Land Supply and Housing Affordability: Where do the Homeless fit in?

–       by Bryan Kavanagh

Precis of a talk given at a forum held at Prosper Australia on Friday 13 October 2006

The evidence on housing evictions just given by Ken Fernandes demonstrates that the dispossessed don’t fit in at all. The poor have no political clout, so they don’t really matter. It’s that simple.

Homelessness is evidence of a corrupt system in any country, whether in countries of the first, second or third worlds.

In connection with housing affordability, interestingly, the recent movie “Thank you for smoking” has more than a hint of an effective response to homelessness when Nick Naylor, the successful anti-hero lobbyist for the tobacco industry justifies what he does for a living when he says:-

–       “I’ve got a mortgage.”

–       “99% of people do what they do because of the mortgage.”

–       “We’d all be better off if we rented.”

Hollywood has never spoken truer words!

Unfortunately, few people understand land price. It’s simply the private expropriation and capitalisation of uncollected, community-generated rent. This example may assist to explain:-

If a residential site sells for $200,000, and residential property yields are showing 4% net – the annual site rent is $8000. [ie. 4% of $200,000]

So, if we took even half this publicly-created rent for public finance, the price of the site would fall to $100,000. [ie. $4000 pa capitalised at 4% = $4000 x 100/4]

Would this not make a home more affordable?

If we didn’t capture the site’s existing $1000 in rates, the price of the site would actually blow out to $225,000 [ie. $9000 pa x 100/4]

Clearly, public charges on land actually lower land prices.

So, if we took the whole $9000 pa each year, the site’s price would theoretically drop to zero.

The homeless can afford zero land price. Unfortunately, most landlords can’t – and landlords have enormous political clout.

And, of course, landlords do not ‘supply’ land – it’s a natural resource.

We used to capture more publicly-generated rent before Gough Whitlam decided to halve council rates at the outset of the 1970s and fund this reduction from federal revenues. A gigantic land bubble had burst during Whitlam’s prime ministership, creating a recession. “It was caused by property taxes and succession duties!” cried the landlord lobby.

So, State probate tax and federal estate duty were duly abolished (led by Joh Bjelke Petersen in Queensland) during what remained of the 1970s.

With these incentives – coupled to those of negative gearing – the green light was given to rampant speculation. And this, of course, has impacted negatively on land ‘supply’ and affordability.

Much the same process which inflated land prices was legislated by most of the western world, exemplified by California’s ‘Proposition 13’ which put a ceiling on the property tax in 1978.

The supply of suitably zoned residential land does affect price to a minor extent, but I find myself at odds with the Institute for Public Affairs’ Alan Moran, whose The Tragedy of Planning argues that greater land release by Australian State governments, as in the US cities such as St Louis, Houston, Dallas and Atlanta is the necessary public policy response to housing affordability.  It’s not.

It may not be coincidental that those cities have experienced far greater than average US crime rates, due in no small part to soulless, unplanned expansion.

Inside a bubble, things have a habit of getting distorted. You even start to believe governments when they say ‘The economy is in great shape!’

People don’t bother to save. “We are asset rich and can borrow more”. [Up go land prices!]

Housing equity withdrawal, or re-financing, went berserk in Australia, then in US, between 2000-2004 as the bubble in land prices was used to purchase even more residential real estate. Even people on modest means believed they, too, could become landlords. [Pity about productivity!]

The ‘wealth effect’ of a bubble has a powerful influence. Australians even believe that Peter Costello, who has presided over the greatest residential property bubble in our history, is a good Treasurer!

Thus, a credit spree has funded history’s greatest bubble in land prices – whilst the gap between rich and poor, and dispossession and homelessness, has grown.

As they say in the classics: “It’s pathological tax systems – not land supply, stupid!”

_________________

If you’re still having difficulty getting your head around the concept of economic rent, this new video cartoon will help you.

Cat’s-paw (kats’por), n. person used by another to serve his purpose; a tool.

[Here’s a classic radio case of a cat’s-paw who was used in an attempted dissertation on Henry George.]

Those 1% who steal the public’s rent rarely have to defend their own position: they can usually rely on a volunteer cat’s-paw!

Unfortunately, it’s not at all difficult to tax everybody on their earnings or on their purchases – the trickle-down tax effect of which is to make the cost of goods and services at least 50% dearer than it should be. (No, dear reader, wages are ultimately NOT the most costly input to the price of goods and services!)

