The K-wave is NOT a 50 to 60 year cycle, but rather the period between two financial depressions.

In “The Recovery Myth” I was wrong about the timing of a Kondratieff Wave, but NOT about genuine recovery being a myth.

THE CHART BELOW IS MORE LIKE IT, and 1971-72 was the peak of the current post-war K-Wave if we look at continued diminishing GDP growth since then.

That’s when speculation took over in the cycle. It had once again become fashionable for governments to wind back taxes on economic rents.

I’ve not studied WD Gann, but from what I understand, he had a good grip on business cycles, too.

1971 was also the year that the USA dropped the ‘gold standard’ because, amongst other things, France’s President De Gaul called the US out by cashing in on the deal. (‘Danny the Red’ seemed to put an end to that!)

Not to suggest that we need to return to the gold standard: we shouldn’t. There’s only one way to end inflation: that is, to tax land values and untax incomes and purchases, as argued by Henry George.

VIMMLBUTT would do that quite nicely!

But where do we find common sense in economics these days, President-elect Trump and Elon Musk, that is, with tax regimes designed to penalise productivity and reward speculation?

Nowhere?

So, President Trump is going to oversee the upcoming financial debacle. It’s kinda fitting that a major property speculator should preside over it.

FINIS

Along with four others, I spoke at yesterday’s Central Queensland University conference. My contribution dealt with the incredibly speculative times through which we are living.

HOUSING AND THE 18-YEAR LAND PRICE CYCLE

by Bryan Kavanagh

HOUSE PRICES

The present political discourse is rightly focused on the cost-of-living crisis and escalating house prices. Australia faces an inadequate supply of housing, and many people believe homes to be unaffordable. However, much of the analysis has conflated the issues of supply and affordability, assuming that an increase in supply will automatically make homes more affordable. This assumption is flawed, because more houses are not like a glut of tomatoes on the market which will indeed reduce their prices.

While it is true that construction costs have risen due to COVID-19 supply chain disruptions and labour shortages, and that inflation, government stimulus, and bureaucratic delays have contributed to rising house prices, simply building more homes may not lead to more affordable housing. Here’s why: –

According to the Australian Bureau of Statistics’ “Total Value of Dwellings” report and Table 61 to the national accounts, land now accounts for over 85% of the cost of the average home. This means that even if builders were to construct more homes, they can’t lower the land price component, because they must purchase sites at market value. Therefore, the high cost of land will remain a significant problem.

Real estate valuers know that while supply and demand, population growth, location, zoning, and the characteristics of a site will affect its rent, the price of the land is largely determined by: (1) what banks are willing to lend against it, (2) the mortgage interest rate, and (3) rates and taxes levied on the land. If governments were to capture the full rental value of the site via a land tax, the market value of the land would be zero, as there would be no rent to capitalise into a price.

Recent increases in land tax in Victoria and Queensland have led some landlords to seek investment opportunities elsewhere, with reported declines in land values. So, taxes on land values do influence the land price component.

FORECASTING ECONOMIC TRENDS

Economists have a poor track record when it comes to forecasting recessions. This probably reflects the adage, “The future is unknowable.” However, some real estate professionals—particularly valuers and agents—seem to have a better understanding of real estate market trends, and therefore, possible economic outcomes.

For example, back in July 1987, I published an article in the journal The Valuer which forecast an economic recession in 1991/92. According to Paul Keating, that was the recession “we had to have,” but I believe it could have been avoided had we tweaked land taxes upward—particularly an all-encompassing land tax, not just one on investment properties.

MY FORECASTS

My economic prognostications have been based on trends in the Australian real estate market as a whole. Although there are of course many sub-markets, I employ two national aggregates, namely, total real estate sales–that is, all residential, commercial, industrial, and rural sales–and gross domestic product. The index compares total real estate sales to GDP. My colleague, Dr Gavin Putland, added the year-on-year change in the index, finding that a 25% drop suggested recession within the next two years.

Obviously, I could not foresee the COVID-19 pandemic, but I was able to forecast a recession in 2020, based on the methodology. The sharp decline in the index in 2018 pointed to a likely recession. MacroBusiness published an article on 18 January 2019 quoting me as saying that “turnover and price declines in Sydney and Melbourne during 2018 indicate an economic recession in the 2019-20 financial year.” The recession occurred, exacerbated, of course, by the pandemic. Despite its immediacy, the media ascribed the financial recession entirely to the effects of the pandemic. My chart showed otherwise.

UPDATING THE CHART

We had to establish a new series, to account for data revisions from the Commonwealth Grants Commission and the Australian Bureau of Statistics when updating the analysis to 2023. Although a 25% decline in the index did occur in 2023, it was not accompanied by the general drop in sale prices that would necessarily signal a 2025 recession.

Despite several of my articles being published in The Age and Herald Sun, I’ve found that mentioning an impending recession is considered taboo. Maybe we prioritise maintaining public “confidence”, even at the cost of overlooking the likelihood of economic recession.

