Political Economy Discounted by Constituent Interests
As published in the Economic Society of Victoria’s Ceteris Paribus.
“You have to ask, if those being duped are too naive to complain, and those profiteering are too valuable to upset, is housing affordability a problem for our politicians, or a gift?” asks Tohm Whitty (Fairfax).
First home owners are currently expected to borrow $226,000 on average (in Victoria), compared to some $100,000 in the 1990s. Over the last decade, Melbourne has increased the size of the Urban Growth Boundary by 97,000 ha and counting. This is enough land to house over 1.6 million people, yet as house prices fell last year, developers reduced land supply. This crimped prices, keeping their constituents happy.
Compounding these pressures is the $22,000 in Stamp Duty Victorian homeowners are asked to pay. This adds an extra $25,000 in interest over the lifetime of the 25 year mortgage. The Victorian State Government has moved quickly to discount Stamp Duties for first homeowners. In principle this is akin to the first homeowners grant. If everyone receives an extra $22,000 in purchasing capacity, the locational price of land and housing will increase by at least that amount. Instead of Stamp Duty money going to the government, it is now going to the seller and in turn the banks.
This is poor political economy (depending on who your constituents are).
If we are to really lower land and housing costs we must look at economic rents. The price of bringing land into production is zero. Any price charged above zero can be termed an economic rent. Therefore land can be taxed without negatively affecting supply.
The value of prime locations improves with infrastructure, education and even funky cafes. These values are created by the public but yet we choose to privatise these windfall gains whilst socialising our own hard work in the form of income taxes and the other 125 taxes we pay. If Stamp Duty was replaced with a higher Land Tax, property investment and hoarding would be less profitable.
In the 1980s investors accounted for 12% of the housing loan market. Today they account for 36%. We have private equity firms such as Blackstone Capital scouring the world buying prime real estate. Their efforts in America have pushed land prices back up, pressuring young people to buy in ‘before it is too late’.
The opportunity cost of ignoring economic rents mounts day by day. Recently we heard of a property overlooking the Mercy Hospital bought in 2004 for $197,000. Now the City of Banyule values it at $2.7 million (whilst real estate experts call it at closer to $8 million).
Proactive Planning Minister Guy has approved the rezoning for a St Kilda Road South location. The 27 story apartment rezoning gave the lucky owners a windfall gain of $12 million through the government’s golden pen tick. The property was soon after flipped to probably another middleman who will sit and wait to flip for similar gains. Once the site is finally developed, the speculative land price will be passed on to home owners. Some will scratch their heads wondering why young people are borrowing so much chasing the home ownership dream.
The recently announced $40 million GST shortfall will see the Victorian State Government forced to cut public health and education services (guaranteed productivity enhancers) rather than look at rent seeking behaviour. The absence of conservative analysis in deciphering a difference between takers and makers sets a challenge for economic analysis.
Political economy grew in popularity due to its ability to make sense of reality. Now that enrolments for economics courses are dwindling, is it time for economists to discuss why those without savings and tax breaks are prejudiced in terms of home ownership? Landownership is seen as the bedrock of democracy. If an entire generation is being out-bided by private equity funds, negative gearers and SMSF’s, will this assist the efficiency evolution? It is time for an age of economic democracy to underpin the freedom political democracy has been unable to deliver.