Budget Smudge it

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HOPE
Creative Commons License photo credit: DieselDemon

Renegade Economists Podcast 89


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As broadcast on the almighty www.3cr.org.au on Wed May 13th.

Show Notes: More speculative handouts revealed in this unique budgetary analysis. Dr Gavin Putland is our guest this week as he analyses the pro’s and con’s of the pandering to lobbyists. Anything in italics is our additional commentary and not the authors.

How $539 million turns into a $4.6billion handout for the lucky few.

19% larger First Home Owners loan between Feb this year and last year – $52,700!

268,200 av FHOG loan in Jan 09,
280,600 Feb 09 – 4.7% jump

anyone’s wages gone up 5% in the last month?

Can u see the asymmetry between slavery and rent hikes?

Farewell to fairyland: It’s time to give back

Well, brothers and sisters, that is the way it’s going to be from here on. In the good times, the Howard government slashed income tax so deeply, particularly for high-income earners, that it has fallen from 12.5 per cent of gross demostic product (GDP) to 10 per cent. This has transferred almost $30 billion a year from the Government to us. It has helped put the Government into deep deficit, and now the Government must find ways to get it back.

In its last 10 years, the Howard government ran up $103 billion of surpluses. In the next five years, the Rudd Government, even after all these savings, is contemplating $219 billion of deficits.

Things will get a lot nastier — particularly when the Henry review of taxation sets out to reduce tax breaks seriously.

But life should not be this nasty for the unemployed. How could Labor, the battlers’ party, ignore the pain of those who lose their jobs and tell them to survive on $32 a day?
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Swan wimps out to property lobby

Karl FitzgeraldCommentary8 Comments

fhog_pain

With all the promise of a tough budget, the biggest concern is the limp wristed, white flag response to the First Home Owners Grant (FHOG). Rudd’s recent mention that’ the FHOG won’t go on forever’ must have seen some furious lobbying in the halls of power by the Ron Silverberg’s (HIA) of the property lobby.

Last night we learned that it will go on. The FHOG will be extended in full for another 3 months and then halved and continued – for another 3 months. Why doesn’t the government just give the property lobby the money directly? The $539million allocated over three years will have a tragic multiplier effect on land and housing prices.

The Age’s Chris Vedelago showed that average prices in poorer suburbs increased by more than the grant, with the average uplift in these Victorian suburbs being $27,000.

Since the FHOG increase in October 08, and by averaging the monthly First Home Grants over the last 4 months we have stats for, we can assume that 146,201 renters will have been manipulated into buying property by the start of the spring real estate season. Then the traditional spring seasonal demand will replace any downturn from the halving of the FHOG at the end of September.

The average FHO loan over the last year was $255,000. By adding the $27,000 bump up that the FHOG will add to the average loan, these aussie battlers will pay $195 extra per month.

Over the next year this means that first home owners will pay $28,509,195 in additional payments to the land banking developer and the lip-licking bank executive.

Over the 25 year lifecycle of the loan, this will add $31,548 in total payments to their mortgage. Taken to it’s logical conclusion, 146,201 first home owners (make that 200,000 according to the latest figures) will pay a combined 4.6 billion dollars more to the property and banking industries than they should have.

That’s how $539 million turns into a $4.6billion handout for the lucky few.

We are being conservative in these figures as they do not include the $6000 increase in FHOG from the Brumby State government. New house owners will now receive $32,000 in handouts ($21k federal and $11K state), and as Saul Eslake warned the ALP before they took office, this will naturally cascade into higher land and housing prices. Economics dictates this, no matter how smooth Swan looks.

The infrastructure boon will also prop up land prices in prime locations. Lucky speculators in Werribee South will be very happy when they can advertise a reduced travel time to the CBD.

Year on year from February 2008 there has been a 19% increase in the size of FHO loans. This is a $52,700 spike.

Tragic economics Mr Swan. Casino economics for the lucky speculative retiree.

These extra payments will undermine the so-called pump priming benefits of the $57.6bn deficit. Why? Because these households and indeed any other recent home purchaser will not have the comfort money to engage in the consumer lifestyle so necessary to bounce this economy back into 4.5% growth territory.

