The narrative of The Depression blog is that the growth (or decline) in real estate price turnover actually leads and directs the economy.

I argued the case in a report “Unlocking the Riches of Oz: A case study of the social and economic costs of real estate bubbles 1972 to 2006” which was released in 2007, just before the US residential real estate bubble burst.

Although the facts are quite clear, economists sidestep this analysis, claiming that real estate bubbles are a factor of the undersupply of land. Inadequate suitably zoned land explains these bubbles, they say, but they have no explanation for what caused land price bubbles before town planning and zoning came into existence, not all that long ago.

Could it be that economists are ignorant of the Theory of Real Estate Valuation? i.e. that the phenomenon of land price is simply the capitalisation of its net annual rent? And, therefore, greater public capture of land rent via municipal rates and state land tax would keep the lid on recurrent land price bubbles?

These two charts complement the Kavanagh-Putland Index. In the first it can be seen growth or decline in GDP does respond to the direction of real estate turnover. So, although GDP growth was up in 2011 in accordance with the growth in 2010 real estate turnover, we may expect GDP to fall sharply in response to the 2011 dive in real estate turnover.  Watch this space.

The second chart states the obvious: if real estate is doing better than the economy, guess in which direction the economy is headed?

The utter economic stupidity, hidden not only by neo-classical economists but also by the crass diversions in Australian political life, could of course be rectified by putting into place the recommendations of Ken Henry’s inquiry into the Australian tax system.

Fat chance when economists don’t understand the Theory of Real Estate Valuation, and when politicians have become as useless as tits on a bull.


  1. Same as Singapore. Hong Kong doesn’t capture ENOUGH of its rent, James. Yes, it does get quite a lot of its land rent—not as efficiently as it could do, mind you—but it is more necessary than ever in intensive island states. No great problem with that one, James.

    Let me quote the late great Dr JFN Murray who wrote the valuation textbook Principles and Practice of Valuation: “… it is remarkable to find that there is an almost complete dissociation between economic theory and the theory of valuation …” He further suggested that economies would lurch from disaster to disaster because of this dissociation – and he was right: seems we now have real estate bubbles and crashes simply as a result of zoning restricting land supply. (Sigh!)

  2. Bryan. How then do you explain the rampant and persistent bubbles of Hong Kong, which has one of the highest LVTs in the world? Your academic approach simply does not match real life evidence.

  3. The ignorance is not mine, James. I have made intensive study over forty years as a valuer of the things contributing to land prices. Size, shape, topography, access to services, zoning and physical constraints ALL contribute. But the one thing that clearly contributes MOST is the extent to which a parcel of land’s rent can be privately capitalised. You obviously don’t get it (nor, obviously, that Singapore needs to capture MORE of its rent if it is not also to experience financial collapse).

    In theory, if the whole of the land rent is captured by government, land price would be zero , because there’s nothing left to be capitalised. The trend since I have been valuing has been for less and less land rent to be captured via municipal rates, state land taxes, etc. Ergo, increasing larger land price bubbles and bigger financial busts. But if you’re happy to stick to your pat little script that it’s all supply and demand and that without restrictive zonings, the US, UK, Spain, Belgium, Ireland, Italy, Greece, Portugal and all the others wouldn’t have experienced their financial crises, you just stick to it.

  4. In regards to Jame’s comments I think Texas and Arizona experienced large bubbles in both price and construction despite having little constraints on building in terms of zoning or regulation or physical constraints like mountain ranges.

  5. Hm yes I thought as much too, I think the best we can hope for is that the banks are part nationalised like in the UK to prevent a total collapse but then we still have the problem of going from having 40% of bank funding from ohshore to nil. I think they call it a sudden stop in economics. Im not looking forwrad to it my business is on the way down as it is but the eventual bust will make things worse for everyone

  6. You truly are clueless on the impact of urban growth constraints, aren’t you Bryan. The fact of the matter is that areas in North America with artificial or physical constraints on land supply have experienced massive bubbles, whereas those without constraints have not.

