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Renegade Economists Podcast 213

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Author Christopher Ketcham hits the forces of Monopoly Capitalism with an overview of how the market system became a host for greed.

www.realestate4ransom.com

Host Karl Fitzgerald: out of the 25 largest cities in America, New York is the most unequal for income distribution. If it were a nation it would come in at the 15th worst amongst 134 countries ranked by extremes of wealth and poverty – a banana republic without the death squads – so writes today’s special guest Christopher Ketcham. He’s a regular writer in Orion magazine.

Yes, today’s special guest is Christopher Ketcham – the next up and comer behind Matt Taibbi in terms of investigative journalism within the world of monopoly capitalism we are enduring. He writes for Vanity Fair, Harpers and GQ and is currently writing a book about secession movements in the north east of the (United) States. He really rose to prominence with an article called The Reign of the 1%’ers that buzzed around the internet in the lead up to Occupy Wall Street and thereafter and he’s also got another couple of killers called “The New Dog in Town” and the “Curse of Bigness”. I encourage you to find them on the Orion website.

I started off by asking Christopher about the writing process and what is the most rewarding facet of it?

C.K: I tend to prefer hate mail because then you know you’ve actually woken people up and sparked a nerve and done some sort of trouble making out there. I mean this article for Orion – the Reign of the One Percenters was written almost entirely for my daughter who’s 16 and for whom, I think the, future is quite bleak given the current situation – given the control that the 1%, the very rich, the oligarchy has over her fate, and my fate and the fate of the political economy. So the satisfaction I had in that article was really just writing a down and dirty polemic against the oligarchy.

And the article opens with her – she and I are taking this tour through the Wall Street area back in the summer of 2010 and I just decided “alright Leah (her name is Leah) – Leah lets take a tour and look at the various institutions of socio-pathology that really run this city”. So we walked by the AIG building, the Goldman Sachs building, or at least its ancillary headquarters in the Wall St area because you know a lot of these big corporations, these big investor banking firms have moved out. There not based entirely in Wall Street. They’re up in the Avenue of the Americas, they’re in New Jersey but there is still enough concentration down there. For example Bank of New York Mellon at 1 Wall St., Duetsche Bank at 60 Wall St., so we took the big tour and, walked by the NYSE, walked by the Federal Reserve where the criminality starts. I was trying to give her a sense as a 15 year old, I was trying to give her a sense of who really runs New York and who is behind the money power that really runs things in this country and, you know, generally, world wide.

K.F: and did she have a filter that she could empathise with what you were discussing. Did she study economics or history or any of those frontiers at school?

C.K: not really – the best part was that we started coming up with all sorts of really venomous invective for the various characters we were seeing. We were just engaged in open satire of the Wall Streeter’s who we were observing, the almost charactertures of wealth and privilege. So it was more a matter of satire and fun than of deep learning – if you will. But she has in her school studied the French revolution, the Russian revolution and the American revolution and understood that where there’s too much wealth concentrated in too few hands that you will have the people rising up and guillotining the very rich.

K.F: its amazing though that during a time when everyone’s after the elusive dollar it seems that very few are studying it (economics) as part of the syllabus at high school and I just wonder whether maybe out of this growing association with inequality there will be a pushback at high school for more kids to study some form of economics that is based on reality.

C.K: well the whole field of economics, what’s called neo-classical economics today is based on un-reality. It is based on the idea that there is no free lunch in any economic system. That for example the financier, the hedge funder, the usurious banker all contribute to society in some fashion, some productive fashion, whereas classical economists – old school progressive economists – throughout late 18th century and throughout the 19th century understood that there were all kinds of free lunch to be had in capitalism and the point of a progressive society was to enact laws that prevented those people from parasitically benefiting from society or from the capitalist system.

So what we have today is we have an economics curriculum in the high schools and in universities – more in universities than in high schools – that basically teaches that parasitism is A ok – parasitism is the way to go. And that’s why you have all those business schools, the major business schools in the United States, producing all these kids who want to go straight to Wall Street to make a billion bucks doing nothing. Basically,you know, pressing a couple of buttons and enjoying incredible profits while actually adding no productivity to society or producing no real goods or services.

K.F: And in Christopher Ketcham’s landmark article – the Reign of the One Percenters he writes “the 1%’er in his Wall Street tower creates value by tapping on keyboards and punching in algorithms. He makes money playing with money – manipulating abstractions. He manufactures and chases after financial bubbles and then pricks them. He speculates on mortgages, car loans, credit card debt, the price of gas that keeps the real economy moving, the price of food that keeps the labor pool alive, always hedging his bets so that he comes out ahead whether society wins or loses.” And that was a killer line for me – I said, right, I’ve got to get this man on the show. So let’s go back to the interview with Christopher Ketcham.

C.K: so if we were to adjust, to transform the way economics was taught I think it would go a long way towards changing the viewpoint of the younger generations in terms of how they see Wall Street, how they see big capital, big corporations, etcetera, etcetera.

K.F: and so much of this modern era is talking as if we have reached new levels of economic discovery and what you’re really telling us there is that 100 years ago our forefathers knew a lot more and were keeping an eye on what you have termed as the Gilded Age. Could you perhaps take us a step back in time to that era and what was learnt in the 1800s?

C.K: well what happened after the civil war in the United States is that there had been enormous increases in government spending and enormous expansion of the industrial plant – infrastructure was expanded – and at the same time you had the failure of the regulatory apparatus to keep up with technological increases or technological innovations and innovations in finance and banking. So the industrial infrastructure and the transportation infrastructure of the United States was captured by monopoly corporations.

Corporations themselves were under the law given all the rights and privileges of the citizen, under the fiction of corporate personhood, and so you had this monopoly power of big money over the political economy of the United States which accrued more and more wealth into the hands of the few who were then able to determine economic policy from top to bottom in the United States. Corporations were acting as states, as governments, as private governments that were liberated from public government. So the Gilded Age was really about the hijacking of the country by private corporations and by the very wealthy.

