Change or suffer

Australian land prices are falling. They will continue to fall until their fundamental economic link to incomes and rents are fully restored. Many with large mortgages will be crushed by these towering liabilities when their equity is erased.

This claim is bitterly resisted by the politico-housing complex and most homeowners, who see the exponential land price rises of recent years as proof of their skill and judgement. In truth, all boats were lifted by that king tide of optimism.

Economic growth based on debt expansion is exhausted and can go no further – consumers have outrun their capacity and willingness to borrow. Australians have flipped into energetically paying down old debt and are not taking out new loans.

The contraction of credit – also known as saving – is shrinking aggregate demand. Retailers are struggling as spending on discretionary items is deferred, and deferred again.

A sudden big rise in unemployment is imminent, as housing construction has effectively stopped. Construction employs over 8 per cent of the workforce. With few new housing starts, those jobs are simply gone.

The retreat from debt-fuelled consumption is a long hard journey. This is the rocky path taken by Japan for the past 20 years, and the US and most of Europe for the last five.

Japan lost two decades, propped up by government borrowings of staggering size that prevented collapse yet gained only the cold comfort of stagnation, with an ageing population and rigid economic settings.

The US spent billions – actually trillions – saving their banks. Those banks merely continued their vicious and greedy rent-seeking, now reinforced by a very dangerous sense of entitlement. Meanwhile, unemployment, poverty and economic misery have reached levels not seen since the 1930’s as each month’s statistics show no end to America’s funk.

If Australia continues as it is, this will be our fate too.

We cannot stop land prices falling, but we can limit the damage imposed on those with hefty mortgages. They are your neighbours, your family, your friends.

Adults injured in the depression of the 1930’s spent the rest of their lives collecting string and brown paper, terrified of risk and avoiding debt on any terms. The scars were life-long, crippling their thinking and behavior. Most are dead now. Their example and the lesson died with them.

How may we help?

By lifting the burden of taxation from labor and business, so citizens have money to spend or to clear their debts as quickly as possible. Dr Ken Henry in Australia’s Future Tax System wants to eliminate 125 energy-sapping expensive-to-collect taxes. To pay for this bonanza, he suggested many minor adjustments and two new taxes: a Resource Super Profits Tax and a federal Land Value Tax.

Both measures capture what are known as economic rents – the bounty of nature or the community. These gifts are so valuable they could replace all those 125 repulsive taxes, and more.

Productivity cascades from quality tax reform. Our economy could flourish even through the massive deleveraging ahead.

We now have a weak version of the mining tax in place, which sadly will not deliver the revenue that would enable big tax cuts elsewhere.

There is no sign of a federal LVT – despite the clear benefits and the advocacy of Treasury. The Gillard government lacks the intestinal fortitude to stare down the rent-seekers, even though this failure commits us to become one of the defeated nations we see around us.

Fitch Ratings have just upgraded its ranking of Australia’s federal government debt to AAA. They cited our high value-added economy, strong political, civil and social institutions and flexible policy framework.

Do not doubt Treasury and the Reserve Bank are massively engaged in addressing how to maintain aggregate demand while households refuse to spend and grimly pay down their debts. The first broadside was the Henry Review. Expect to see the bureaucracy push government very hard indeed to implement major structural and tax changes to fight these bitter enemies of prosperity.

Now is the time to use these great national strengths for some heavy lifting, to undertake this tax reform. It would save us from the harsh experience of Japan and the US. And we would protect two generations of our citizens from a lifetime saving string and brown paper.

Richard Koo of the Nomura Research Institute, Tokyo explains the dilemma of ‘balance sheet’ recessions in this paper, which I commend to all.


  1. Jon13-12-2011

    Why not tax the banks for the people’s resource called the money supply.

    Let the deflation begin, and let the guillotine fall where it must. It has been the most profligate that have been rewarded, now it is time for the most responsible to have some time in the sun.

  2. Adrian B13-12-2011

    Sadly David despite the best efforts of Treasury and the other Federal economics departments there will be no LVT. Holding up land (and housing) prices is, I suspect, one of the Federal and State and Local Government’s top priorities – so what if a lot of builders go under and building workers go unemployed – their numbers are nothing compared to the votes that would be lost through a significant decline in land or residential property prices. All levels of government are really only concerned with staying in power – good policy comes a very distant second. The Federal Treasury can put up any number or well-argued, wealth-enhancing, and reforming policy papers but they will go nowhere if they don’t sync with the views of Govt. and the vested interests that capture Govt.
    A year ago I really thought there would be a correction in residential property prices but at least here in Adelaide they are as healthy as ever and people are having no trouble selling. The Federal Government still has a lot of ammunition to keep prices up – slash interest rates, more first home vender grants, and of course increase immigration. And don’t forget rents are rising and that together with shutting down the supply of new housing will soon bring things back into balance. Also the current house price of 5 or 6 times average earnings is the new 3 times – largely because both partners work in well paying jobs that this lucky country still provides.

