The bluntness of Interest Rates is again in the news: Average Pay Wont Buy a Home. Whilst we hear again that mortgage payments are taking an increasing share of our pre-tax income (now 37.4% to service a median home), the Opposition Treasurer Malcolm Turnbull proposed that the real pressure on inflation was global prices for food and energy.
We also have conflicting growth patterns throughout Australia with the mining states of QLD & WA booming whilst NSW & Victoria are sluggish. So why use interest rates that slug all sectors of the economy equally?
In comparison, the Land Value Capture tool is well rounded rather blunt because booming land values in WA are captured by a flat percentage, whilst lower land price growth in NSW means they don’t pay a disproportionate amount compared to their economic well-being. Businesses with investment loans also do not suffer. Neither do exporters fearing yet higher exchange rates triggered by higher interest rates. First Home Owners can have peace of mind that the only increase they pay is reflected by the higher market value of their site, as LVC rates aren’t altered seasonally.
The reason why an LVC tool is vital is that underwriting all the movements in food and energy prices is the growth in land values. It is the land, not building, appreciating in the so-called real estate market. We’ve commented earlier on how only one in 12 dollars borrowed for housing investment is spent on new housing. Speculators have affordability under the thumb. Reports like Average Pay Wont Buy a Home pressure tentative first home buyers to jump into a market that will surely follow the US & UK downturn. Remember Steve Keen will discuss on March 13th how our land price bubble is higher than even the US’s.
A fairer way for the government to quell demand is to adopt a location specific revenue raising mechanism. A Land Value Capture model will take the heat out of the land game by pushing speculative vacancies onto the market. As increasing percentage’s of such LVC revenues are gained, less efficient taxes such as the GST can be abolished, putting downward pressures on prices.