So what happened in response? The progressive era rises up. You have the populist movement in response. You have the campaign for the mayoralty of New York by Henry George in 1886 who was one of the earliest of the progressive voices. You have the Populist party of 1892 and 1896 vying for the presidency as a 3rd party. You have all of these populist, progressive movements rising up saying “no – we have to reign in the power of the monopolist, reign in the power of the corporation, reign in the power of the very few – the oligarchy – and free the market place so that it will be a level playing field. So that we can all compete freely” and they called this radical republicanism; they called it democratic capitalism.

This lead to some amelioration of the problems of corporatism – the graduated income tax for example. The corporate regulatory apparatus was put in place with the interstate commerce commission, and with various anti-trust acts – the Sherman anti-trust act, the Clayton anti-trust act, etc, etc, and this was all through the period let’s say, 1890 – 1914/1920.

You have huge, aggressive, disruptive labor movements rising up with the Industrial Workers of the World, with the Congress of Industrial Organizations in the 1920s and the 1930s that seek to basically say “alright big, corporate America we’re going to disrupt your operations until you play fair”. And so these disruptions lead to the reforms of the New Deal – you have social security put in place, you have all sorts of systems put in place to protect the citizen against the depredations of corporations.

And then what happens? Well you have a period between 1945 and roughly 1975 where the country is the most equal its ever been. The incomes equal out, more or less, the very rich are heavily taxed. There is still a growing and continuing trend during that period towards increasing size in corporations, towards corporatism – the marriage of big government and big corporate power – but there are regulations in place that prevent corporations from going whole hog and just becoming savagely predatory in the market place.

All that ends with the election of Ronald Reagan in 1980 when you have the beginning of a long period of deregulation which basically means that the government steps into the marketplace and regulates the marketplace to benefit corporations against the interests of the citizenry. And this is a period, and rather this is a trend that continues irrespective of Republican or Democratic administrations. It begins with Ronald Reagan but it really accelerates under Bill Clinton – the great traitor to the Democratic Party, well to the old school, democratic, populist, roots – the populist, labor roots of the Democratic Party.

Bill Clinton was the corporate whore par excellence in the Democratic Party. Under Bill Clinton there were more mergers than ever in the history of the country. That is you had larger and larger corporations establishing larger and larger monopoly control over markets and the political economy. You had skyrocketing income inequality that begins under Bill Clinton and then of course the trend continues apace under George Bush, George W. Bush and now under Barrack Obama. So we are now in a new Gilded Age in a sense that we have returned, we have regressed to the point we have lost a 100 years of political, economic, progressive thought in action. That is we have dismantled all of those various apparatuses that had been put in place by the progressive movement to reign in the power of private, corporate governments.

K.F: and so what are some of the frontiers of monopoly you are seeing develop now? Where are the so called entrepreneurs pushing this control of independence, that’s essentially what’s been locked up is our ability to look after ourselves and our community on each and every front and we’re told that this monopolistic power is a good thing. Are there any new developments that are things people should be looking out for? We’ve seen our DNA’s start to be privatized – we’ve got all sorts of issues going on with electro magnetic spectrum, and pharmaceutical buy-ups of indigenous plants around the world are going full steam ahead. I just wonder over there in America, are there any new whisperings about that we should be looking out for?

C.K: Google. Google is one of the most dangerous monopolists out there because Google is increasingly securing its place as the gatekeeper and possibly the toll keeper for the internet. I mean when people go on the internet where do they go? They go to Google.

Google becomes an informational gateway and just take the monopoly that I think is developing in email … in email systems like Gmail for example. At OWS I’ll go around, I’ll be interviewing people and I’ll ask “so what’s your email?” and I’d say that 75-85% of all the people – these activists, these protestors – radical dissidents who are operating at OWS and participating in the marches etc, etc – they’re all on Gmail. Well, Gmail, it’s known that you have no privacy on Gmail and Google can read your email, can read the contents of your email at anytime.

The emails that you write and receive through Gmail are all in the end the property of Google. They sit in the Cloud in some remote computing location and you don’t actually download them to a computer where you can hold on to them and consider them yours, consider them your private data. So that’s an interesting monopoly that’s developing.

Amazon is also a huge monopolistic power on the internet which is exercising nefarious power over the marketplace and then all the various elements that you mentioned earlier whether it be GMO’s, whether it be crops, whether it be seeds, the patenting of genes, you name it, corporatism has run amuck.

Corporatism is a wild, rabid, predatory creature that is savaging the planet with its bloody jaws and something has to be done.

K.F: do you think following this extended recession/ depressionary period – will property bubbles be seen as a dangerous thing or are they just going to run onto the next bubble as can be imagined with these poor economic policies. Are they trying to enforce this lost decade? Is this what you’re seeing? Because from down here in Australia we’re still doing okay in our economy but were seeing all of these bail-outs as policies extending the recessionary forces and to think that austerity is the way forward I just don’t know how much pain they’re trying to inflict on the 99%.

C.K: well the way forward is to destroy the banks. The way forward is a debt jubilee. The way forward is to end the control of private institutions over money supply. The way forward is to create public banking systems to control our currency through the public – not through debt backed money. And barring that, barring a truly revolutionary transformation of our monetary system, we will continue to have bubbles because that is all we produce now in the west. We produce bubbles and that is how our economy survives. It survives entirely on leveraged investments … that then drive up asset prices… and so then you have more people leveraging themselves in order to buy more assets. So this is what you saw in the internet bubble of the late 1990s, that’s what you saw in the bubble that followed – the housing bubble of 2001-2008, so we will be seeking as many bubbles as possible.

You don’t know how many people I’ve talked to that say housing prices have to go back up – …. they have to go back up as “it’s the only way I’ll survive, all my money is tied up in property – all my money is tied up in the idea.” And these are people are good old Americans – middle class Americans – who invested in housing and considered it to be their means of retirement.

They say “I need this house to go up in value in order for me to survive”. Well for it to go up in value to the extent that they want, to the extent that they need to survive, they need another bubble, they need another housing bubble. So everyone’s implicated. Everyone’s tied up in this monstrous system. And the only way to end the monstrous system is for a calamitous transformation of that system and that would be very bad. That would be chaotic. And yet sometime you’ve got to have some chaos in society. Sometime you’ve got to have upheaval. We need upheaval. We need a revolution. We need this monstrous system to be destroyed in order to move forward.

