Prosper Australia

photo credit: Stuck in Customs

On the first anniversary of the collapse of Lehman Brothers, this piece sums up the cause to the GFC, as predicted by 5 economists who subscribe to the line of economic thinking we promote: land rent theory.

Dirk Bezener, the academic who collated the 12 economists who predicted the GFC, wrote in the Financial Times Why Some Economists Could See the Financial Crisis :

Glenn Stevens, governor of the Reserve Bank of Australia, said: “I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.” We must indeed.
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I undertook a study of the models used by those who did see it coming.* They include Kurt Richebächer, an investment newsletter writer, who wrote in 2001 that “the new housing bubble – together with the bond and stock bubbles – will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recession”; and in 2006, when the housing market turned, that “all remaining questions pertain solely to [the] speed, depth and duration of the economy’s downturn”. Wynne Godley of the Levy Economics Institute wrote in 2006 that “the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010”.

Michael Hudson of the University of Missouri wrote in 2006 that “debt deflation will shrink the ‘real’ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse”. Importantly, these and other analysts not only foresaw and timed the end of the credit boom, but also perceived this would inevitably produce recession in the US. How did they do it?

Central to the contrarians’ thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these “flow-of-funds” models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees.

Neo-classical economists only focus on two factors of production – capital and labour. Bezener misses the big one in his flow-of-funds analogy. The imperative question is – what was the money was borrowed for?

Land – predominantly. Land values in Australia are twice as big as the ASX.

Fred Harrison wrote in his 1997 analysis – The Chaos Makers

By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market equal to what happened in 1988/9. Land prices will be near their 18-year peak, driven by an exponential growth rate, on the verge of collapse that will presage the global depression of 2010. The two events will not be coincidental: the peak in land prices not merely signalling the looming recession but being the primary cause of it.

Fred should be given his due respect, especially as his Power in the Land (1984) also predicted the 1987/8 downturn using the 18 year land cycle. See one of his best videos on the GFC.

Who else used the role of land in their interpretation of business cycles to do what the most high profile economists in the world failed to do?
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Timely when local current affairs talk about 20,000 homeless whilst 20,000 vacant houses are holding these people to ransom In Lost Vegas.

photo credit: kodama (home)

Suburbs hit with land tax increase

TAXPAYERS owed more than $227 million in land tax by the end of February – a 20 per cent increase since last year, Office of State Revenue figures reveal – with a Herald investigation finding that much of the pain is being felt in the Labor Party’s backyard.

The debt rise comes after the State Government lifted land taxes by 25 per cent on properties valued above $2.25 million at the onset of the recession in November last year.

This is another sign that the NSW housing market is about to unravel. Speculators in Labor safe seats, no doubt many of them investing in formerly ‘affordable’ suburbs, have made the most of the Land Tax threshold, which starts at $368,000. This means for a $500,000 land and house property investment in Sydney, the speculative investor would owe $2112. Not much. This property advertised in Parramatta for $479,000 would owe $1904.

Soon the financial pressures will add up and these vacant and under-utilised sites will be sold. The added supply will push prices down and thus assist affordability, breathing hope into the lives of the youth.

But small business must be hurting. The Rees Government gave a signal to the market that they prefer small business over speculators by reducing Payroll Tax from Jan 1 by 0.25% to 5.75%.

To avoid this sort of scare campaign by the Property Council, the Rees Government should flatten the Land Tax and lift it so that Payroll and the regressive GST can be removed. Prime locations such as Pipers Point have a higher locational value, rendering obsolete the need for differential tax rates. This will mute government criticism for using Land Tax as a wealth tax. It should be aimed fairly at all occupiers of land as a ‘beneficiary pays’ charge. Hands up for those who want to abolish income tax? This attitude would help us move away from the casino economics mentality that dominates policy makers.

Where is the hard yakka in shuffling paper?

photo credit: Cosmic Kitty

With auction clearance rates plateauing at 54% for the 3rd consecutive weekend, property pundits are doing all they can to avoid doom and gloom perceptions. The market has ‘found a new level’ is the positive spin.

Let’s hope most First Home Buyers are biding their time wisely, watching and waiting for the looming swell of sellers. Sellers are desperately trying to maintain their market power by refusing lower bids at more realistic levels vis the earning capacity of the buyer.

Concerns must be raised at Rudd’s move to billow first home owners with cash via the expanded FHOG. Will these buyers feel suckered when they realise they have bought at prices 30% higher than they should be?

When Christmas approaches and the sharemarket drops below 3200, sellers will be keen to replenish their cash flow, accepting bids at more realistic levels.

