin in 1910. Debt peaked in 1893, driving a colossal commercial land bubble that burst, causing the worst depression in Australia’s recorded history. Again the same occurred during the 1920s, with the same result. It took until the 1970s for the debt cycle to assert itself once again, with one boom and bust after another. Debt reached the highest peak on record in 2008, driving the largest land boom on record.

Unsurprisingly, the cause for the massive rise in housing prices and land values, along with net rental income losses, is the colossal increase in household debt, primarily composed of mortgage debt. It has more than quadrupled since 1988, rapidly accelerating during the 1990s and 2000s. The ratio peaked in 2010 as did housing prices, which is clearly no coincidence.

As household debt has climbed, so too has debt as a percentage of household assets. The ratio will rise as housing prices continue to soften. It has tripled from 1990 through to 2008 before the GFC, falling and then resuming its upward climb.

 
The same has occurred with housing debt to disposable income, tripling over the same time period.

Despite very high interest rates during the early 1990s, the ratio peaked in 2008 due to the staggering debt load of households, even at lower interest rates. It is no surprise that this ratio closely matches the net income losses experienced by property investors as shown in the next figure.

Perhaps the most telling of all data are investors’ ability to finance the debt and routine expenses on their residential properties. In the midst of the late 1980s commercial land bubble, an element of residential speculation caused real housing prices to increase, most notably in Sydney and Perth. Speculators suffered income losses from 1988/89 to 1991/92 while seeking capital gains. The market later stabilised before making the largest net income losses from 2000 onwards, signifying a zero net yield and massive residential bubble.

The obvious cause of these losses is due to the rise in interest repayments rather than running expenses, which have remained stable at around 50 per cent of gross rental income. Interest repayments peaked in 2008, driven by higher interest rates before the GFC hit.

Not only are investment properties overvalued, the entire residential stock is. The vast majority of properties are owner-occupied, at almost 70 per cent. Since 2004, all owners on aggregate have been running net income losses which do not bode well for them once capital values stop increasing.

Once again, it is interest repayments that are the cause of the income losses. A slight uptick in expenses during the 2000s surely didn’t help, but has since then fallen back to its long-run average.

Despite the best efforts of the National Housing Supply Council and the FIRE sector (finance, insurance and real estate) to spruik a housing shortage, the long-term trends show dwelling growth has consistently outpaced population growth since WWII. From 2008 to 2009, the trend reversed temporarily.

Perhaps the only positive factor is the government’s relatively low position of gross debt to GDP. The fashionable idea often repeated these days is that rising public debt poses a risk to the economy has little substance in reality. Compared to the pre-WWII era, the governments of today are a picture of fiscal responsibility and prudence, with the rise in taxation revenue helping to offset the need for using debt. In the event of a substantial and prolonged downturn in the economy, the federal and state governments are well-placed to debt-spend.

A better measure of government debt is net rather than gross debt, and even better is the net rather than gross interest repayment burden, expressed as a percentage of GDP. What matters for countries that have high levels of government debt is how great the net interest repayment burden is. This is what separates the US and Japan – countries with a relatively high level of government debt – with the basket-case PIIGS nations (Portugal, Italy, Ireland, Greece and Spain). Australia is currently situated in an excellent position, and even if the government debt to GDP ratio were to rise, this does not necessarily translate into higher net interest repayments if the Reserve Bank further cut interest rates from already historical lows and purchased government bonds.

Increases in the government debt to GDP ratio are typically due to two occurrences: world wars (1914 to 1918 and 1939 to 1945) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008. The rise in the ratio before the 1890s was due to colonial government mass construction of public infrastructure. It is obvious to see which type of debt today presents an overwhelming macro risk to the economy. Government debt will inevitably rise to counter private debt-deleveraging but it is very unlikely that political parties will engage in the necessary and timely expansion needed to ward off the adverse effects of debt-deflation.

In conclusion, the data presented should provide more than enough evidence to suggest that Australia’s residential property market (specifically land market) is vastly overvalued, driven by debt-financed speculation and the relative non-taxation of land rent. While land bubbles have been a continual feature of the Australian economy, what separates this cycle is the relative enormity of the boom in both land values and private debt. A smaller private debt to GDP ratio during the 1880s and 1920s was enough to produce two devastating depressions, including a number of recessions during the mid-1970s, early 1980s and early 1990s.

The question is often asked why housing prices are so high. Instead, the real question is to ask why prices are so low. The banking and financial system is ready to lend absurd amounts of debt to the willing army of ‘greater fools’, and has constructed an elaborate chain from mortgage brokers’ offices through to the business development managers at the banks in order to commit extensive fraud by manipulating loan application forms. This is the ‘six degrees of separation’ Denise Brailey has uncovered. Consequently, the only determinant that prevents the banks from lending more credit is debtors’ ability to finance repayments out of current income. Only when it becomes difficult to finance repayments will the housing and land markets finally capitulate.

It is often claimed “this time is different”. It certainly is, but not for the reasons usually given: Australia has not experienced a land bubble of this magnitude in its history. Seven in ten adults own property, solvency of the FIRE sector is dependent upon ever-increasing capital values and the governments’ addiction to housing-related tax revenue and votes, its none-too-surprising bubble deniers have been out in full force, asserting housing prices are based upon fundamental valuations. Also unsurprising is that all bubble deniers have conflicts of interest, and in an age of the secular equivalent of religious fanaticism and greed, facts and history are conveniently dispensed down the memory hole.

The only option left to policymakers is to continually kick the can down the road, hoping the bust does not occur on their watch. The result, as seen with the Rudd government’s additional First Home Owner’s Boost, was precisely that. This intervention restarted the debt machine, re-inflating housing and land prices to a new, higher peak in 2010. The overarching private debt bubble, which began in 1964, will likely come to an end once and for all when the government runs out of fuel to throw on the fire.

Philip Soos is a researcher at Deakin University’s School of International and Political Studies.

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