K.F: so I dare say you’ve got some veggies growing in your back garden?

C.K: nah man. I mean I’ve got a couple of guns. I’ve got a bunch of guns. You have veggies growing in the garden? I’ve got a couple of veggies. I’ve got garlic – some garlic to keep away the vampires.

K.F: well it’s a massive, massive decade or so we’ve got coming up because were just really dealing with peak debt here and peak oil, peak demographics, climate refugees – its all coming our way. Do you think that just reforming the public banking system is enough though? We’re talking huge systemic change here.

C.K: its just one element …. that would have to happen. Because, look, in a system where money is backed by debt, that means you have to have constant growth in order to pay off the interest accrued on that debt. So you borrow 10 bucks. The 10 bucks is brought into the money supply at an interest rate of 2 or 3% or whatever. So the actual money that must be paid back compounds. And you have to continue to grow and grow and grow. That is you have to have this constant growth economy. A constant growth economy implies constant use of resources – increasingly scarce resources.

What we have today is an economy that is both delusional and suicidal. Delusional in the expectations that it can grow forever and suicidal in that we know it can’t grow forever and yet we continually say we need to grow – we want to grow. So you’re also talking about a societal transformation. A transformation which people are no longer engaged in the consumerist hallucination: no longer sickened with affluenza – with this desire for unabated and unhinged affluence. You know, the continual amassing of possessions that you really don’t need.

Then you’re also talking about a transformation of massive brainwashing and propaganda systems inherent in Madison Avenue in the promotion and publicity relation complexes which are all dedicated to deceitfully… basically lying to people in tricking them in to buying things they don’t need – selling sugar water to children. These are sick, demented, degraded, degenerate industries – I don’t see them going away anytime soon. So again were talking about transformations …that maybe are so quixotic, so idealistic to consider that they will never happen.

One of the guys that I got to know at OWS over weeks and weeks of just going there every night and just hanging there and talking to people was a guy called Jeff Smith – formerly in advertising – totally a clean cut dude. Here’s a guy who spent 15 years, as he put it, “selling sugar water to children” and repenting of it and finding now that he had worked for as he put it – quote – the most evil industries. So now he’s down at OWS fomenting disruption and marches and helping to organize the media working groups – so called – that engage in outreach with people like me. So you have the entire spectrum down at OWS in Zucotti Park in Lower Manhattan.

K.F: were talking to Christopher Ketcham, author of Reign of the One Percenters, and Christopher, in closing, can you tell us in about the next level of development for the OWS movement. What has been happening down there? We’re seeing that there’s plenty of goodwill still continuing – meetings going on in various public buildings around the city. But what are you feeling is going to happen once this winter is over in the north?

C.K: well, you know, November 15 rolled around and the park was raided and many people were assaulted and pepper sprayed. It was a bloody scene. It was violent and there was some talk that that was the end of it. That OWS with the scattering of the encampment at Zuccoti Park that that would also be the scattering of the movement. But in fact it rebounded astonishingly. Two days later, on November 17, OWS organized with a labor coalition the largest march it has ever organized to date – 32,000 people marched through lower Manhattan and across the Brooklyn Bridge.

Forty labor representatives in protest of the violent crackdowns of police in New York and elsewhere across the United States were arrested. Now that hasn’t happened since the 1930s. Labor has not come out in a cross-trade coalition to support each other – to support a political movement. That is to support radical political change. So you got a labor coalition coming together with OWS.

OWS now has an office and its got a central core of organizers. Its got lots of support. They’ve got lots of money. They have got their encampments that are still surviving and fighting off the police all over this country whether it be in LA or in Oakland where there’s been a lot of violence.

So you know the movement is not over. And in a sense the destruction of Zuccoti Park, which had become the symbolic centre of the movement, handed to OWS the moral high ground. And, so in a sense, it was a tactical error of huge proportions on behalf of the Bloomberg administration. So I see the movement growing. I see it building coalitions. I see it turning into I’m not sure what, but it will have some sort of effect on the 2012 elections.

K.F: and what would you say to Australian listeners in respect of the northern hemisphere at the moment?

C.K: I would say that the enemy is in NYC and the enemy is the 1% and they’ve got to be taken down – peacefully. That’s what I would say. And the 1% is everywhere.

The 1% is a global elite that want to steal, and plunder, and privatize and sequester the wealth and resources of this planet unto themselves and I think we have to band together, worldwide, and stop it. Stop it so that the world, the planetary commons can be shared among all and so that we can have some sort of dignified survival in the future, you know, as a race – as a human race: as homo sapiens. That’s my message.

A clip taken from our film Real Estate 4 Ransom.

For those visitors from this weekend’s Domain article, feel free to read this or this. Listen here.

Our second Melbourne screening of Real Estate 4 Ransom will be a huge day.
We hope you can join us.

2.15pm – Melbourne’s Magic Money Walk
3.30pm – Federal Greens MP Adam Bandt introduces the film.
4.10pm – Co-Directors Karl Fitzgerald & Gavin Emmanuel Q & A
4.30pm – Drinks downstairs

Melbourne’s Magic Money Walk

Co-Director Karl Fitzgerald will head a walk through Melbourne’s real estate hot spots, describing how the interplay between community, government and creativity adds millions of dollars in magic money to the lucky few.

Why have certain shops turned over? Why have some been for sale/ rent forever? What are the stories behind developments during Melbourne’s recent apartment supply blitz. Speculative vacancies anyone?

The free 45 min walk will end up at ACMI cinemas to see Real Estate 4 Ransom the film.

Meet at the Roundabout near Victoria markets on the corner of Queen and Franklin st, call 0433255721 if you get lost.

Federal Greens MP Adam Bandt will introduce the film. What hope is there for affordable housing?
See the trailer.
Or Collect the Ransom.
Buy your tickets to the film for $10.

