Creative Commons License photo credit: alexkon

Karl Fitzgerald

Project Coordinator and Web Editor
the Saturday Age – Business section, p2, Oct 25th.

FREE market principles are being put to the test like never before. With share prices collapsing, policymakers are scrambling to keep up with the loss of confidence in the market.

Prime Minister Kevin Rudd has stepped into the breach with gusto. A $1.5 billion injection into the property market via the first-home owners grant will keep the banks and property lobby happy. And yes, the ubiquitous financial analyst will support this, too. But what about single people?

The 1% cut in interest rates will save the property investor $200 a month. One can rest assured this will not be passed on to renters. Single renters will also miss out on the $1000 Christmas bonus.

With the market benefiting from this additional buying power, these economic forces will push housing prices even higher, strangling Rudd’s affordable housing credentials.

Pensioners must understand that these same forces will soak up their handout, too.

The planned infrastructure projects will also make prime locations more valuable. Meanwhile, property prices are dropping dramatically in sprawling suburbs.

The monopoly power inherent in land deems economic growth irrelevant. All social developments are captured in higher land prices.

Rising property prices are only good for banks and speculators. The IMF’s Boom-Bust Phases in Asset Prices and Fiscal Policy Behaviour report reveals that economic downturns are more pronounced when following a housing price bubble.

Many blame the subprime crisis for the meltdown. However, the motivating forces driving the land and property bubble should be looked at more closely as the cause of the crisis.

Society has been conned into believing that property prices never fall. The lure of easy profits encouraged over-investment in land and housing. While Australian banks have not leveraged as far as in the US, the Aussie battler certainly has.

Land prices have risen to record prices. At its peak, the US housing market required four times the average wage to buy a house. Australian first-home buyers require over 7.5 times the average wage to pay off an average house. This trend has nothing to do with regulation or bank chiefs.

Now Rudd and world leaders have prioritised policy to ensure that we spend more than 40% of the average income on housing. From what we hear, we will soon be spending 50% of our earnings on housing.

The crunch is that US banks have been hit by falling property prices. This forced a mass writing-down of assets, subprime loans included. Subprime’s were an “effect”. The “cause” was land speculation.

Governments, not banks, are to blame for changing the tax mix over the last 30 years.

The OECD’s Do tax structures affect aggregate economic growth? (Arnold, 2008) says: “Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth friendly.”

Will the Henry tax review have the ticker to push this powerful reform, a reform that has given the “fair go mate” mantra a chance during our formative years?

The continual reduction in holding charges on land have given the nod to property speculation. Whether we talk about land taxes or council rates on land, the trend has been to downsize these from the tax mix. Such holding charges are a tax burden that the wealthiest people on the planet cannot dodge.

Yet recent government policies and the nature of our tax system have seen speculative investors claim 88% of all money borrowed for housing.

Dangerously, the lobbying forces of the vested interests are moving quickly to blame property taxes for the looming recession.

China and the new West Australian Government have pledged their allegiance to the world’s wealthiest speculators by cutting property taxes.

Economic laws ensure that any cut in property taxes will be captured by speculators. They have no competition to pass on the saving to first-home owners or renters.

So rents will stay higher than they should and people will have less money for food.

Our freedom will be genuinely enhanced when more money is available for food and fun, breathing life back into our community.

Karl Fitzgerald is Project Co-ordinator for Prosper Australia, an NGO focused on economic justice for all.