Prosper Australia

photo credit: alles-schlumpf

Date: Thursday July 23rd
Time: 6.30pm
Venue: Frank Halkyard Library, 1/27 Hardware Lane, Melbourne
Speaker: Bryan Kavanagh, Research Associate, LVRG

Greenshoots? How bad WILL the Global Financial Crisis be? Why did our economists fail us? What’s the future of real estate? Come and hear Bryan Kavanagh dissect “The Anatomy of the Global Financial Crisis” and explain where it all went wrong.

Kavanagh, a valuer who worked in the Australian Taxation Office and the Commonwealth Bank before co-founding his own valuation practice in 1997, has the runs on the board. He forecast the GFC in the British journal “Geophilos” in 2001, and published a study of Australia’s real estate cycles, “Unlocking the Riches of Oz”, in 2007.

Come and hear Kavanagh’s latest interpretations in the warm atmospheres of our Hardware Lane abode.

RSVP appreciated
Gold coin donation to cover drinks and nibbles

photo credit: arvindgrover

Letter to the Age 29/06/09
The ups and downs
Bryan Kavanagh
Glen Waverly

Re your page 1 headline about State land tax (Age 27/6). Our forecast in THE AGE Opinion Section on 11 March didn’t take long to materialise, did it? We said that the same property ‘investors’ (read speculators) who got land tax concessions for themselves as our real estate prices headed skyward will put their hands out for more when they start to collapse.

Wow! That would be some quite result in comparison to all other taxpayers, wouldn’t it, getting tax reductions for yourself both on the upside and the downside of the real estate bubble?

Bryan Kavanagh
Research Associate
Land Values Research Group
Melbourne

photo credit: azrainman

Occasional commentary # 9

27 March 2009

Bryan Kavanagh

Let’s say labour joins with capital to produce wealth. The locational rent of land arises as a by-product, simply from the existence of the community.

Say, for some reason or other, you wanted to create an economic depression. How would you go about it? OK, then let’s tax labour and capital to reduce their wages and interest. But don’t collect the land rent for government, because we’re trying to get a depression happening, remember?

So you fine labour and capital for working, but you don’t capture the land rent, is that it? Yes, but that’s only the beginning. It’s what happens next with the rent you’ve left in private hands that’s the most important consideration. That’s because if you’re really trying to create economic depression, you’ve got to set up a vast disparity in wealth, and to squeeze the middle class and the poor. You choke off what they call ‘effective demand’ by putting them into impossible debt.

Now, as the wealthy own the most valuable properties, and usually more than one property, they also control much of the land rent. That means that every red cent they pay in taxation is clawed back by the increases in land rent which is then capitalised back into the value of their properties. They may pay more tax than the poor, but they’ll certainly get it all back via their escalating land values. They simply translate it into their asset values by privatising rent.
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An occasional commentary on the depression # 8

5 March 2009

Bryan Kavanagh*

There’s something happens when people get together in groups. Their IQs halve. If the most obvious fact an outsider puts to the group is incomprehensible to them, the interloper should be set upon and duly removed by the group’s designated attack dogs.

Take for instance what happened during the onset of this economic depression. Economists obviously aren’t to blame. How could they be? Nobody could have possibly foreseen this financial collapse approaching. (A veritable cyclone, the Prime Minister calls it.) Those one or two blowhards, such as Steve Keen, who claims to have foreseen these debt levels to be ‘impossible’ are simply publicity-seekers. Did they actually want to destroy confidence in the economy? They ought to know that mountains of debt are a house of cards, waiting to fall if they utter the wrong words! Why didn’t these individuals accept their responsibility to see the economy as ‘a matter of confidence’?

Access Economics has played a much more respectable part throughout. Chris Richardson patiently and simply explains what has already happened to the economy. There’s no harm in that, so long as it’s well and truly after the event. That’s the way it should be if we are to retain peoples’ confidence in the financial system. Albeit we may allow economists to take a guess at next year’s increase in GDP, and the overnight cash rate that might apply at this time next year, that’s just a nice game. You may conclude with absolute certainty that anyone who claims to see where we’re really headed, especially if they see dark clouds looming on the economic horizon, is most certainly an imposter, a fraudster, not at all worthy of the profession.