As a spin-off, such FHOG distortions will also help consolidate small business in wealthy areas. Wealthy communities will be the only ones willing to support boutique, creative enterprise. Choice will expand at the top but yet gets dumbed down for the traditional Labor supporter.

In years to come someone will release a study proving the effectiveness of handing lobbyists the money directly rather than using economic trickery to boost their bottom line. If young people knew about the sucker punch they are falling for, they would offer to roll out the red carpet for the property lobby. Why not? It would be more economical for us to give them the money directly AND to fly to Canberra to put on a giant party for the property lobby, with Gen X, Y and Z waiting on them hand and foot for a whole weekend rather than spending their lives hocked up to their eyeballs in debt.

The 6 month reprieve for the housing market has now been extended. The Rudd government is aiming to lock us into 40% plus payments on our mortgages, more than any other generation.

And to top it off, clean coal was given the majority of funding in the clean energy component of the budget.

Let infrastructure pay for itself!

Karl FitzgeraldArticlesLeave a Comment

2008_03_13_bos-ord-aus_491
Creative Commons License photo credit: dsearls

Gavin R. Putland

Everybody wins when we tax the benefits of infrastructure to cover the costs

DON RILEY owned properties near two stations on a new section of London’s underground Jubilee Line. The rise in the value of his properties outweighed all the tax he paid in the previous 40 years.

In his book, TAKEN FOR A RIDE (2001), Riley calculated that the new line, which cost taxpayers £3.5 billion, raised land values by a conservative £13 billion. If 27% of the uplift in land values had been reclaimed through the tax system, leaving the other 73% for the lucky property owners, this project would have paid for itself without burdening any other taxpayers.

Riley couldn’t help noticing that if the tax system reclaimed a share of ALL uplifts in land values, property owners would be the biggest winners, because numerous infrastructure projects that were stalled for want of money would suddenly become self-funding.

In a recession, this is just what is needed to reverse the decline in property values and create jobs without trashing the Budget. Moreover, such uplifts in land values are compatible with affordability in that they represent improved amenity, not higher prices or rents for the same amenity.

The benefit of an infrastructure project is measured by the price that people are willing to pay for it, and whatever part of that price is not paid in user charges (fares, tolls, etc.) is paid for access to LOCATIONS serviced by the project. In other words, the benefit (net of user charges) is manifested as uplifts in LAND VALUES — not building values, which are limited by construction costs, but values of land (or space), which has a location and therefore a locational value even if no buildings yet occupy it.
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Review: The Secret Life of Real Estate

Karl FitzgeraldCommentary2 Comments

Review by Mason Gaffney, May 2009

available from our bookshop – $50 hardback

This is an exciting, important and timely work; it will sell well. Anderson has ferreted out and marshaled dozens of sources on the 18-year cycle of boom and bust in real estate, its history, its mechanics, and its dynamics. Some sources are old and neglected; some are current and neglected; but after Anderson it will be hard for macro-economists to continue neglecting them. He melds the dramatic skills of a raconteur with the industry of a scholar and the discipline of a field marshal, to keep readers wide awake while they follow and most likely accept Anderson’s take on economic history.

One test of an hypothesis is prediction. Anderson accepts that challenge, even providing us with a “clock” to let us know where we are in the cycle. His theme is “Understanding the Past to Predict the Future”. After guiding us through many 18-year cycles, from 1800 to date, he sums up with a chapter disarmingly titled, “Knowledge we Gained along the Way”. Here are some major findings:

  • The prices of land peak before other measures do, i.e. it is a leading indicator. Construction peaks after land prices do, but before recession hits, where “recession” is measured in GDP and other familiar metrics used by the NBER.
  • Few people study history, so few under about 42 even know there is a land cycle. All they know is their own recent experience, so in the heat of a land boom, lasting several years, they easily fall prey to projecting the boom indefinitely forwards. Few leading “mainstream” experts forecast crashes, even as they are beginning to happen; quite a few deny them even as they turn catastrophic. Anderson names names, including Ben Bernanke’s, and most of us could add more.
  • Bank credit swells and shrinks in synch with the land cycle. The two interact in a positive feedback process: swelling bank credit raises land prices; buyers need more credit to purchase the land; the appreciated land then serves as collateral for more bank loans, and so on.

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