Renegade Economists

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Michael Hudson was recently interviewed for our 200th show, following his visit to President Medvedev’s Global Policy Forum. The interview has gone viral following a link from Naked Capitalism and Michael’s popular site.

Listen here

Transcription

Karl Fitzgerald: Michael Hudson, our old friend here on the Renegade Economists, from the University of Missouri in Kansas City, has just returned from Russia speaking at the Global Policy Forum. Michael, tell us about the GPF.

MH: well that’s organized by President Medvedev more or less as an anti-Davos. Whereas the Davos invites many of the financial people to figure out how to run the West further into debt the subject of this forum was Russian poverty and how to overcome the fact that in the last 20 years the neo-liberal program that promised that Russia and the rest of the soviet republics would get rich has simply driven them all into debt and impoverished them.

KF: And so 30 years on from glasnost there must be quite some sense of concern about where the Russian economy has ended up.

MH: there certainly is. It’s been losing not only capital flight of $25 billion a year to the west but its people have been emigrating and President Putin, now Prime Minister Putin, has said that the demographic effect of just privatizing Russian real estate, and industry and following western advice has lost maybe 30 million Russians from what the normal demographic growth would be to 2050. So the effect of neo-liberal financial policy has been more devastating to Russia than WW2.

KF: 30 million people have gone due to neo-liberal policies?

MH: that’s right. The birth rate has fallen, life spans are shortening, and this is throughout the former Soviet Union. People of working age are emigrating. Instead of getting rid of the old Stalinist bureaucracy the neo-liberals simply privatized it and the result of course is corruption. Now public officials that used to be in charge of handing out public policies and administering them- not very efficiently its true – simply say give us a bribe or we won’t work.

In Latvia, for instance, people who go to doctors are expected to pay the doctors under the table in a little white envelope…but most notorious of all is the real estate debt they’ve taken on. What’s unique is that, just imagine, 20 years ago when there was the revolution that turned over power to Yeltsin in Russia and broke up the Soviet Union there wasn’t any debt at all. Families had all been living in their homes without paying rent and getting a free public education, public services were free and employers provided lunch, vacations and pensions, cultural and all of these connections were pulled up. And all of a sudden instead of just turning over the property to the people who lived in the homes and the businesses that used the offices the government said, okay, we are going to put it all up for sale and let the banks, usually the foreign banks, lend you the money, to buy it.

And the result was the biggest real estate bubble in the world in the mid 90’s and this is what started the whole real estate bubble- certainly what catalyzed it in the west because all of a sudden Russians, Latvians, Estonians and other people had to take on a lifetime of debt in order to get the homes that they’d been living in and not be thrown out on the street. So essentially they were told your money or your life – that’s neo- liberalism.

KF: And they’ve turned over from quite a stable society to one based on volatility, and oil price volatility. The after effects of the 2008 meltdown must have shocked a lot of people in the Russian government. What was the talk along those lines – what were people thinking about?

MH: Very little because they’d already in 1991 dismantled their industry. They were told that the way to get rich was to become a raw materials exporter or what the American protectionists and the bible called “hewers of wood and drawers of water”. So Russia simply dismantled its industry. The west said, oh, you’re not competitive and what the Russians didn’t realize is that all of this was very self serving to the west. The West, especially the American planners- the Harvard boys that went over said, well, we really don’t want is for Russia ever to be a military threat. We’d like to conquer it, to break it up, let’s now just slam them at the end of the cold war.

So without an industrial, manufacturing base there can’t really be much of a military. So the first thing they did was say – get rid of your manufacturing, get rid of your engineering, begin charging for your schooling, close down the schools – you don’t need engineers all you really need to do is make a hole in the ground.

But none of this export revenue from the hole in the ground should really be turned over to the state – we want to make sure that you only tax labor and tax business, but don’t tax natural resources – let it all be privatized. And so Russia thought, gee this sounds like a funny way to get rich but that’s what they did. And so they followed the Harvard advice to give away the oil, the nickel companies, the mineral resources, and that’s how they got the money to begin sending it all to the west. There wasn’t any Russian money to buy these companies because the IMF and World Bank wiped out Russian savers with a hyper inflation by getting rid of all the capital controls and letting the rouble float. So it was just one bad advice after another and now the Russians realize they’ve been taken.

And they’re trying to figure out how on earth do we get out of this mess following the West’s advice. They thought, and the Baltics thought, that they were been told how to develop in the way that the West did. Neo-liberalism is the exact opposite of how Britain and the United States, Germany, Japan, and now China, got rich by progressive taxation, and having public infrastructure provided at much lower cost than privatized infrastructure and a resource fund tax, basically a land tax which is how Europe and America – states and localities – have been financed all throughout their history.

KF: So what was the sentiment at this GPF? Was there much discussion along those lines or are they tinkering at the edges with Tobin taxes and the like?

MH: Mostly tinkering at the edges. For instance Paul Krugman was invited and most of the focus was on the US and western financial meltdown. And he pointed out that while the problem of the post 2008 bubble was caused by private sector banking -the financial bubble – the solution is focusing on fiscal policy and particularly cutbacks in social security, Medicare and social spending and so the government’s response to the crisis that the banks have caused is to reduce living standards for labor all the more by taxing labor. There was no discussion by the Americans or by anybody that there was another fiscal policy that would have prevented the bubble in the first place, namely taxing the land and taxing real estate, and having a resource rent tax that wouldn’t have left all of this free lunch income available to be pledged to the banks and paid out as interest.

KF: I just can’t understand this austerity mentality that’s going on. Have Western economies lost the understanding of the multiplier effect? Can you explain to us what the multiplier effect is and why it’s no longer relevant under today’s neo liberal agenda?

MH: The basic idea is that if there is a decline in purchasing power – what we’re in right now in the West is debt deflation – people have to pay so much more money every month to pay their mortgage debt, their bank debt, their education loans and other bank loans, that they don’t have enough money to spend on goods and services. Now without spending on what labor produces – the goods and services – the businesses are not going to employ more labor to produce goods and services and they’re not going to invest in capital.