However, just you try to suggest taxing land values will reduce prices and raise wages without being inflationary, and the cat’s-paw suddenly becomes most solicitous about what this might do to home-owners, farmers, and the poor widow. They’ll have to be excluded, of course, so there goes your very tax base straight away – so why, then, bother at all with land value taxation?

[Here’s a video example.]

Then there’s the person who believes that land value taxation is only about the SIZE of your land, when it’s all about its VALUE. And, they say, if you’ve got a big, beautiful house on a block of little value, you won’t be taxed much, whereas a person with a cheap house on a valuable block will be taxed more.  (Yes, exactly, because the latter is in a more valuable location, maybe even ripe for redevelopment.)

[Another video demonstrates this.]

No; land value taxation has NOTHING to do with your income – nor should it. It has to do entirely with the annual value generated by the site(s) over which you hold ownership.

In cases of genuine hardship, exemptions to payment of the charge may be given, but for fairness sake, people should be equally, if not more, solicitous about home owners, farmers and poor widows having to pay more than double what they should on their every purchase because of our current errant tax regimes.

No, no, that doesn’t suit the rentier (nor his cat’s paw) at all!

__________________________

Now, here’s a bit of GOOD news!

There are a number of reasons behind Westpac Bank’s record profit of almost $7 billion. Suffice to say capital and interest repayments on bubble-inflated residential mortgage helped the bottom line.

Westpac’s announcement and the RBA’s 25 basis point cut in the cash rate gave me a flashback to a talk I’d given at Melbourne University in 2005 when I’d mentioned both Westpac and the RBA in unflattering terms.  (And hasn’t Westpac resurrected itself from the Bank that nearly went under in the early nineties!)

My talk “Collapsing Economies and National Resource Rents” was given at a Centre for Public Policy symposium on “Equity in Sourcing Revenue” at Melbourne University on 2 August 2005.

Other speakers were Professors Julian Disney and John Freebairn, and Tim Colebatch, Economics Editor of THE AGE. The symposium was chaired by Brian Howe, AO, Director of the Centre for Public Policy and former Deputy Prime Minister of Australia.

On the day, I took the opportunity to practise a little prophesy: “Ladies and gentlemen, if we don’t take what is the community’s for the community then, tragically, community – civil society – is lost.”

– ALSO FROM GAVIN PUTLAND

<—- Click

… ALL BAD!

Hot on the heels of the Australian Bureau of Statistics updating its Australian System of National Accounts, my colleague Dr Gavin Putland, Director of the Land Values Research Group, has released another fascinating series of charts confirming the portents of the Kavanagh-Putland Index.

They show Australia has been set up for a financial bust as big as, if not bigger than, anywhere else in the world.

Unbelievable?

I’m confident time will shortly prove the statement correct, because Gavin Putland and I have put in years of work quantifying Australian real estate bubbles and their damning consequences. This one will put others to shame.

In bubbledom, we are the champions!

Who’s to blame?

We are. Australians are; particularly the baby-boomer generation. Many of us got a warm inner glow as our land prices shot up to nosebleed heights from 1999 to 2007 under the bubble-ignorant political leadership of John Howard and Peter Costello, only to be followed by the equally ignorant Rudd-Swan-Gillard regime.

The warm inner glow was sorely misguided, because future generations of Australians were being locked out of housing opportunities, and the X and Y generations began to realise the fact.

Most of the boomers didn’t care, though. Wasn’t their wealth increasing rapidly? Couldn’t they borrow  more against their assets?

Australia’s politicians, either ignorant of the realities of property bubbles, or with an eye to not losing baby-boomer votes, were not up to disabusing them of the notion that skyrocketing land prices were good for the nation.

So – no, Australia has most certainly not avoided the global financial collapse. We’re living on a rapidly diminishing band of borrowed time, and no one’s up for the simple fiscal adjustment that would turn this sad presentiment around.

The “Occupy” movement and unions do have an inkling, but they’re not even warm yet.

Howard Jarvis and Paul Gann are the men responsible for turning the once ‘Golden State’ of California into the economic basket case of the USA.

What did they do?

They garnered support for the “People’s Initiative to Limit Property Taxation”, otherwise known as “Proposition 13” to cut the property tax, ostensibly to stop the property tax from driving older Californians out of their houses, but in reality to appease the landlord lobby for whom Jarvis worked. Landlords had become increasing unhappy with the incidence of the property tax on their net yields, especially through the 1970s recessions.