  3. Damien13-12-2011

    @ Adrian B,

    I don’t know what Adelaide you are living in.

    Prices as healthy as ever?
    Vendors getting quick sales?

    Just had my place on the market for 15 months and ended up selling for 15% less than I purchased it for in 2008.

  4. David Collyer14-12-2011

    At Adrian: House prices began falling in March 2011, after you ‘thought there would be a correction’. Adelaide auctions are failing and there is a mountain of unsold stock desperately hoping for a buyer. Interest rate cuts will not bring back the frightened FHBs – not until fundamental value is restored. Rents are not rising, they are not even tracking inflation. The amount of stock on the market is greater than a year’s supply, assuming noone else wants to sell. And why the hell should couples stick their dual incomes in the pocket of a vendor. That good fortune should be theirs alone.

    The bubble has popped, pilgrim. If you are so confident our current extreme state is the ‘new normal’, shut up and get buying!

  5. Gavin R. Putland14-12-2011

    Adrian wrote: “Also the current house price of 5 or 6 times average earnings is the new 3 times – largely because both partners work in well paying jobs that this lucky country still provides.”

    Er, no, because the much-publicized increase in the price/income ratio uses HOUSEHOLD income, not individual income. So it’s on top of the increase that one should expect from the rise of the two-earner household.

    To get around the arguments about what is the appropriate measure of HOUSEHOLD income, I’ve tried scaling the ABS house-price index to per-capita GDP (which likewise reflects the increase in the fraction of the population in paid work). The result is in the red curve at . History shows that the stable level at current interest rates is about 90. We’re now at nearly 120.

  6. Glenn Peters15-12-2011

    I’ve been reading property doom-and-gloom websites for 4-5 years now,and guess what? No Aussie price collapse. Yes, some pockets here and there that were way overpriced to begin with, but that’s about it. Almost 4 years post GFC, it still hasn’t happened. That prices could remain flat while incomes catch up (which is already happening) is a scenario that few seem to want to accept. Open-ended predictions are useless. If I predict that Melbourne will win the premiership, that prediction has no benefit (such as making a bet) if I cannot say when. After a few years, you’d have to admit that in fact Melbourne are not going to win any time soon. Australia had not nor does it have today the same fundamentals that caused the price collapses as in the USA, UK, Portugal, Spain etc. If it did, then where is our collapse, years after the event? I imagine in 2016 that the doomsayers will still be predicting a collapse. That’s the way with open-ended predictions, you can run with them forever.

  7. Bob C15-12-2011

    “No Aussie price collapse”

    What world are you living in Glenn ?

    Prices have been falling on a national basis for close to 12 months now. You cannot deny that. It is happening now.

    We are not different either, we have embraced credit expansion and banks here also lowered their lending standards to dole out mortgages to all and sundry. In fact the closer you look at our property market the easier it is to see how we have committed the same sins that created housing bubbles in other countries.

    Where is the collapse – open your eyes, the evidence is clear to see for all. By 2016 we will be in the same sorry state as the countries you have mentioned above.

  8. David Collyer15-12-2011

    @ Glenn: My prediction is categoric as to scale and and time. I say land prices – the land component of property prices – will halve in real terms over five or six years. Further, I say we entered this correction phase in March 2011. I have made this prediction in these terms in all fora. I am not aware of having modified the prediction in any way.

    The prediction is subject to the government not taking precipitate action, a matter which cannot be anticipated. A First Home Vendor’s Scheme of similar scale to previous initiatives would not change the outcome. A Zero Interest Rate Policy would not change the outcome. Massive Quantitative Easing would not change the outcome.

    I do not give an undertaking to walk in my undies to Mt Koscuisko if I am wrong. My future economic wellbeing IS dependent on my prediction in that I intend to take advantage of the fall and buy in about five years time. I have previously owned three properties.

    I believe Treasury and the RBA are actively planning ways to minimise the damage to the wider Australian economy the bursting of The Great Australian Land Bubble will cause. They do not plan to stand in the way of this massive force.

  9. Mr. Ploppy12-01-2012

    The scourge of globalisation has initiated a global race to the bottom for wages and conditions never seen before in history. Never before in my knowledge has productive capacity been freely removed from a civilisation, and an empire and given to somebody else. Other than slavery of course, but this time it’s different. We don’t own the countries and people that our productive capacity was freely given to.

    Now it has become obvious that we need to actually produce and sell tangible products to survive economically. Surely therefore wages and standards of living now must fall to match those of our main competitors in order to gain global market share. So too must working conditions and production and management techniques adjust to match those in our competitor nations.

    There is much pain in store for the developed world which has squandered their competitive advantage built by their forefathers during the industrial age, and selling it off to the lowest bidder.

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