So the idea is if there’s a shortfall in the demand for goods and services the government should step in and run a budget deficit to rebuild the infrastructure because that’s what governments have always provided – roads and everything – in order to keep the economy solvent. But the bankers and the neo-liberals don’t want this.

When you have a poverty imposed on a country decade after decade, somebody is benefiting from all this and people are saying isn’t it too bad that economies are getting poor. Well it’s not too bad at all if you’re a banker because now these countries like Greece and Ireland are broke and now the bankers get to go to them and say, well, you have to finance your government spending not by government running a deficit – but sell us your real estate, sell us your mines.

So the bankers of the European central bank have gone to Greece and said in order for us not to plunge you into anarchy and just destroy your banking system you have to sell us your prime tourist land, ports, water and sewer systems so we can begin to charge people for water and sewers – you have to sell us your roads so that we can put up toll booths, but most of all give us your land, give us the Parthenon and if you don’t we will wreck your economy.

So what most people think is a policy mistake isn’t a mistake at all by the bankers. This is where they say foreclosure time has arrived and we’re going to get rich. This is where we put on the squeeze and the effect of finance under these conditions is very much like a military invasion but it’s a military attack without anybody losing their life except for the people who commit suicide, who die early and emigrate for the whole thing. So people don’t realize that the poverty for the many and the austerity is how the wealthy 1% of the population gets to clean up.

KF: surely though in Russia they’ve seen these huge property bubbles in Moscow, they’ve seen the oligarchs fly around the world buying up soccer teams all over the place and on the other side they’ve got their lead ice hockey team die in a plane crash and the average person on the street is not even surprised that planes fall out of the sky like anybody’s business over there. So how much can the people in Russia handle before they get really serious about looking at deep seated economic reform?

MH: nobody knows. There are the oligarchs and while Russia is known for the fact that much of the population is in poverty the fact is that they’ve created an awful lot of billionaires, almost more than anywhere else by giving them all of the land, resources, oil and the gas. So all the billionaires do what they do in other countries. They pretty much control the government and they’ve convinced the government to stop providing schooling and to close down many of the schools, especially in engineering, and they control the media so people really aren’t discussing the kind of thing that we’re discussing here.

That came out pretty clearly. The head of the economics section of the Academy of Sciences did ask me to write up most of these ideas to put them into discussion but the discussion has been almost entirely censored by the neo-liberal advisers who they brought over, ever since Jeffrey Sachs and the Harvard boys all came over and said don’t follow any advice but ours – there was a choice and they don’t realize in Russia that there was a choice.

For instance in 1991 my friend Ted Gwartney went over to St Petersburg in Moscow and offered to make a land map for them and said, look, if you make a land map and the price of real estate goes up, if the rental value of these homes goes up this should be your tax base and you’ll have the money to continue to spend on infrastructure – you won’t have to tax your labor and you can make your industry into a world competitive force.

Well he was told by the World Bank that’s not our plan. Our plan is to have a flat tax – to tax labor, not to tax land and resources because we want the West to buy up these resources. We want to buy it all and we don’t want to be taxed. We want the Russians to pay the tax and then we want all of their skilled labor to go to the West and that will cripple them. Russia’s poverty is the West’s benefit in this case and the result was that Russia became the world’s leading stock market from 1994 to 1997 and made enormous fortunes for Wall Street speculators while essentially emptying out Russian capital, labor, industry and the same thing happened in the Baltics.

KF: and now we have David Cameron in Russia spruiking up the support for Russia to join the WTO.

MH: I can’t understand that. Nobody discussed that in policy. We just talked about how Russia could overcome the poverty that it’s in and what they could do.

KF: so it’s interesting what’s happening on the world trade frontier we’re seeing this new age of protectionism becoming more and more prevalent with currency devaluation and recently the Swiss franc had a cap placed on it. Of course the Chinese Reminibi has always been undervalued there to assist their exports. What you are seeing now that America has all sorts of public-private contracts written in where there’s local procurement policies in place where you to buy a certain amount of steel from a local manufacturer for example.

MF: that’s been the case for the last 100 years. America has always been the most protectionist country in the world. This is where the theory of protectionism was really refined in the second half of the 19th century and when the WTO and international trade agreements – the GATT- were being formed after WW2 the US grandfathered in its protectionism. It said we’re going to have free trade except for countries that already have agricultural price supports and other subsidies – they get to continue what they’re doing and so America has always been the most protectionist country in the world and that’s what I wrote about in (my books) “Global Fracture” and “Super Imperialism”.

KF: Well so many countries are looking to protect their own backyard because of the short electoral cycle, because of the failure of these neo-liberal policies to deliver the so called wealth bonus for everyone and now the story keeps growing – let’s blame the banks for it was all to do with their corrupt lendings. Well I was very interested the other week to see the FHFA lawsuits against 17 banks in America been launched, and it was stated that Goldman Sachs were employing property valuers or appraisers who would overstate the value of the land that they were lending against and I was just wondering – you say you worked with a few land valuers, Ted Gwartney you mentioned – how they have been incorporated into this giant bubble ponzi scheme we are stuck within?

MH: the financial sector in America basically has become a criminalized sector. My colleague at the University of Missouri, Kansas City, Professor Bill Black, calls it a crimino-genic environment. He was one of the heads of the Federal Savings and Loans Bank board back in the 1980’s when the Savings and Loans were going bust on crooked loans to real estate and he points out at that time 2000 executives were sent to jail for financial fraud. In this bubble nobody has been sent to jail not even the big perpetrators such as Angelo Mizzello of Countrywide and the reason is that the banks bought immunity from politics by backing politicians who agreed not to regulate – not to do anything about the financial fraud that the FBI itself warned about. Basically you’re going to have criminals going to where all the money is – you know – where the wealth is.

The economy’s richest sector isn’t industry – it’s actually real estate – and the largest element of real estate is land. So most of the criminals all said here’s where all the money is, here’s where we can get rich in real estate lending. So in America they had no documentation loans so in other words the banks said we have got to begin … here’s this huge market and we make money making loans – let’s fuel a real estate bubble. They fueled it by easier and easier loan terms.

