photo credit: midlander1231

For too long, the media eagerly reported the property spruikers’ claim ‘prices only go higher’.

This ‘truth’ turned homeowners into speculators and led a whole generation of first home buyers to commit to enormous mortgages they will only pay off after thirty years of unrelenting sacrifice.

This week the public story changed.  Abruptly, solemnly, journalists have picked up another thread and a new story to tell: Land prices are so high they are stifling economic activity.

And their sources are impeccable.

The International Monetary Fund yesterday warned Australia’s housing bubble threatens our financial stability.

Australia’s Housing Industry Association is wringing its hands over the fact that land prices are driving up house costs while material and labor costs are essentially flat.

COAG – the council of our state and federal governments is commissioning a review of factors curtailing the supply of new houses and artificially pushing up the demand for housing.

And as I noted below in It’s official: Australia’s house prices the highest in the world!, The Economist newspaper ranks Australian prices as globally the highest relative to rents.

Monitoring and preventing economic bubbles has become a major preoccupation of policymakers.  Exploding bubbles destroy lives and the consequences can linger for years.

As the Land Values Research Group demonstrated, most recessions are home-grown and centred on land speculation.

Australians are exquisitely exposed, as Jeremy Grantham explains:

“Bubbles are important for the country because there is nothing more dangerous and damaging to an economy than a great asset bubble that breaks. And this is something the Fed never seems to get. … We looked back as far as we could, [of the 34 bubbles we found over the years], 32 have moved all the way back down to the trend line that existed prior to the bubble forming. There were no exceptions. The two that are outstanding, the UK and Australian housing bubbles, form a unique and interesting subset caused by, I believe, floating rate mortgages. The mortgages came down so fast that they protected the bubble, and now we have to see what happens when interest rates rise. But if they do not, in both cases, go back to the old trend line multiple of family income, which is what should drive house prices, it will be the first time in history that such a bubble has not broken. This is not something that I would want to bet on if I was thinking of buying a house right now.”  – Jeremy Grantham, Interview with the Financial Times, 19 Apr 2010

This part of the economy is in screaming need of automatic stablizers. Such a mechanism exists in Land Tax.

When prices are high, so is the tax, which slows activity. When prices are low, so is the tax, boosting activity.

The food we eat and the clothes on our backs are taxed yet land is somehow exempt.  How can this be fair?

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