LAND PRICE BUBBLES

There have been people historically who understood the risks of inflated land prices. Just before the Great Depression, a young Robert Gordon Menzies, who was to become Australia’s longest-serving prime minister, warned of the dangers of post-WWI inflated land prices. His warnings proved prescient, as the land price bubble burst just before the 1929 stock market collapse.

In more-recent times, the 2008 Global Financial Crisis was another example of a real estate bubble-burst. During the GFC, the housing market collapse in the US was directly linked to inflated land prices, after banks failed risk management by lending against overinflated values. Australia was impacted less, because with Treasury assistance the government acted quickly to pump some $50 billion in public works into the economy. Maybe pink batts were not the best way to do it.

The political environment around real estate remains sensitive. The property industry, financial institutions, and investors are heavily invested in real estate, making it difficult to consider fiscal measures that would reduce land prices. However, history has shown that these bubbles inevitably burst, and the damage they cause is far worse than taking pre-emptive action.

ROCKETING LAND PRICES

Australia’s tax system has played a significant role in inflating land prices excessively. The combination of generous tax policies for property investors—such as negative gearing and the 50 per cent capital gains tax discount—has encouraged land price inflation. Meanwhile, state governments have been slow to use land tax to cool the market. It’s all left to the Reserve Bank of Australia – and RBA cash rate policy hasn’t succeeded,

Since 1971, Australian land prices have increased at an incredible average rate of 12.2% per annum. In 1971, total land values in Australia were only $258 million, but by June 2024, the figure had grown to $9.74 trillion. We may want to ascribe this to population growth, but whereas total land prices represented $2,000 per head for every man woman and child in 1971, they’ve now risen to an astonishing $364,000 per capita. I consider this foreshadows a correction.

AUSTRALIA’S FUTURE TAX SYSTEM

In 2010, the Henry Tax Review recommended an all-in land tax, alongside income tax, the GST and a mining tax, to replace all other state and federal taxes, as a trade-off. If implemented, this could have tempered the growth in land prices. However, after a failed attempt by the Rudd government to introduce the recommended super-profits tax on mining, tax reform has stagnated, and land prices have continued to rise unchecked. 

LAND MARKETS WILL HAVE THEIR WAY WITH US

If politicians remain unwilling to address the issue of land price inflation through tax reform, the real estate market will eventually correct itself. Historically, real estate markets follow a regular pattern of boom-bust, with land prices rising to unsustainable levels before the inevitable crash.

Phillip J. Anderson’s The Secret Life of Real Estate and Banking traces this US land price cycle back to 1800. It demonstrated a recurring 18-year cycle. Australia’s property market follows the US cycle quite closely, although it’s rarely discussed publicly, due to political reluctance and vested interests in maintaining status quo.

THE 18-YEAR CYCLE

Let’s take a look at a diagram of the 18-year land price cycle since World War II. It’s based upon the writings of the six people shown at the foot of the chart and isn’t financial advice. The 18-year cycle peaks were in 1954, 1972, 1990, and 2008, with another anticipated in 2026. After each peak, there’s a steep four-year correction, followed by a recovery and a mid-term peak. The mid-term top is usually accompanied by a two-year recession. As we approach the final “Winner’s Curse” phase of the cycle, shown at the top of the chart, whereas many analysts had expected a recession in 2023/24, it has failed to materialise. So, if the 18-year cycle does hold, it may be be a case of “off to the races” next year, with a land price surge that could herald a crash in 2027. I guess we’ll see?

TO CONCLUDE

CEDA, the Committee for Economic Development Australia tells us that productivity is at a 60-year low. GDP grew only 1.5% last financial year, the weakest since 1991/92. With land prices averaging increases of 12.2% per annum since 1971, the tax regime has been directing us into real estate investment by taxing productivity excessively. As we tank towards another real estate bubble burst, maybe it is time for Australians to consider taxing land values more and incomes and purchases less?                     

WHY ECONOMIES ARE FAILING: The Real Excess Burden: an overarching approach” by Bryan Kavanagh.

This piece critiques the way land prices, taxation, and economic policy interact to harm economies, particularly Australian ones. Kavanagh argues that the real “excess burden” of economic problems is not simply the taxes themselves, but how escalating land prices, combined with conventional tax systems, distort economies and exacerbate social inequality.