But the big questions is why should buyers have to bide their time during one of the worst housing crises ever? Why should sellers have so much market power when housing is supposedly a human right?

By increasing holding charges on land, the ability of sellers to dominate the market is reduced, encouraging all sites to be used productively, rather than withheld for speculative profits. Then our freedom is enhanced and pesky taxes can be culled.

Desperation in the housing market is leading to varied responses. The latest the Age has promoted is the Container Home phenomenon. Miners earning $100,000 have been forced into them in Port Headland and other fast growing mining communities. Now a company is promoting shipping containers on the eastern seaboard as a means to solving the housing crisis.

Nice try. However, it requires the land to place them on. Whilst public lands could be used, why not free up the 119,623 unoccupied properties identified in the 2006 Census?
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With the growing pressure to find affordable accommodation and our excitement at the Canberra Land rent proposal, we thought it high time we showed you a growing trend through the northern hemisphere – Community Land Trusts

by Prosper Tasmania’s Leo Foley

(Based on material from the Institute of Community Economics, Massachusetts)

A Community Land Trust (CLT) is a democratically controlled nonprofit organization that owns real estate in order to provide benefits to its local community – and in particular to make land and housing available to residents who cannot otherwise afford them.

CLT’s recognise that land is a finite resource and will naturally appreciate in time due to social progress and population growth. This natural appreciation in land values is recycled back into the Community Land Trust to ensure that future home owners can afford to enter the CLT.
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The day after the 2008 Federal Budget, Gavin Putland (our Research Officer) sent three letters to newspapers.

This one was sent to THE AGE, which exercised its editorial discretion not to publish:

Cop-out On Inflation And Rents

If a Budget is to be anti-inflationary, it must stimulate supply more than demand. Most importantly, it must stimulate supply of accommodation, not only because residential rents feed into the CPI, but also because goods or services cannot be supplied unless (a) enterprises can afford commercial accommodation, and (b) employees can afford housing within commuting distance of the enterprises, on wages that the enterprises can afford to pay.

To boost the supply of accommodation, the Budget could have made the First Home Owners’ Grant available only for new construction, or confined negative gearing to new construction, or made the discounting of property investors’ capital gains contingent on new construction, or at least on offering the properties for rent. None of these things happened.

Meanwhile the Government proposes to increase the intake of immigrants, ostensibly in order to boost the supply of labour. Never mind that immigrants also demand goods and services and, most importantly, housing!

These observations show that the top priority of this “Labor” budget was not to contain inflation — let alone rents — but to maintain a desperate shortage of housing in order to drive up rents and prices for the benefit of incumbent property owners.

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Saturday’s Age article on Melbourne’s rental growth outstripping all other states is reflective of current government policy at all levels – local, State and Federal. When combined with record immigration levels, property flipping will continue unabated.

Prosper Australia spokesman Karl Fitzgerald was quoted in another Age article on Home Buyers Lose out in Tax Change. We would have preferred a longer commentary covering the topic from this perspective:

The fillip to demand prevalent in Swan’s housing budget of $2.3bn will more than compensate for the comparatively small tightening on GST that the property lobby faces. The half a billion earmarked for infrastructure under the Housing Affordability Fund will result in higher land prices that alone will dwarf the closing of this GST loophole. The lack of supply side policies is the real criticism of this budget. Swan has failed economics 101 with the First Home Savers Accounts, creating additional buying capacity for first home owners with the $1.178 billion proposed. This capacity will be capitalised into higher land prices.
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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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Yesterday’s Federal budget surplus of $21.7 billion raises the spectre of a global trend tied to the principles represented on this website. Take the foreign reserves of Singapore (US$176bn), Hong Kong (US$160bn) and Russia (US$563 bn). Singapore and Hong Kong have raised a significant proportion of their revenue via the capturing of economic rent from land. Russia is a new boom entrant with the capturing of oil rents.

However, the returns on foreign reserves from government bonds are dropping, especially when denominated in the falling US currency. This has seen a diversification away from countries holding their budget surpluses in foreign reserves and towards what is called sovereign funds.

Fifteen of the top 20 sovereign funds in the world are dominated by revenue raised from the resource rents that nature’s resources provide. Australia has benefited greatly from China’s resource boom. Hong Kong and Singapore have maintained their growing funds by ensuring the public share in the real estate bonanza of the last decade. (Remember, land appreciates, housing depreciates.)

We propose a balance of the two strategies, capturing money from both land and the resources below and above it. Then small business can be freed from the shackles of the compliance required in meeting the 56 taxes Australian businesses face.
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