In the past in America a local bank would make a loan to somebody they knew – families that put 30% down and they would pay off with their income and the bank would use this income to pay part of it out as interest to depositors. Well in the last 15 to 20 years banks have begun to package them and sell them to other people. So the crookedness and the fraud took place in having mortgages way above the property value at a very high interest rate and then selling them to pension funds, to German banks, and to foreigners and essentially selling them property for much more than it was actually worth.

For instance the FBI found that 80% of the mortgage loans in these packages were fraudulent and in the worst of the liar’s loans – the AAA rated packages- the average actual price of the property in America happened to be the same value as in Ireland – 22 cents on the dollar. In other words 4/5 of these loans were just way beyond the value. Well that’s why all of a sudden, now that the banks are no longer fueling property by credit – and they’ve withdrawn their loans – that’s why property prices have fallen by about 30% in America and you walk down the street and there are “For Sale” signs everywhere and there are empty shops in the big shopping streets.

KF: so I just want to get this straight. Are you saying that it’s the packaging up of mortgages and on-selling them in these exploding interest type mortgages was that what caused the great recession that we are in now in or was there a deeper part?

MH: well the deeper cause is the fact there was a real estate bubble to begin with and the reason people wanted to take out mortgages now was that they thought that we had better buy a home now before the price rises even further and they didn’t realize that the reason prices were rising were because the banks were making easier and easier credit. They thought that homes were worth what the rental value was or what people could afford to pay when actually what a home is worth is whatever a bank is going to lend against it. So if somebody goes out to buy a home they’re bidding against other people for the same house and the winner is the person who can get the biggest bank loan and that’s the person who says I’m going to pledge all the rental value to the bank so the bank gets all the rent as if it were the landlord.

So three years ago, for the first time in American history, the average home equity relative to bank loan fell below 50%. And now, just 3 years later, for the USA as a whole, homeowners own only 1/3 of their home, 2/3 are owned by the banks and that it is despite the fact that about 20% of homes are owned without any mortgage at all- free and clear.

It’s basically a financial bubble that is based on what the banks can squeeze out of people who are trying to buy houses on credit and the price of credit – the debt service – absorbs all of the rental value. So in the past people used to criticize landlords for squeezing workers living standards but now that you’ve democratized land ownership it’s the banks that are doing the squeezing. But obviously there has to be the rental value there and in America about 40% of a blue collar worker’s income goes to pay for housing. Now that’s an enormous percentage. You don’t have a bank bubble in Germany so that there you only have 20% of income going to pay labor. So you talked about protectionism and trade earlier and people think, gee. German labor must be highly productive so that it can afford to undersell everyone else although the reality is that German labor doesn’t have to pay as much of a mortgage as American labor so of course Germany can undersell Americans using the same technology.

KF: what I’m trying to get at though is because the tax system penalizes us for working and rewards speculation in property, surely, that has given the big heads up to the powers that be to invest in real estate, to speculate, in that area and that’s what has forced the land prices up so high that its forced all these people to become sub-prime mortgagees – you know they wouldn’t have had that home credit stress if the price of land was lower due to the tax system but you’re saying, listen, that its only due to what the banks can lend. Isn’t that secondary?

MH: now wait a minute – there’s a connection between the two. By not taxing land the government has left all of this rental value free to be pledged to the banks. People think that land tax actually increases the overall burden of homeowners and workers but its just the opposite. If this rental value that’s been pledged to the banks as mortgage interest were taxed then the banks wouldn’t be able to capitalize the rent into a large mortgage loan. Housing prices would be much lower if we had the old fashion land tax like we used to have and also by taxing the land you wouldn’t have to have all of these heavy taxes that are put on labor. For instance in Latvia in 2 weeks they’re having a national election. In Latvia there’s a set of flat taxes on employment that add up to 59% of the wage budget and there’s only a 1% tax on the value of property. So here you have money going into real estate which is untaxed – people will borrow against it – and instead of the government getting this rental value which is created by nature and by the community building roads and infrastructure the banks get it and the government has turn to somewhere else to tax – namely on to employment.

KF: I’m pleased you clarified that Michael because a lot of people blame the 70’s recession and stagflation period on the oil bubble but few remember there was a monstrous land price bubble that happened back then. I’m seeing that this era we’re going through now, we’re going to blame the wrong thing – we’re going to say listen it was the banks and all of their dodgy lending strategies that caused this whereas really to look right at the root cause it would be fairer to say, look, it’s the land problem and we’ve got to tax the right things.

MH: the banks lending strategies are part and parcel of fiscal policy. Financial reform and fiscal reform are two sides of the same coin because banks lend against whatever the tax collector doesn’t collect. If you don’t tax a free lunch then it gets pledged to the banks just like when the Russians gave away their oil and gas, the kleptocrats borrowed, mainly from the west, to buy these things, so that the government didn’t get the revenue. There’s a tradeoff between either taxes or interest but one way or another somebody’s going to pay the rental value of the mines, of homes, and of office buildings – of all of these things – so the whole economy is turned from a real estate toll booth into a financial toll booth.

KF: so essentially you’re seeing that the world economy is going to splutter along for another 5 or so years in this recessionary mode with everyone on the edge of our seats worrying about share markets?

MH: it will continue to shrink. Nobody can see how industrial profits can grow if they’re not able to sell. In America 40% of recorded corporate profits are made by the banks. Now when that happens – these are not factories, these are not employment figures – I think the Bank of America said yesterday that it’s firing 30,000 people – the banks are downsizing because the economy is all loaned up – there’s no one else they’re going to make loans to. The economy is shrinking steadily, I think, over the next 5 years, and it will continue to shrink as far as the eye can see until people write down the debts and change the tax policy.

Additional ‘un-published’ commentary:

KF: Michael Hudson – fantastic to have you on the show. On a finishing note, 1/3 of Australia’s corporate profits just announced this profit reporting season were from the mining sector.