Key Points of his Argument:

1. Land Rent vs. Capital Rent: Kavanagh emphasizes the distinction between income derived from land (or “nature”) and income from capital. He argues that land rent is not earned in the same way as the returns from manufactured capital and should be treated separately in economic models. The income derived from land, as a public good, should be captured by society, not private individuals or groups.
2. Land Price Bubbles: The piece argues that land price bubbles, particularly in Australia from 1972-2006, were a primary driver of economic recessions and unemployment. The bubbles were linked to escalating land prices, which in turn resulted in excessive mortgages, debt, and unstable economic growth. Kavanagh claims that if these land price bubbles had been eliminated, the Australian economy could have grown at a steady rate of 5.53% annually, resulting in a GDP nearly $1 trillion higher by 2006.
3. Excess Burden of Taxation: The concept of “excess burden” refers to the inefficiencies and economic distortions caused by taxes. Kavanagh suggests that while economists typically focus on income or capital taxation, they overlook the broader economic damage caused by land price bubbles and the indirect costs associated with them, including reduced economic growth, unemployment, and social pathologies. He argues that taxes on labor and capital have a “deadweight” loss—economic costs that outweigh the benefits—and that this should be considered when assessing the overall burden of taxation.
4. Proposed Solution: Kavanagh advocates for a system where at least part of the economic rent from land (the publicly-generated value of land) is captured by the government to replace some of the taxes that cause deadweight loss. This would reduce the financial pressure on labor and capital, leading to lower land prices, more sustainable economic growth, and a fairer distribution of wealth. He references historical precedent, such as the federal land tax in Australia from 1910 to 1952, and also points to the Henry Tax Review as advocating for this type of reform.
5. Wider Economic Implications: Kavanagh is critical of the current economic system, which he believes disproportionately benefits the wealthiest individuals (the 0.1%) by extracting public rent from the economy through land speculation, while imposing heavy burdens on the broader population. He suggests that this is one of the key reasons for wage stagnation and growing inequality, which are central to the failure of modern economies.
6. Caution Against Conventional Economic Wisdom: Kavanagh challenges mainstream economists, who, he argues, tend to separate the issues of land price bubbles, recessions, and taxation. He claims this separation misses the bigger picture, where land speculation and rising land prices create a vicious cycle of economic instability and inequality.

Underlying Themes:

• Economic Rent: A central theme in Kavanagh’s argument is the idea of “economic rent,” which refers to the income derived from ownership of land or other natural resources. Kavanagh argues that this rent is a collective societal product and should be used for the benefit of society, rather than captured by individuals or private groups.
• Land Value Tax: The suggestion to reintroduce a form of land value taxation (such as the one Australia had from 1910-1952) is a proposed solution. This tax would capture the unearned rent from land ownership and use it to fund public goods and reduce other forms of taxation that cause greater economic distortion.
• Debt and Speculation: Kavanagh’s analysis suggests that land speculation—often fueled by excessive mortgage debt—is a key driver of economic instability. By addressing land prices, Kavanagh believes it would be possible to reduce private debt, smooth economic cycles, and enhance overall prosperity.

Critique of Current Economic Thought:

Kavanagh is critical of mainstream economic models and the economists who focus primarily on income taxation or the supply-demand dynamics of land without addressing the deeper structural issues. He specifically calls out economists like Thomas Piketty and Yanis Varoufakis, suggesting that their frameworks do not sufficiently consider the pernicious effects of land speculation and rent extraction.

Conclusion:

In essence, Kavanagh’s essay argues that land price bubbles, exacerbated by speculative real estate markets, are a key factor driving recessions, wage stagnation, and growing inequality. He advocates for capturing the economic rent from land to replace taxes on labor and capital, which he sees as creating economic inefficiencies and social harm. By doing so, Kavanagh believes economies could experience more sustainable growth, higher wages, and more equitable wealth distribution.

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Yes, that’s almost it, AI. Thanks! My accompanying data table is in the original article.

I like to keep things simple.

The United States of America introduced black slaves for cheap labour. Australia became involved in ‘blackbirding’ Melanesians for the same reason.

Today, Australian and US businesses can’t afford* to pay fair wages to workers either, so they welcome excessive migration and cheap labour.

Immigration is fine, but it needs to be managed properly.

Although Donald Trump won the election opposing this more genteel form of slavery, he and his economic advisors are most unlikely to apply a brake to the debt-inducing impossible land prices that have been constraining national productivity*. Earned incomes and profits have declined rapidly as financialised speculation festers, burgeoning out of control.

This is the USA’s currently ‘great economy’, but Australia currently leads it at property speculation.

As in the late 1920s, this must end badly.

There’s something ironically apposite about Donald Trump being in charge of a likely 2027 real estate crash.

Also, that businessman-lobbyist for real estate interests, Howard Jarvis, headed the move to cap the property tax via Proposition 13 which has recently seen 100,000 Californians emigrating to Texas where people are doing better under a higher property tax regime.

Then we had Trumpian-like real estate guru, Seymour Durst, design the so-called ‘national debt clock’ in New York which actually accounts for government transfers into the private sector, whilst ignoring repetitive phases of impossible mortgage debt that burst regularly into financial recession and depression.

Click here for Victor Lebrun’s account of Leo Tolstoy and Henry George.

(Victor Lebrun was Tolstoy’s secretary.)