photo credit: ToOliver2

Dr Gavin Putland

Taken from the Dec – Jan edition of Progress.
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If a “site” is a piece of ground or airspace, then the “rent” of the site is simple enough: it is the price per unit time that the highest rational bidder will pay for the use of that ground or airspace, subject to any legal constraints on the uses to which that ground or airspace may be put.

But what if the “site” confers — or simply is — the right to exploit a mineral deposit? At any given time, that right will command a rent of so much per year. But because the deposit is depletable, the time over which the rent can be collected is limited. Moreover, as other deposits are depleted, the value of this deposit will presumably increase over time.

“Hotelling’s rule” says that because the conservation of this resource must be competitive with other uses of capital, the capitalized rent per unit of the remaining portion of this deposit must increase at the going rate of interest, in which case the present value of the right to exploit the deposit is independent of the timing. But this rule assumes unrestricted competition between uses of “capital”.

If in fact the “capital” available to exploit this deposit comes from a limited pool of which the owners expect some element of economic rent, then the remaining portion of the deposit must appreciate faster than the going rate of interest in order to justify its conservation. If, in addition, this deposit is a small part of the global reserve, exploiting it faster will not significantly accelerate the appreciation of the remaining portion, in which case the company with access to the resource will simply deplete the resource as fast as its capital allows. That (as Michael Hudson told me in October) is what typically happens.
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photo credit: xeeliz

Our colleague Gavin Putland is quoted in this article by Leon Gettler:

Predicting when the property bubble will pop is bad for your mental health

PROPERTY bubbles suspend laws of supply and demand. In markets for widgets, demand goes down when the price goes up. With real estate, it’s the other way around. Higher prices lead to more demand as people seek to profit from the boom; property prices go up and potential buyers expect further increases, so they are willing to pay more. Maybe these laws are also inverted for other asset bubbles but the combination of leverage and low-priced finance leaves housing markets chronically vulnerable.

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Bubbles tipped to burst this year include China, gold, US Treasury bonds and, according to the Melbourne-based Land Values Research Group, Australian property.

LVRG director Gavin Putland puts it bluntly: “It’s months rather than a year, but how many months is hard to say because it’s so irrational and being irrational by definition makes it hard to predict. But reality must assert itself.”

If he is right, it will be a shock to many. In the late 1990s and early 2000s, the idea that homes and flats were fabulous investments took hold of the public imagination. Hence the frenzy. Newspapers in recent weeks have been fuelling the excitement, running pieces about half of Sydney’s home owners becoming millionaires by 2020 and sitting on a daily $766 average increase in the value of their properties.

The article ends with a shocker quoting Yale economist Robert Shiller:

Shiller says society needs mechanisms to let air out of property bubbles, something more than interest rates. These include home-equity insurance and new markets selling real estate futures with the potential to tame speculative bubbles.

So derivatives will save the day?!!! Short selling on an 18 year land cycle will do little to curb the boom busts. A tragedy that the history of economic thought has been watered down to such Junk Economics.

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It’s hard to keep up with Professor Hudson’s rapid fire work rate. Wash the dishes to these 2 key interviews.

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photo credit: moominsean

Tuesday 2nd March
Phillip J Anderson

Phil Anderson, (Economic Indicator Services) author of The Secret life of Real Estate, will discuss the economic policies of the day in light of his arresting array of charts.

Will the commodities boom push us upwards and onwards or are other issues likely to influence 2010?

Phillip has spent much of the last year traveling the world presenting to packed audiences. We are looking forward to an exciting talk, his last in Melbourne for the next few years.

$5 entry, 6.30 – 8 pm | JASPER HOTEL (former YMCA)
489 Elizabeth Street | Melbourne (right next to the Vic Market)
RSVP

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photo credit: Hyaground

Peter Martin, the journalist with the biggest sieve (catching all those Henry Tax report leaks), wrote recently on the LP’s highly secretive Ergas report:

The report proposes an annual land tax that would extend to the family home and would be used to fund the abolition of real estate stamp duty. ”It would be obvious nonsense to exclude the family home. It would create an unbearably low base.”

Company tax would be modeled on the resource rent tax that is presently in place for offshore petroleum and which the government’s Henry review recommends extending onshore.

Bryan Kavanagh stated:

So, we have a coalition report (the Ergas report) recommending a 20% flat income tax, plus a land tax which must include the family home, and the Henry Report that Glenn Milne initially inferred an across-the-board federal land tax, but which we’re assured by Peter Martin now excludes the family home.

With the GFC still raising it’s ugly head with recent sharemarket tremors, the need for other nations to review their tax system will no doubt continue. With the recent NZ tax review also recommending a greater role for land taxes in a highly mobile marketplace, our beliefs have never been more important.

If governments are serious about avoiding boom-busts, then the harnessing of the community created locational value of land (and other licensed monopolies) cannot be ignored. Billowing credit levels (as per helicopter Ben) will do little for the productive economy or sustainable growth. Resource Rents must be the prime revenue base for an economy concerned with reward for effort.

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