MH: uh ha – well that means that all of these profits could have been taken by the government which used to own all the sub-soil wealth and that means that money that used to be paid in taxes, so that they wouldn’t have to tax employment, instead is been paid out to the financial sector and in fact when I met with the central bankers down in Australia in 2009 they said Australia doesn’t need any industry, it doesn’t even need employment, all it really needs is to make money off the mines’ mineral exports – to make holes in the ground. So I’m not sure what the Australian’s are hoping to get out of all this.

KF: yeah well we’re just a giant quarry, a quarry economy that seems to be what’s happening around the world and quite interesting to see that in Brazil that they’re talking about a 4% royalty on iron ore rates – just 4% – and of course the ‘poor’ miners there are screaming about it. You beat your head against a wall wondering how much easy money these guys have to make before they realize how some of this commonwealth should be paid back to the government.

MH: well that’s what we call wealth addiction. Their demands are infinite and they are willing to sacrifice billions of dollars in the economy just to make 10 or 20 dollars more for themselves. That’s the financial mentality.

KF: Michael I hear you’ve been writing a book. What topics are you covering?

MH: well I’m putting together most of my economic essays and the economic model that has described all of this. I’m explaining that there are two approaches to the economy. One is the sort of neo-liberal free trade approach that’s taught almost censorialy today in the text books and the other is the classical economics approach that made a distinction between earned income and unearned income, between the rentiers getting a free lunch and the industrial economy. And I’ve been publishing this for about 20 years. So I’m putting it all into more or less a history of economic thought and application to today’s bubble economy to explain it all.

KF: fantastic Michael – we’ll keep an eye on michael-hudson.com for more on that.

Renegade Economists Show 199

Celebrating 4 years on air. Subscribe now.

Global activist Polly Higgins discusses the legal moves to protect the environment from corporate entities.

Listen here

Her websites are:
Trees Have Rights Too
Eradicating Ecocide – the book
Polly Higgins

Polly is currently touring Australia.

Following the interview we discuss our new documentary Real Estate 4 Ransom, the new screening dates and return fire to some minor criticisms from the recent film review by the Age property writer Chris Vedelago.

One day I will discuss royal libertarians.

If you are an online campaigner and would like to help with the film, I’d love to hear from you.

As written up in The Age today, p5:

Speculators ‘locking up’ empty dwellings that could be homes

Michelle Griffin

PROPERTY speculators have locked up 46,220 empty homes in metropolitan Melbourne, the housing campaign group Earthsharing Australia says.

In a documentary soon to be released, Real Estate 4 Ransom, the group says that 4.95 per cent of the city’s potential housing stock is unoccupied, double the rental vacancy rate of 2.4 per cent published last week by the Real Estate Institute of Victoria.

While the institute calculated the volume of available rentals by taking a sample from 45,000 tenancies on the books of its member estate agencies, Earthsharing used water-meter data supplied by City West Water and Yarra Valley Water to determine which residentially zoned properties were empty.

Dwellings using less than 50 litres a day for six consecutive months were deemed vacant. At the height of the drought in 2008, average household daily water use in suburbs with stage three restrictions was about 140 to 160 litres a day.

The group’s Speculative Vacancy Report says that in Docklands, almost a quarter of residential properties there, 23.32 per cent, are vacant. The official vacancy rate for Docklands is 3.62 per cent.

Other established suburbs with many empty homes, according to the report, include East Melbourne (18.64 per cent), Carlton (11.51 per cent) and Essendon North (13.07 per cent).

A spokesman for the Tenants Union of Victoria, Toby Archer, said he regularly heard from tenants who reported that houses sat empty for more than a year after they were evicted by new landlords.

“The report highlights that there may be more houses potentially available to renters than the indicators developed by the REIV,” Mr Archer said.

Earthsharing director Karl Fitzgerald admits that properties with no water usage could include vacant blocks, derelict houses and even homes with water tanks.

But he says the estimates may be conservative, considering apartment blocks or townhouses could be built on many blocks.

“Local councils always overvalue the house and undervalue the land,” Mr Fitzgerald said. “It gives a huge economic incentive for the owner to smash the house down. You could spend $5000 to fix the holes in the wall and make it fit for tenants, but for many property investors, the main thing is to sell this property. The land is the valuable thing.”

To fund the $50,000 documentary about land banking and tax reform, Earthsharing drew on funds realised when it sold off two properties at the height of the boom in 2008, an office building in Hardware Lane in the city and a commercial property in Coburg.

“I used to be really embarrassed [by the properties]; we’ve got to put [them] to use,” Mr Fitzgerald said, adding that the documentary was ultimately an argument in favour of the Henry Review’s proposals for land tax.

The Gillard Government’s Clean Energy Future plan signifies that the game is up for the free rider’s polluting our planet.

The Carbon Tax of $23 per tonne of carbon for July 1 2012 – June 30 2013 sends a clear message that polluters must pay. In this age of compromise politics, the industry lobbyists who seem to have won are the steel manufacturers. The ALP’s union links have been rewarded. The coal and mining lobby have lost out. But have no fear, Gina Reinhart has no doubt flown Lord Monckton to Australia to represent their interests.

Land Locked
Of immediate interest will be to see how land prices in sun drenched locations near major power transmission lines behave. If it is anything like California’s Mojave desert land rush, land prices there will sky rocket. Land speculators will get in first, with solar operators forced to pay more for land to meet their ransom price.

Rainforest land values
How will land prices for carbon sinks in the Pacific Islands react to this announcement? One expects there to be a gold rush of land grabbing for rainforests. Reports of cashed up mining companies hedging their bets has been prevalent for a number of years.

We remind you that these precious carbon sink resources, the lungs of the world, will only get more valuable in the future. Selling carbon permits off per annum is a much more sustainable solution for tribal elders. Then when carbon prices increase to $100 – $200 per annum, they get a share of the rising prices too.

Selling rainforest lands outright should be avoided at all costs.

Pressures on Housing
The exemption of petrol form the carbon tax means that sprawling home owners won’t be penalised. Some in the housing industry are complaining:

“Competing against imports from non-CO2-e taxing countries, Australian building product manufacturers face a cost collage as the carbon tax is passed on down the line into the inputs for each production and fabrication phase,” HIA Chief Executive Graham Wolfe said.

