Yesterday’s OECD Economic Survey of Australia pinpointed key areas of risk.
As Philip Soos and Paul Egan showed today in their 21 chart pack, Australia’s land bubble and accommodating credit cycle opens the economy to incredible risk. But the Abbott government has yet to even add housing affordability to their todo list.
The OECD’s no1 Key Recommendation was:
1 Ensuring Price and financial stability – Continue intensive monitoring of the housing market; maintain deep micro-prudential oversight and consider using macro-prudential tools to bolster credit safeguards and signal concern.
Closely followed by:
2 Pursuing fiscal consolidation and ensuring efficient tax and public spending: Rebalance the tax mix; shift away from income and transaction taxes, make greater use of Goods and Services Tax and land tax.
3 Reform federal-state financial relations; reduce grant conditionality further, instigate state-level tax reforms to enhance funding autonomy, and increase state-level responsibilities and accountabilities.
Three of the top five key recommendations are directly related to our advocacy for a higher policy priority for housing via land reform. Prosper’s submission to the Senate Housing Affordability Inquiry included a recommendation on macro-prudential reform. The jury is still out as to their effectiveness though. However, there are little doubts to the effectiveness of Land Taxes in dampening housing speculation.
The OECD’s Figure 3A shows just how much riskier the Australian housing market is compared to other OECD nations. The link between credit and housing prices can be seen in Figure 3B but what about the link between house prices and the tax loopholes on economic rents?
With the mobility of capital continuing to rise, we are concerned at the number of global cities suffering from land price appreciation so soon after the GFC. Global cities such as London, Los Angeles, Sydney, Melbourne and San Francisco have suffered significant land price increases over the last year. According to the latest Global Property Guide report, we can add Dubai, the Philippines, Taiwan and Iceland to that list. Continuing the trend, the Irish have learnt little from their property (read ‘land’) bubble with prices up 14.25% y.o.y to Q3 2014.
Whilst Land Taxes were mentioned in the OECD survey, they still rate barely a mention in the report. This is disappointing as the macroprudential reforms will do little to curb foreign investment. Unless all the world’s central banks sign up to such a policy, this ‘reform’ will actually advantage foreign investors over local home owners who will have a comparatively harder time accessing loans. Significant efficiency dividends found in transferring away from taxes on income and onto economic rents will also be lost. Thus the policy costs outlined in this OECD graph will continue:
The need for better utilisation of state taxes was hinted in point 3 above:
Reform federal-state financial relations; reduce grant conditionality further, instigate state-level tax reforms to enhance funding autonomy, and increase state-level responsibilities and accountabilities.
This can be inferred as the need for state governments to push for greater utility of their Land Tax base. Current holding charges on land have been eaten away by the increasing of Land Tax thresholds. Land Tax as an affordability tool has all but been wiped out in Qld ($550,000 threshold), NSW ($432,000 in 2015) and Victoria ($250,000).
Land Taxes in Melbourne amount to barely $500 per dwelling. With capital gains running at close to $60,000 p.a, and rents a comparatively minor $16,000, there is little motivation to put property to its highest and best use, as our recent Speculative Vacancies report showed.
State governments and their bureaucracies must join in the education of the populace on this important topic and how Land Taxes can reduce housing pressures whilst raising revenue. Elsewise, a visionary Federal Government may one day swoop in to ensure further centralisation of power via a Federal Land Tax.
Concern over the regressive nature of the GST continues despite the widespread signposting of welfare reform. Even if payments are redirected to offset the added burden, the compliance costs will continue to drown small business, encouraging more and more to join the global land game. Possibly the most concerning statistic of 2014 was the UBS finding that 97.4% of all credit created since mid 2012 was channelled into property. Just 2.6% went to small business, the catalyst for job creation.
Wanted for 2015: politicians willing to join us in the long term game of Land Tax reform!