When the economy slams shut, the market exposes those who don’t have to work for a living. Whilst the media focuses on those thrown into 4.30am Centrelink queues, at the other extreme are those who benefit come rain, hail or shine.
Such privilege is reserved for property owners. Their market power has been on show in negotiations between landlords and tenants. Keeping a roof over our head when the economy is closed for business brings focus to this age old master and servant relationship.
State government rent-relief policies have been limited in scope, perhaps due to the absence of federal funding. Most packages have given land tax relief which will predominantly affect landlords in wealthier areas and tenants who can afford to live there. Victoria is the only major state to offer direct relief to renters, but this is targeted to just 5% of all rental properties.
Many landlords have claimed there is no free ride for their tenants – they must pay their rent. Under current social norms, this is an accepted position. There are no free lunches in society, least of all now.
But this can be questioned when wealth creation for landholders is analysed.
Typically, the land component of an investment property assumes some 70% of the property value, and thus the mortgage. For older homes, the land component can reach beyond 80% of the loan. (On analysis, my previous home had a land value of 94%).
Over time, houses age, requiring repairs. These are expenditures many landlords often loathe to make. Fortunately, a few do, but the community in general carries on developing new cafes, libraries and train stations. These are all services delivered by public investment or by our own effort. Importantly, this public effort drives the vast majority of gains in private land values. The rising value of land generates capital gains, over time allowing investor rental incomes to increase.
So, if tenants are told they shouldn’t expect a free ride, there’s a sense of irony when landlord windfalls are analysed.
Australia’s fetish for property investment has rendered the necessary rebalancing of economic power between landlords and tenants a difficult political matter. The market is currently doing that work for government. As the crisis drags on, some renters will be forced to move back home or in with friends. The surge in former AirBnB rentals hitting the long-term rental market will improve renters’ options. As vacancies rise and rents decline, renters will enjoy a stronger bargaining position.
Those who slip through the cracks won’t be so lucky. The health emergency has revealed even more starkly the inhumanity of homelessness. Images of rough sleepers corralled into car-park-like sleeping spaces painted on US pavements are not easily forgotten
Homelessness, always a moral issue, is now also a public health issue.
With the sanctity of public health superseding even economic issues, could this be the time we recognise the waste of 60,000 vacant homes in Melbourne? Would it not be reasonable to expect some landholders to volunteer their empty homes to the homeless? Additional properties could be offered to health professionals concerned about infecting their families, their flatmates.
As we consider the development of ethical property use, governments are loosening their purse strings like never before. Policy makers must recognise that public subsidies ultimately flow up to those who own that scarcest of finite resources – land in prime locations. Put simply, job keeper payments have been sculpted to support mortgage commitments.
Policy watchers will understand that any short-term pain for landlords is expected to be offset by a generous series of long term subsidies. Perhaps, a beefed-up first home owners grant, 40-year mortgages, a nation-building infrastructure project (making nearby properties more valuable) and/ or a federal shared equity scheme? These are all likely handouts to support the powerful property sector whilst affordability remains unaddressed.
On that topic, the housing supply pipeline we hear so much about must be monitored. As the economy hibernates, master-planned communities will mothball supply releases so as to keep a floor under current prices. Just how far supply manipulations are allowed to impede the market is a question for your next digital hangout.
What role can banks play? Much of the pressure could be reduced on society if banks were to halt investor mortgage payments for several months, just like they have done for the commercial sector. Banks would endure short-term pain from the mortgage holiday, but their social licence would be re-invigorated.
The crisis has re-written conservative economic textbooks, most notably in the UK where the government is creating money off-balance sheet, via Treasury. Such a mechanism ensures future generations are not further burdened by debt. This MMT-like practice could be used to assist rental payments during this Great Pause.
A wall of money is being thrown at workers, banks and small business to offset economic calamity. Our risk-laden real estate market is the primary driver of so many billions in public support. We must ensure this does not come at the cost of an even greater power imbalance between those who work and those who own.
This situation is interesting to me from a lot of points of view.
1. If the economy really tanks will house prices fall and be bought up by the super rich who are the only people left capable of buying?
2. If the result is across the bank less dollar value of net wealth for everyone including the super rich does that perhaps suggest dollars don’t measure wealth very well anyway and ownership of square metres of land might be a more sensible measure?
3. Off the point perhaps but is land ownership really that important? After all isn’t most land zoned either out of use or zoned into low value use such as agriculture? Are the people who control the zoning of land and release of land the real controllers of wealth? Probably they are also the same people who are major land owners, the same people who are the senior bankers and the senior (but not prominent) politicians? Don’t they simply feed themselves through zoning and release processes more so than actual business activity?
Hi Daron,
As we have warned in the past, the corporatisation of the rental and mortgage market is accelerating. Blackstone Capital has a $30bn war chest ready to deploy when the price drop hits. Re point 2, the measure of wealth, I’m a bit lost with what you mean there. Re land ownership, the issue is that if you stay a renter, you miss out on the secret subsidy of unearned incomes (capital gains). We agree these should be shared amongst the community, but in the meantime ….. Re zoning, this is a narrative the insiders want to distract us with, blame government, look that way its the NIMBYS but more focus needs to be looked at the drip feeding of supply in master-planned communities. Certainly, we have quantified some $18bn in rezoning windfalls handed out p.a. Its immense but hopefully an area government will look at more urgently, particularly in this changed environment.
In NSW it’s the minister of planning that essentially controls rezoning. This creates incentives for developers with deep pockets to land-bank land likely to be re-zoned and then drip feed that land when it becomes zoned for residential uses to the market.
The question that must be asked is why is the State Govt so reluctant to rezone land to residential uses? Other than a perverse desire to keep land prices higher perhaps it’s the fiscal burden on State gov? Even with development levies and developers largely paying the costs of local roads, water, electricity, telecommunications infrastructure in greenfield developments typically the NSW state govt is still on the hook for 50% of other infrastructure costs associated with new developments.
State Governments raise approximately 15% of all tax revenues and rely heavily on federal government grants (which usually have strings attached). Yet sate government is responsible for for building new; hospitals, schools, police stations, fire stations, major trunk infrastructure such as roads and public transport etc – all of which are necessary to support greenfield development.
Perhaps a system of infrastructure bonds as has been proposed in NZ would alleviate this problem for State govt.
How did state govt pay for infrastructure from the 1950s to the 1970s when many new suburbs (now very expensive suburbs) were built?up until the mid 1970s in NSW there was essentially no zoning as we know it today. Back then land could be subdivided for residential uses before town infrastructure was available. When councils and state government could afford it they would install sealed roads and kerbing and other infrastructure (funded mostly by debt). This is why many housing developments from the 50s weren’t connected to town water and relied on ‘night soil’ collection (it’s also why many lavatories were built separate from the house). This ability for Sydney to expand at its fringes kept a lid on land prices. Today such subdivision and development would be illegal and today state govt is very reluctant to take on debt (as they did previously) to pay for infrastructure to support greenfield development.
Many good comments raised there remind me of this recent article on NSW’s fast tracking of development approvals. The NSW govt actually does release a lot of land, more than needed, but developers hoard it whilst complaining there is not enough, so that more of their land is rezoned. A billion dollar formula. A recent Sydney housing supplyanalysis stated “Approximately 70% of dwelling approvals become completions”.
A lot of the misinformation can be undone by reading Cameron Murray’s article in this edition of Progress. There we learn about the role of property options theory.
Regarding infrastructure, yes infrastructure bonds should adopted and repaid by the rising value of land as per land value capture. The council rating system once performed this role.