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.
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