Michael Hudson
As published in today’s Business Age Opinion section
HIGHER land and house prices typically lead to an increased supply of housing. Yet at the peak of Australia’s perennial housing affordability crisis, the Housing Industry Association declared that there would be a 13 per cent fall in housing starts this calendar year, compounding last year’s 18 per cent fall.
In light of massive rezonings in Victoria and improved planning bureaucracy in many states, this can only be seen as a warning that property insiders expect there to be a price crash.
The public face of the housing industry is quite different. So, what do property investors expect that the rest of the population does not?
Government spokesmen reflect assurances by bankers and their major category of customers – the real estate industry – that Australia’s economy is defying gravity. In reality, that is as impossible in economic life as it is in physical nature.
Property prices are defined by how much a bank will lend. Donald Trump claims that a man is worth what he can borrow. This usually depends on what a borrower can afford to pay, after meeting basic break-even needs (the cost of living, plus taxes). In the corporate sector, it means after-tax cash flow. So property prices are set by the banks, subject to the tax system.
The motto of real estate investors is that rent is for paying interest – and whatever the tax collector relinquishes is available to be capitalised into a bank loan as a flow of interest payments. The guiding idea is that affordability determines property prices. One example of how the tax system affects property prices is in its failure to distinguish land from capital improvements. Speculative withholding of prime locations from the market in an undeveloped or unsold state creates artificial scarcity. This raises prices.
Property speculators are able to afford this hoarding to the degree that the land’s potential site rent remains untaxed. Taxing the land would bring underutilised land and other property on to the market. It also would reduce the available free-lunch rent that is currently capitalised into bank loans to raise prices.
The myth is that higher property taxes increase the cost of housing and office space over time. The reality is that higher taxes would leave less site-rent to be pledged to banks – thereby reducing the financial cost of property ownership – while also enabling the government to shift the tax burden back off labour on to property, as used to be the case in Australia before the mid-1970s.
This explains why the financial lobby supports the real estate lobby in shaping public perceptions of the property market – along with government financial policy towards the finance, insurance and real estate sector.
Australia’s fiscal-financial system has become increasingly dysfunctional in giving tax preference to land-price ”capital” gains and hence property speculation rather than tangible capital formation. Instead of raising living standards by producing more, what passes as post-industrial ”wealth creation” takes the form of inflating asset prices on credit. The result is a bubble economy. And inasmuch as asset-price gains are fuelled by debt leveraging, wealth creation is more accurately viewed as debt creation.
The problem is that debts remain in place even as prices drop.
And they are dropping in response to the economy’s shrinking ability to pay, as more and more income is earmarked to pay debts run up in the past. This debt service is not available for spending on goods and services. The result is debt deflation. Lower spending on goods and services shrinks the domestic market (and also shrinks imports), leading to lower business profits and also lower business rentals. Lower rental income results in lower property prices – and at a point, property falls into negative equity: the mortgage debt exceeds the current market price that home owners or commercial investors can recover.
This is the end stage of debt-leveraged bubbles. In this respect it behoves Australians to look ahead. It seems that Australian property investors are also doing this. How else to explain the cutback in new building?
Michael Hudson is distinguished research professor at the University of Missouri.
2 Comments on “Hudson hints at why speculators are ignored in supply slide debate”
Hudson’s recent tour of Australia has produced a remarkable series of recorded programs containing the clearest analysis of the current situation and its historical context I have seen in many years studying the subject from the point of view of the land question. He does not say it in this article but elsewhere he makes it clear that the Neo-Liberal program of de-industrialization and privatization of what used to be publicly owned is properly characterized as Neo-Feudalism. The term Neo-Liberalism from now on should never be used except in conjunction with the term Neo-Feudalism.
My limited study of feudalism indicates to me that feudalism made great sense to the extent that the land rents collected by the feudal lords was required to be used to support the local community by way of infrastructure and protection and the sovereign by way of privately provided knights in armor and troops. Feudalism became corrupt when the lords succeeded in pushing taxation off onto the people while they continued to collect the community created land rent. This effort really bore fruit in the 20th century until today few understand what the good old boys pulled off. Even my best good hearted liberal friends do not see any reason to make any distinction between taxes on labor and industry vs taxation on community created land values. Conservatives make a distinction except it is in reverse by especially hating property taxes that fall on land values. It does a feudal lord’s heart good to see such ignorance.
Today what we have is not capitalism but a corrupt form of feudalism. You have to admire the tenacity of the corrupt feudal lords who have virtually succeeded in reducing all the rest of us, the 90% at least, to a condition not unlike serfdom. We have the vote, we have civil rights galore, we have our guns in America, but none the less we are serfs.
At least we should expect our lords to live up to the standards set by the real feudal lords of old. No feudal lord was so stupid as to completely impoverish his serfs lest they rise up and smite him. The current lords somehow have forgotten this rule.