And take the example of the political parties. They may seem to be at odds as they cut each other to shreds, but they still honour the group rules. Neither major party may support any action of genuine reform, because that simply gives the other side too much leverage for criticism, and that only ‘scares the horses’. It’s common, in fact, to accuse the other side of scaring people. And some people are clearly too simple to have truth thrust upon them. So, the status must remain pretty well quo. That’s really what confidence is all about, isn’t it, being concerned to leave things more or less as they are, whilst giving the appearance that things are going along smoothly with all the legislation and stuff?
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Bryan Kavanagh (LVRG)

11 March 09
As published in the Age today (Business Opinion page)

“Put to the vote: as many are of the opinion that a public tax upon the land ought to be raised to defray the public charge, say ‘yea’… ”
“… Carried in the affirmative, none dissenting.”
- Philadelphia’s first tax law, 30 January 1693

The above wisdom is timeless, but today’s very sophisticated rent-seeker knows better. Before the property market peaked, he demanded that council rates and land taxes be wound back because prices had been escalating and he’d been ‘slugged’ badly. But as the real estate bubble bursts, he now says that property-based revenues need to be wound back, because people holding real estate have been ‘hurt’ enough already, and the last thing they need is property taxes causing any more ‘damage’. Property tax relief is necessary both on the upside and the downside, it seems.

The truth is that the public capture of publicly-generated land rent never does harm to society. To the contrary; it may be dawning on policymakers and analysts that the real estate bubble was the inevitable result of inadequate land value capture. They may even consider extending and fortifying council rates and State land taxes in order to prevent damaging real estate bubbles from developing again in the future.

Unlike the late 17th century Philadelphians, much of local government doesn’t appreciate the ingenuity of the reasoning behind the rating system by which it is mainly funded. Therefore, it often won’t defend it against those hostile ratepayers who attack it because they can. (Ratepayers are rarely to be seen knocking on the door of the federal treasurer, protesting against their income taxes!) Meanwhile, State governments reduce State land taxes, acceding to powerful landed interests whose property values must apparently be allowed to achieve nosebleed heights unfettered by land-based revenues.
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An occasional commentary (for Australia’s federal politicians) #5

2nd February, 2008

Bryan Kavanagh LVRG, AAPI

Early this morning Australian time, the BBC featured a well-credentialed panel in Davos discussing the world economic meltdown. As usual, none had workable solutions. None ‘saw the cat’, the real estate bubble, painted in camouflage within the global economic picture. Each of them nevertheless provided some useful insights: Nouriel Roubini merited a congratulatory pat on the back for having called the downturn; similarly, Laura Tyson, an advisor to Barack Obama, for suggesting that it’s pointless to seek scapegoats when there’s a systemic problem that needs to be urgently addressed. But there were no answers, because participants couldn’t get down to the root causes of the unfolding economic depression.

It was accepted that central banks failed us by not turning back the credit spigot before the real estate bubble began developing. And, golly, if only we had our time over again, this wouldn’t have happened! Nonsense! Easy credit may have exacerbated the real estate bubble, but it didn’t create it, and it would have occurred even under a tighter credit regime - because that’s where the capital gains and tax advantages were to be found, the cost of money notwithstanding.

The real problem is our double standard on real estate speculation. Although property bubbles precede and underpin each and every crash, politicians know that many of us get a warm inner glow when our property values increase, so they’re certainly not going to interfere by telling us there’s a line to be drawn on the increase in land price until it self-corrects in a recession. After all, a man’s house is his castle, isn’t it? So, it seems that real estate speculation and rampantly escalating land price increases are only ever to be condemned after the event by politicians and economists. But, even then, nothing must be put into place to ensure that these events can never happen again!

It is not only politicians and economists who can still praise land price escalation as one of the ‘benefits’ of the private ownership of land whilst condemning the lack of affordable housing out the other side of their mouths. Even at law, real estate has come to be regarded as ‘private property’, and charges thereon as something approaching some sort of aberrant nonsense - although this flies in the face of well-established dicta that even freehold land is distinguished from ‘private property’ and that ‘quit rents’ used to be payable on freehold titles. So, speculative accretion in land values are rarely questioned or condemned from within the law either.