The USA property lobby, then emboldened by the success of Proposition 13, got behind a similar push in 30 other states, most of which proved unsuccessful. This was promoted by selling the fact that cutting the property tax would help property owners. Nothing was said about how resultant budgetary shortfalls were to be financed.

The carrying of Proposition 13 in 1978, of course, meant that Californian budgets were forced to rely on alternative taxes which slowly but surely began to erode its prosperity.  Government spending excesses compounded the problem.

To this day it’s arguable that most Californians still can’t figure what happened to them.  Were they to examine the miscarriage that has become their property tax base, they’d get an inkling.

_____________________________________________

Further reading:

The beginning: Mason Gaffney 1978

The middle: Mason Gaffney 1995

The end: California had the biggest property boom in the United States, the median property price in April 2005 being $500,000.  Orange County, Ventura County and the San Francisco Bay Area had median prices around $650,000.

As home prices plummeted in 2007 and 2008 after the housing bubble burst, many thousands of homes have been foreclosed.

.

Well said, Tom!

And, of course, a flat rate charge on land values will pick up the mega rich (and the rest of us) quite nicely.  Problem is, the ultra wealthy push the poor widow to the fore to carry their argument against it–but she can be accommodated!–and the ‘two-bob toffs’ will also come out of the woodwork to object.  (The latter are quite used to being stolen from; taxed on all their comings and goings, so they don’t see there are PRINCIPLES involved.)

Land can’t flee overseas or be hidden.

The holding of other natural resources, too, is the complementary sine qua non, of course:  proper charges on oil, mineral, fishing, forestry & spectrum licenses, etc.

7 billion population?  More than ever, we need to ensure a thoroughgoing stewardship of the planet: that land is protected, used efficiently, isn’t monopolised or misused, nor held unreasonably out of use.

There IS an answer: the capture of economic rents and abolition of all arbitrary taxation imposed by those who would rape and abuse the planet.

The press normally publishes details of the Land Values Research Group’s Kavanagh-Putland Index when it is released. Not this time.  Have real estate advertisers got to newspaper editors, laying down the law against articles suggesting this is NOT the time to buy?

WITH mining States Queensland and Western Australia leading the real estate sales race to the bottom, Dr Gavin Putland said today “there will be a recession in 2011-2012” if the newly-updated Kavanagh-Putland Index fits the pattern.

Radio 3AW morning host Neil Mitchell is an interesting character.

He has abilities to describe and comment upon the shortcomings of the local Victorian community, our failing hospital and education systems, to bewail the losses in superannuation on air today with Tom Elliott (which are going to leave self-funded retirees with inadequate retirement incomes), yet manages to attack the very people who want to address these issues.

You might say he argues both sides of the question without being able to reconcile them, nor to see that change is essential if we are to repair these increasingly socially-devastating problems. His approach could be characterised as: ‘Politically, things are all right; it’s just that our services are falling apart.’

As he characterises most of the protesters in the City Square in Melbourne either as radical unionists or Greens, an intelligent woman calls in to let him know the gathering was clearly broader than this; but this was largely water off a duck’s back.

Prosper Australia (which says public funding for education, health, civil order and infrastructure can be vastly improved whilst we also abolish many taxes) was represented at “Occupy Melbourne”, and I can assure Neil that our members vote for the whole range of political parties. I think, however,  he would find this hard to accept, because it’s simpler to filter everything into black and white.

As with Andrew Bolt and Alan Jones, the economy is not Neil Mitchell’s long suit.

Like his Sydney counterpart Alan Jones, from whom he attempts to distance himself, Neil likes to pigeon-hole groups who suggest it may be possible to change things for the better. More often than not, he sees them as trouble-makers, especially if their protests have an ‘edge’ to them.

As rent-seekers pillage the common wealth that is the economic rent of our land and natural resources, and the world consequently collapses into financial instability, Neil has a message for protesters: “Go home! You’re blocking the City Square and affecting adjoining businesses!”

Maybe, Neil. But you’re pandering to a constituency frightened by anything resembling change, and that won’t improve our hospitals, education system, law and order, infrastructure or social welfare, will it?  We need a reformed economics to do that.  No?

We must call the rip-off rentier 1% to account, and change the system.  Oh, and Neil, that would lead to a genuine free enterprise system!

________________________________________________________

“If anything is certain, it is that change is certain. The world we are planning for today will not exist in this form tomorrow.” – Philip Bayard Crosby