    This has nothing to do with an absence of LVTs, property taxes or the like. Easy credit doesn’t explain it either, since credit availability was more or less universal. Rather, it is all about whether land is free to move from rural to urban uses. If so, urban land prices will remain low and stable. If not, they will increase due to scarcity and speculation. It really is that simple.

  7. Yes, it does predict the downturn to some extent, Steve. Whilst I said in 2001 we could ‘expect the burst by 2009, but don’t set you watch by it’, it’s a little easier to predict its depth. Where the ’91 recession grew out of a predominantly commercial/industrial bubble from 1987 to 1990, which topped out just above 26% as compared to GDP, this is a residential bubble which began at the end of the ’90s, still has not really burst significantly, and topped out at almost 30% of GDP. So we have a 3-year ’90s bubble compared with a significantly taller bubble of 13-year amplitude. It’s monstrous in comparison, and the outcome will be with us for decades unless economists wake up to themselves and slash taxes on labour and capital. I’d expect an initial GDP decline in the order of 10%, but wouldn’t be surprised if it overshoots this target before some recovery off this lower base. It’s big.

  8. Just one question does this model predict the depth of the downturn ? I would think its going to be worse then the 1991 episode so will aim for peak to trough decline in GDP of 5%.

  9. Do you understand what land price is, James? If you are unaware that it is the private capitalisation of that part of the economic rent of land not captured for public purposes, then you’ve started off your argument from well behind the eight ball. In my experience, there are few comprehend this critical point. And, yes, zoning may very occasionally have a marginal affect on land prices, but I invite you to study the reality of the so-called shortage of land in California and get back to me to resume the discussion.

  10. So strict zoning, planning and other constraints on land supply (such as geographical barriers) have nothing to do with housing bubbles hey Bryan? Seriously mate, what planet are you on? If that was the case, places like Hong Kong, which collects around 40% of its taxes from land value tax (LVT), would not experience perennial housing bubbles. Or a state like New Jersey in the USA, which has the highest property tax in the country (admitedly not as good as a LVT) but has tight planning also wouldn’t have perennially volatile house prices.

    As for your argument that bubbles existed prior to planning/zoning laws, talk about a straw man argument. Modern production builders did not exist prior to the 1950s and the building industry was incapable, even if it wanted to, to build homes quickly and cheaply in response to changes in demand. This is certainly not the case now. The building industry in most western countries would be capable of supplying homes quickly and cheaply if only they were not burdened with excessive regulation. If you want real life examples of this, look to North American markets with traditional planning systems, such as Texas. And guess what? NONE of these places have a LVT and most have relatively low property taxes. And they all have affordable housing.

  11. Several years ago I saw a listing of all the US states, based highest to lowest on their property-taxing. There was a tight correlation between their economic performance and the higher property-taxing states. At the time I believe New Hampshire was the highest property-taxer and the best economic performer. It stands to reason, I guess, if you’re taxing a state less for doing well economically and more on its property values, it must tend to be a better economic performer.

    Yes, chattel slavery may be gone, but bring on the “come to Jesus moment” among wage slaves. It also seems to me the “Occupy” movement needs an economics that actually works. Cheers.

  12. The more I think about these things and look at the US situation where they do have large state based property taxes which go to fund local services and it seems less reliance on income tax. I get the feeling that is why there Bubble is smaller then ours. Real estate prices at around 3 X income in the States still seems crazy to them yet here we are with figures of 10x household income. I can only conlude that the reason they perform better then us in terms of Science and manuafacturing is that less of her nations resources are devoted to Land speculation. I acknowledge the place is a Plutocracy and they did have an insane bubble but our own situation is getting worse. We have no real national champions in industry outside of those that benefit from continous inflation. We need to hit rock bottom here before the ideas of land rent capture can become mainstream. I also think the decline of traditional print media will free the minds of the local Serfs and help bring the “come to Jesus moment’ closer.

    Keep up the good work.


Leave a Reply