These vagaries about the role and responsibility of holding land in modern society are supported by the theory of real estate valuation having been written out of the study of economics - so that we never become too condemnatory about excesses in real estate markets, nor the recurrent economic busts that inevitably flow from them. These cycles of boom bust are far from ‘the essence of capitalism’, as is often portrayed.

It is not generally understood that the value of a piece of real estate may be established by capitalizing its net rent at the yield (or rate), indicated by the market. Were valuation theory widely understood, it would be seen immediately that a ‘market’ yield of 3% and less (that is, greater than 33 years’ purchase!) on residential property is entirely speculative. It follows therefore that a bursting has to follow the bubble, so that yields can return to commercial levels.

In valuing real estate for 38 years it has often struck me that more than a few real estate agents and many valuers develop a feeling for impending economic recession well before economists do. And, no doubt, real estate agents and valuers, amongst others, will have had a derisory chuckle at last week’s announcements from Access Economics and the IMF that economic growth might tail off during the course of 2009. Some ‘forecast’!

The ludicrous state of affairs exists that economists can only ‘forecast’ after the event because, whereas property professionals do understand the theory of valuation, economists don’t - because it’s not part of their neo-classical economic training.

But so long as real estate professionals’ fees are based upon a property’s value, they’re not going ‘to blow the whistle’ on the damaging effects of real estate bubbles on the economy, either - even though it may surely be argued that an ongoing healthy and vibrant real estate market is preferable to one characterised by repetitive booms and busts. They defensively pose the question whether it’s the role of real estate agents and valuers to second-guess economic analysts, anyway? And “surely it’s not for real estate agents’ or valuers’ institutions to get ‘political’ [read ‘honest’] on the role of real estate within the economy?” Thus has the science of political economy been reduced to a standing joke by the contrived separation of real estate from the economy.

Until policy makers can assert that real estate speculation destroys economies, the chances of remedying the current economic depression are zero. On the other hand, we’ll know we’re back on track when framers of public policy do acknowledge the need to capture more publicly-generated land rent and less taxation to the public purse. It’s beyond time that they did so, because taxing thrift and industry and inflating land price bubbles have obviously proven antithetical to healthy economies for more than 200 years now.

To corroborate that we’re exceedingly slow learners, we’ve only got to listen to the many irrational and contradictory ‘solutions’ analysts are now promoting in response to the meltdown, Chaos rules, in the name of developing ‘a global solution’.

Even though the one thing necessary for a swift recovery from the financial collapse is a simple fiscal adjustment to our revenue systems, it seemed a remote possibility when I listened to the BBC this morning. So, we’d better batten down for the long haul, and trust that ‘The Powers That Be’ don’t prefer again to wage war rather than to make this simple adjustment, as they did 100 years ago.

The economic depression: an occasional commentary # 4

10th January 2009

Bryan Kavanagh, LVRG

[If you wish to keep things simple and ignore unnecessary explanation, please proceed to the final, italicised paragraph.]

The form of reductionism that has provided DNA sequencing of the human genome is leading to enormous gains in medical science; but reductionism in economics has taken the science of political economy into the dead end of an occult art. There’s no overview to put matters economic into perspective. When economic analysis misses the forest for the trees as it has so blatantly in the case of the financial meltdown, it’s time to apply the blowtorch of Occam’s Razor to the debt-bloated carcass of the US economy. We’ve got to ask some basic questions to come to sound conclusions. It has become fashionable for economist to say “There are no easy solutions”: but they’re wrong.

What’s the real problem? Why did these tremendous levels of unsustainable mortgage debt, from which the US economy needs to deleverage, arise in the first place? Monetary theorists would say that money was too cheap. Although that argument clearly has some merit - because money represents produced wealth and the cost of borrowing this wealth was indeed too cheap - it still doesn’t quite cut it in terms of Occam’s Razor, if the bad pun may be pardoned - of getting to the most simple and accurate explanation. Who is to say what the precise rate of interest is that would have stopped a real estate bubble from developing? We should first get down to defining and quantifying what constitutes a real estate bubble, because, as precedes all economic downturns, the US certainly did experience an enormous real estate bubble. And bubbles do burst!

