Land Supply and Housing Affordability: Where do the Homeless fit in?

Prosper Australia forum, Fri 13 October 2006

Ken Fernandes (Stop Evictions) & Bryan Kavanagh (Land Values Research Group) provided a cosy audience with a number of insights.

Amongst many interesting facts, Ken gave us some startling evidence from Karachi, Pakistan:

  • Since Jan 2006, 3,490 houses have been demolished
  • 40% had no opportunity to take their belongings out of the house.

The number of people evicted:

  • Jan to June 2004 – approximately 334,593
  • Jan to June 2005 – approximately 2,084,388

Ken informed the audience that this is a common trend throughout much of South-East Asia.

Bryan Kavanagh kindly provided his speakers notes

The evidence on housing evictions just given by Ken Fernandes shows that the dispossessed don’t fit in. The poor have no political clout, so they don’t really matter. It’s that simple. Homelessness is evidence of a corrupt system in any country, whether it be in countries of the first, second or third world.

As for housing affordability, the movie “Thank you for smoking” has more than a hint of an effective response to homelessness when Nick Naylor, successful anti-hero lobbyist for the tobacco industry justifies what he does for a living:-

  • I’ve got a mortgage
  • “99% of people do what they do because of the mortgage”
  • “We’d all be better off if we rented” [!]

Provided it didn’t mean ‘from landlords’, Hollywood has never spoken truer words!

Unfortunately, few people understand land price. It’s simply the private expropriation and capitalisation of uncollected, community-generated rent.

This example may assist to explain:-

If a residential site sells for $200,000, and residential property yields are showing 4% gross, the annual site rent is $8000. [ie. 4% of $200,000]

So, if we took even half this publicly-created rent for public finance, the price of the site would fall to $100,000! [ie. $4000 pa capitalised at 4% = $4000 x 100/4] This would make land affordable!

If we didn’t capture the site’s existing $1000 in rates, the price of the site would actually increase to $225,000 [ie. $9000 pa x 100/4]

So, public charges on land actually lower land prices!

  • And, if we took the whole $9000 pa each year, the site’s price would drop to zero!
  • The homeless can afford zero land price. Landlords can’t – and landlords do have clout!
  • [And, of course, landlords do not ‘supply’ land – it’s a natural resource! ]

We used to capture more publicly-generated rent before Gough Whitlam at the outset of the 1970s decided to halve council rates and fund this reduction from federal revenues. A gigantic land bubble had burst during Whitlam’s Prime Ministership, creating a recession. “It was caused by property taxes and succession duties!” cried the landlord lobby.

So, State probate tax (led by Joh Bjelke Petersen in Queensland) and Federal estate duty were duly abolished during what remained of the 1970s.

With these incentives–coupled to those of negative gearing–the green light was given to rampant speculation. [And this, of course, has impacted negatively on land ‘supply’ and affordability.] Much the same process which inflated land prices was legislated by most of the western world, exemplified by California’s ‘Proposition 13’ which put a ceiling on the property tax in 1978.

Of course, the availability, or so-called ‘supply’, of suitably zoned residential land has some affect on price, but I find myself at odds with the Institute for Public Affairs’ Alan Moran, whose “No opportunities on the property ladder”(23 August 2006 – please read comments section), argues simply that greater land release by Australian State governments, as is done in the US cities of Houston, Dallas and Atlanta is the necessary public policy response. [It is not coincidental that those three cities have experienced far greater than average US crime rates, due in no small part to their soulless, unplanned expansion.]

Inside a bubble, things have a habit of getting distorted. You even start to believe governments when they say ‘The economy is in great shape!’ The ‘wealth effect’ of a bubble has a powerful influence. People don’t bother to save. “We are asset rich and can borrow more”. [Up go land prices!] Housing equity withdrawal, or re-financing, went berserk in Australia, then in US, between 2000-2004 as the bubble in land prices was used to purchase even more residential real estate. Even people on modest means believed they, too, could become landlords. [Pity about productivity!]

Thus, a credit spree has funded history’s greatest bubble in land prices – whilst the gap between rich and poor, and dispossession and homelessness, grew.

As they say in the classics: “It’s pathological tax systems – not land supply, stupid!”

Land Supply issue in further detail