The Housing Bubble and Lazy Land Use
As published in today’s Online Opinion
The beauty of the disinformation is staggering. As house prices accelerate 7.6% nationally, poor housing supply continues to be blamed for the housing crisis. Meanwhile, the sixth Speculative Vacancies report found over 64,000 empty homes in Melbourne.
Consider for a second the national headlines if we had an 8% unemployment rate or lo-and-behold a 4% inflation rate. There would be widespread concern. But here we have a never ending housing bubble, and a 4.4% vacancy rate. This is enough housing for at least 160,000 people. Inefficiently used. Wasted. Its akin to the unemployment rate for our most crucial resource.
The locked out generations have endured 14 years of housing frustration since John Howard halved the capital gains tax rate and ushered in housing investment as a national past time. There seems to be no answer in sight. First Home Buyers have withered to 6.8% of all housing loans in Sydney. Yet the media game is to blame the removal of the sellers’ subsidy, the First Home Vendors grant. Little is said of the high price of land. Little is mentioned of the flat earth economics used to justify foreign investment. No matter how much money you invest, you can’t create more land. It’s bound to push prices up.
We all walk past dilapidated houses with over-flowing mailboxes and unkept lawns. Rusted industrial sites. The perennial vacant shop plastered with rock posters. We have conditioned ourselves to ignore these wasted sites as an inevitable part of city living. But with housing supply such a prominent issue, perhaps it is time to look more closely at how many vacant homes there are before we sprawl any further.
The report defines vacant properties as using less than 50 litres of water a day on average over 12 months. Single person homes average 177 litres per day. Only 2% of Melbournians have a water tank plumbed into the house.
In June 2012, 12,361 properties were available for lease in Melbourne. The report found 12,691 properties used zero litres of water for a full 12 months. But rents keep rising. What could doubling the amount of rental property do for affordability?
The tragedy for young people is that they now face the prospect of a lifetime of renting. Over $50 billion is given to property investors in tax subsidies each year. Those on Newstart receive barely $6 billion in welfare. Yet Federal Treasurer Joe Hockey talks about the age of entitlements. We ask, is it perfectly natural for those who already own property to receive such significant subsidies?
Our public policy encourages property speculators to hold property off the market, enforcing scarcity. Louis Christopher of SQM Research recently stated a ‘staggering 17.6% less property’ is on Sydney’s booming market than this time last year. The less on offer, the higher prices go.
Concern over vacant housing is rising. Both China and France are using electricity consumption as a proxy for vacancy. The Chinese found a staggering 65.4 million empty apartments in 2010 – a sure sign the global property ponzi game is alive and kicking.
In the USA last week, the Census Homeownership and Vacancy survey revealed a housing vacancy rate of 10.2%. The media enthused at the recent rise in US house prices, but rarely mention it is an investor led recovery, fuelled by the cheap money helicoptered in via quantitative easing.
Typifying this is Blackstone Capital, one of the world’s largest property players. Despite the mess made by mortgage backed securities, the company last week launched a new breed of financial wizardry – rental backed securities. Now that so many have had their financial futures blacklisted by buying at the top of the real estate cycle, groups like Blackstone, who have snapped up over 40,000 homes in foreclosure fire sales, will now rent out these properties to (perhaps) those same families. The rental income streams and the mortgages owned by Blackstone will be grouped together and sold in tranches based on credit ratings to bondholders. Rental payments will in turn pay off the bondholders, releasing more capital for Blackstone to snap up properties. A few weeks ago, Blackstone CEO Stephen Schwarzman was in Australia talking up a $2 billion fund to snap up prime locations here.
The UK has a property bubble double the size of Australia’s with over 1 million empty homes. The BBC TV show The Great British Property Scandal highlighted the concern last year. Stories of high London rents see people finding it cheaper to fly from Barcelona and back each day. In Ireland the pre-crisis demands for more land quickly turned into rapid oversupply once land prices started falling. But that didn’t stop the bailouts.
The global trend is evident. Easy profits in real estate are luring more entrepreneurs into this lucrative field of tax loopholes and easy profits. They are comforted by the knowledge any meaningful reform resides in the too-hard-basket. ‘It’s political suicide’.
The recommendations in the Speculative Vacancies report include increasing the holding charges on land with a broad based Land Tax. These revenues could be used to abolish Stamp Duties. This would be a step in the right direction by taxing away ‘unearned incomes’, providing an incentive for the empty homes and shops in our neighborhoods to be brought onto the market.
Renters are being pushed to test how many rental increases they can handle in the face of thousands of vacant properties. On current projections it will take less time to change the tax system than to pay off a mortgage.