We should first ask: What assets were offered as security for loans? Real estate: either the value of the particular piece of real estate being purchased, or other real estate held by the borrower. OK then, let’s understand that the price of the security consisted of two components: 1) the value of the buildings, and; 2) the value of the land. The value of buildings is easily assessed and may be confirmed by checking the replacement cost of buildings and applying a level of depreciation (if that applies). But how do we assess the value of the land itself?
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Over the next few posts we will bring you a series of reminders about how we and our colleagues have been warning about the impending financial peril for many years.

The Depression
An occasional commentary
(for Australia’s federal politicians)      #1
4 December 2008

ASTONISHING EVENTS?

At last night’s Lowy Institute lecture in Sydney, the former governor of the Reserve Bank of Australia, Ian Macfarlane, said that he found the events of the last year to have been quite astonishing.  Astonishing? But we foretold of this asset price deflation three and a half years ago!  In THE AGE of 15 June 2005, we warned the RBA not to increase interest rates because Australia was “primed to tank into a deflation” and “in the current deflationary environment” the next adjustment of Australian interest rates would more properly be down.”  

The RBA chose to ignore the warnings provided by this index though.  Also ignoring the looming price drop, it ratcheted interest rates up 1.75% over the next three years (seven times by 25 basis points). Now the RBA’s “seeing is believing” approach has witnessed it move into panic mode to lower interest rates by 3.00% in just three months! Surely this hopelessly dilatory action is the real ‘astonishing’ event, Mr Macfarlane?  It is a damning indictment of the very body whose raison d’etre is to maintain full employment and to protect Australians and their currency. By whom has the RBA been advised? Did the Bank take any cognisance at all of the Australian real estate bubble that we defined and quantified for it? No, it used its ‘experts’.

The Land Values Research Group (LVRG) hereby challenges any commercial economic forecaster, analyst or credit rating agency to match our economic forecasts. Alan Kohler noted in Secrets and Lies” on 2 December that Goldman Sachs admits to tailoring the truth a little in delivering it’s economic prognostications, because it is a commercial organisation, and, well …. it just has to! The LVRG isn’t a commercial organisation and we and our colleagues at Prosper Australia don’t have to ‘doctor’ any of our studies - so we’ll stick to telling people the truth about what they reveal.

OK, so Ian Macfarlane seems to agree with Christopher Joye and other bubble-deniers that people like us and Steve Keen are incorrect - that even though our real estate bubble may be bigger than all the others, ours isn’t about to burst next year.  Want a bet?

There are workable solutions to this horrible financial implosion.

Bryan Kavanagh
Land Values Research Group
Melbourne

photo credit: GFX69

Prosper Australia’s long time Executive member Bryan Kavanagh had this excellent article published yesterday in The Age

NOTHING changes. In the 1970s, the collapse of Mainline Corporation and Cambridge Credit heralded a recession after the 1973 real estate bust. In the early 1990s it was Pyramid Building Society, Tricontinental and the State Savings Bank of Victoria after the 1989 real estate bust.

We will no doubt learn shortly which building developer or bank will come to be seen as the harbinger of this particular financial collapse.

Why don’t we simply end these damaging real estate bubbles? As recent US experience confirms, bubble-affected mortgages offer lenders no real security, so why didn’t the Australian Prudential Regulation Authority and the Reserve Bank act to protect Australians and their banks?

Read More

By Bryan Kavanagh

Treasury’s mission is “to improve the wellbeing of the Australian people by providing sound and timely advice to the Government, based on objective and thorough analysis of options, and by assisting Treasury Ministers in the administration of their responsibilities and the implementation of Government decisions.”

It aims to assist:

1. A sound macroeconomic environment
Although it covers monetary, fiscal and monetary issues, Treasury has little or no understanding of the theory of valuation insofar as it relates to the national real estate market, a proven driver of the economy. This is demonstrated by the manner in which it allowed the residential real estate bubble to continue develop ever since 1999. Of course, it is possible that it did offer advice to the government in this regard but was ignored. If this was so, we need to know so that blame may be sheeted to the Howard government.
Mark: 2/10
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