Easy money for some …
Who pays for a $43 million windfall gain in three years? That’s a 352% return for the “entrepreneurial” Richard Gu. His skill? To have the capital to buy the land, then to apply for a 1500 apartment re-zoning of the land (from commercial to multi-density).
Not bad work if you can get it.
But who pays? And who created the $43 million profit? There certainly is a little skill in filling out paperwork correctly and applying to the local council and state government with good manners. But a 352% return in three years?
Here are three terms you can mention to any property speculator to stop them in their tracks. And /or to perhaps put a politician on notice.
Windfall gain
The next time a friend is boasting about the capital gains on an investment property at a dinner party, ask if they classify those earnings a windfall gain? Such a gain results from no genuine effort on behalf of the owner. It’s akin to saying a free lunch has been delivered. In economics this is the least desirable form of income. Adam Smith called such rent seekers the Public Enemy.
Unearned income
Digging a little deeper into economic theory, the process of a windfall gain is delivered by an unearned income. This is the ability to earn income without any productive output.
We ask – has this Kinnears factory land grown in size, improved in location, or produced anything? The answer is no. The bureaucratic golden pin tick is primarily responsible for the 352% return. That infers the 352% is a publicly granted unearned income.
Economic rent
This is the ability to earn money in one’s sleep. Technically it means the ability to charge a price above what it would take to bring the product to the market. We can see here that Gu has not created any new land. He has not beautified it into a public spectacle. He has simply applied for a rezoning of this land.
In economic theory, economic rent is seen as the smartest tax base for ensuring both equality of opportunity and efficiency.
If all levels of government recognised this, the fever pitch of property speculation would quickly subside. The windfall gains would no longer be so prevalent as they would be channelled back to the same public entity that created the value.
Who pays? The $43 million in windfall gains translates into an extra cost of $28,666 per apartment. The opportunity cost of such borrowings would most likely be doubled to ensure a decent return. That $57,000 per apartment is what the new buyer of the Kinnear’s location would be forced to pass on to potential home owners. This adds thousands of dollars in mortgage interest to a homeowners budget, resulting in the shortcuts we all take to survive each and every day – two minute noodles, endless leftovers for lunch, less social interaction, and the inevitable kitchen table arguments over finance.
Why is it perceived to be more painful to understand economics then to live life with an empty wallet?
The additional stress on such an apartment includes the likely situation that one has purchased property far far away from one’s parents and community. This creates challenges for young parents trying to maintain sanity.
Consider the life of those same young parents battling their way through gridlock to drop the kids off at their parents some 40 minutes away. What if they were to recognise they are passing some 10,000 vacant properties on that very commute? That is what is happening around most capital cities on this planet as the speculative agenda rolls on unhinged.
We ask if housing hurts, who pays? Certainly not astute investors who are trained to dodge paying taxes like its some sort of sport. And as some have seen this week, politicians may have a personal interest in ignoring such behaviour.
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