Right about now Treasury and the RBA’s greatest concern should be whether the Australian property market is about to drop off a cliff.

What can they do in this circumstance? If they do nothing, many property owners will find themselves in negative equity. If the June quarter’s National Accounts show negative growth in September, we’ll be in technical recession.

Many Australians have a feeling, or dread, that something big’s afoot; they’ve virtually stopped shopping, because they’re busily paying down Australia’s record household debt.

So, it’s not at all fanciful to conclude that we’re almost certainly facing a recession, and that the relatively low unemployment rate will shortly start to spike.

I’ve already assessed elsewhere that we’d spent $2.8 trillion on real estate during the term of the current bubble to 2010, and that some $805 billion of that amount is actually within the bubble itself.

So, Treasury, the RBA and Australian government are going to have to tread very warily, if our ‘big four’ banks are to remain solvent.

Although I see greater public capture of natural resource rents, including land, is the only medium to long term response, I’ll readily confess to not having much of an idea about how we deal with the obvious short term economic shock that is ahead of us.

Enter Dr Gavin Putland, director of the Land Values Research Group, who has been busy working on this problem for some time.  Having assured himself that it works, he blogged his response earlier today.

Property owners should be given the right to opt out of the income and GST system says Putland.  His proposal for a “no losers” system does prevent home owners from plummeting into negative equity – except the “bailout” element is financed not by taxpayers, but from the saving in deadweight costs!

Hey! Julia, Wayne, Treasury, RBA, are you listening?  Something that works is surely something worth considering, especially if it obviates a US style crash in property values and has no losers?

Putland suggests the only possible opposition to the tax exemptions rent (TER) can come from opponents of choice – and he’s right.


  1. Dan: Yes, it would be better if there were one set of rules for all. But we don’t have that now. If you’re an ordinary home owner, you’re outside the CGT system and the land-tax system but you can’t negatively gear. If you’re an investor it’s the other way around. If you trade as a company, you’re treated one way; if you trade as an individual, you’re treated another way. Etc., etc. If you want reform with no losers, you can’t expect to sweep away all the inconsistencies at once.

    Moreover, even the purest Georgist system retains a distinction between property owners and non-owners: the former deal directly with the tax office; the latter don’t.

    You wrote: “I have a high income and no property… I would immediately buy the cheapest smallest bit of land I could find…”

    Then you’d have to negotiate a very high TER to rid yourself of income tax. And the ATO would be attaching conditions to protect future revenue. But you could do it.

    “The time and effort I spent in doing that would take away from my productive capacity…”

    That would be a one-off. But the saving in income-tax/GST paperwork would be permanent.

    “I would be holding the land without using it…”

    You’d need to use it to justify the hefty negotiated TER.

    Re shares: It’s better for COH to pay a recurrent charge on its above-par share value than to pay income tax — which would be payable even if COH were making only enough profit to keep its shares at par or below.

    Yes, the “above-par” condition is a crude attempt to capture economic rent while sparing the return to “innovation and hard work and retained earnings reinvested…” But income tax at best makes no such attempt, and at worst does the opposite (e.g. through capital-gains discounts/exemptions and negative gearing).

    The “super-profit” base of “resource-rent” taxes has the same problem. The above-par component of the share price is a proxy for super-profits, but is simpler and less susceptible to transfer-pricing rorts.

    But because the above-par component of the share price is only a crude proxy for economic rent, the standard rate on that component is lower than the standard rate on site values.

    Re debt: There are two reasons for including secured debt in the “property” base. First, the preferred security is real estate, including land. Second, if credit is rationed by a central authority, the limited supply of debt is analogous to the limited supply of land; and if credit *isn’t* rationed, those who create credit still constitute a cartel and their interest margins are still, in part, a return to privilege. Henry George thought that debt secured against land (if that is somehow separated from debt against improvements) should be treated as a share of ownership of the land and taxed accordingly. Because I have spread the net wider, I have nominated a lower standard rate on debt than on site values.

    My proposal, as implied by the desire to “devise methods of removing non-property-owners from the old system”, is only a first step. It isn’t a perfect system of capturing all the rent and only the rent (and I doubt that such a system is possible). But I submit that it’s a reasonable first step, and indeed that it would be an unambiguous improvement even if there were no further steps.

  2. I believe you may have misunderstood, Dan. However, that people can’t follow on first (or second) reading may pose a problem in itself. So, I’ll ask Gavin if he’ll respond on both counts.

  3. I believe your third sentence and your second paragraph answers the questions implicit in your first and second sentences, James. And I agree we’ve been running a Ponzi scheme financed by banks that didn’t care about their risk management. (So, let their shareholders, not taxpayers, bail them out!)

  4. HI Bryan

    I have to say I find it hard to make sense of Gavin’s proposal. Surely there should be one set of rules for all, not the ability to decide which tax system you reside in if you are a property owner, and no choice if you are not

    By way of example, I have a high income and no property by choice, so I pay a lot of income tax, (in part to support crazy speculation it seems). Should such a system be introduced, I would immediately buy the cheapest smallest bit of land I could find at a cost of a few weeks income and volunteer to pay land tax on it instead of income tax. The time and effort I spent in doing that would take away from my productive capacity, and I would be holding the land without using it while someone else might use it if I were not induced to do so by this policy – not exactly a speculative vacancy – more of a tax policy satisfaction vacancy.

    The other thing I can’t get my head around is the idea that debt and equity should be taxed as resources. Surely the above par component of company shares is the essence of the wealth creating effects of labour, production and innovation. The owner of a debt or equity is a saver – not a user-upper. By way of example, I have owned shares in COH for quite a long time. COH makes hearing implants using decades worth of innovation and hard work and retained earnings reinvested to generate an income which is now more per year than the inital par value of the shares. They are therefore worth a multiple of the par value of the shares. This rise in value cannot be equated with land or resource rents in any form. There was hard work and innovation involved. The rise in value of those shares is hard work and saving, not mere speculation.

    Perhaps I have misunderstood?

  5. The rental market is tight, but what I don’t get is why no new houses are being built. Building approvals are low and you’d think with all the talk of a shortage there’d be more houses built. I think this proves the shortage was just a myth as most sensible people expected!

    The housing sector is doomed. The party is over and everyone knows it. Vendors are taking their overpriced homes off the market and putting them up for rent because they can’t even sell!

    Australian has been running a Ponzi scheme with our assets, our resources and our future. It’s unsustainable. Everyone knows auction results have fallen into a black hole ( see Auction Results Collapse ) and it’s got so bad now that even the spruikers can’t fudge the figures up above 50%. Melbourne was at 48% last weekend. Dire.

    The housing market is in severe trouble, no two ways about it.

    James Matthews.

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