Construction costs have largely flat-lined during this land and house price boom. However, there is next to no commentary from the HIA on the role of land speculation in holding prime locations bare and forcing the rest of us to travel further to our work, our home.

Land speculation is an issue that will increase in importance as the drive to a more sustainable future becomes intrinsic to humanity’s survival. Listen to this recent podcast where second only to energy production was the importance of living in central locations (as the surest way to reduce our carbon footprint by 70%).

Some are complaining that Negative Gearers would be hurt by the rising of the tax free threshold from $6000 – $18,200. This will deter property investment/ speculation as there will be less of a tax write off for those hard working property flippers. This is a good thing. First home owners and the market in general continue to prefer established housing in centralised communities, rather than McMansions in ‘Master Planned Communities’.

Some commentators are concerned at the $4 billion budget hole over the next four years from the Clean Energy Future package. Compare that to some $24 billion we will be giving to negative gearers to both bid up existing house prices and support the building of unwanted McMansions in unwanted areas.

The Big Sell

Now we are set for a campaign like fever of salesmanship from both PM Gillard and Opposition leader Abbot. When will anyone in politics use the golden words ‘tax switch’ as a means of describing this momentous shift?

To see Abbot in his fluro vest working amongst the people, one wonders when a government MP will hit him over the Mining Tax. Abbot wants small business in manufacturing and services to pay the same company tax rate whilst miners benefit from record price gains for their products. That does not sound like a strategy towards lowest operating costs. It sounds like the end of the eastern seaboard manufacturing industry. The Liberal Party have become little more than a protectorate for monopolists, rather than the shepherds of efficient pricing systems.

Land Value Capture
Our aim for a sustainable society will not be maximised until we adopt a Geonomics system, where the earth’s scarce values are recycled back to the community. Page 7 of today’s AFR reported the high cost structure of the proposed high speed railway as one of its biggest hurdles to competing with discount airfares. Melb – Sydney is the world’s fourth busiest air route. A high speed train emits 1/4 of the greenhouse gases per person than what air travel does.

Land values along this train route would sky-rocket, especially at linking train stations. The $32 – 59 billion infrastructure price tag could be met if landowners paid back just 6% of the windfall land price gain they receive from this new service (over 20 years). Then train ticket prices could reflect the Marginal Operating Costs, keeping their price structure low.

That would certainly continue the positives.

An interesting report by the Fels Institute of Government (University of Pennsylvania) was quoted in Yes Magazine:

… [We] found that within 1/4 mile of one of Philadelphia’s 54 branches, the value of a home rose by $9,630. Overall, Philadelphia’s public libraries added $698 million to home values—which in turn generated an additional $18.5 million in property taxes to the City and School District each year. That benefit alone recouped more than half of the city’s investment.

More detail was found the Fels report:

Value to Homes and Neighborhoods

• Homes within ¼ mile of a Library are worth, on average, $9,630 more than homes more than ¼ mile from a Library. For homes between ¼ and ½ mile of a Library, the additional value is $650.
• Homes in Philadelphia are located, on average, about a half mile (.56 mile) from a Library; 95% of Philadelphia homes are within 1.13 miles of a branch, 75% of Philadelphia homes are within .73 miles, and 25% of Philadelphia homes are within .34 miles of a Library.
• Libraries are responsible for $698 million in home values in Philadelphia. That’s an increase in home values that homeowners can borrow against to finance education, home improvements and other types of spending.
• The additional home values generated by proximity to a Library produce an additional $18.5 million in property taxes to the City and School District each year. Under a scenario of accurate and timely assessments, this is how much property tax revenue could be lost per year if all libraries were closed.

The value of public works to the locational value of the home is undeniable. In our primer Land Value Capture for Infrastructure, we outline how public works often benefit the landowner many times over the cost of the project.

The new High Speed Rail 2 is a case in point. The UK’s Sunday TImes states:

Homeowners near these stations have cause to celebrate. Research by Savills shows that a one-minute reduction to a commuter rail journey adds £1,000 to the average value of a home.

People from all over the state/ nation are expected to pay for improvements that capitalise into higher land values in one particular location. In economics this is called leakage.

What have we done to deter such leakages?

On the contrary, with such windfall gains available, society has set up elaborate systems to promote them.

Infrastructure Australia, the peak body for public works funding by the Federal government, is one such organisation. Of the 18 person board, there is only one representative for the public interest – Mr John Fitzgerald, Victorian Department of Treasury and Finance, Commercial.

The 17 other members of the board have a vested interest to ignore the fact that public works deliver windfall gains to private owners of property.

From accountants specialising in infrastructure tax offsets, to heads of infrastructure companies to housing and construction heavyweights, one wonders how decisions are made at the Infrastructure Australia board level when so many must excuse themselves from voting with a conflict of interest over any given project.

Perhaps more public libraries will be built when similar reports are written in the Australian context…

Executive Summary

We estimate the Speculative Vacancy Rate for Melbourne in 2011 to be 4.94% or 46,220 of 935,305 properties surveyed.

Our Estimated Speculative Vacancy Rate is more than twice the REIV’s Rental Vacancy rate for the same period of 1.7%. The rental vacancy rate is the rate most commonly referred to in media coverage as ‘housing vacancy’.

Recent increases in house prices have been driven by speculation, not a housing shortage. Property buyers are restricting the supply of housing by holding their properties off the rental market.

More than 20 suburbs surveyed had estimated vacancy rates in excess of 8%.

15,237 properties surveyed consumed on average 0L of water per day.

The Speculative Vacancy rate was down from 2009’s rate of 6.84%. It is unclear how much of this fall is from an improvement in property usage and how much is attributable to changes in methodology/sample.

This report sampled 64% of dwellings in Greater Metropolitan Melbourne.

Download the 2010 Speculative Vacancies in Melbourne report

Introduction

The Speculative Vacancy 2010 Report sets out to answer the question ‘how efficiently is housing allocated by the market?’ We specifically look at properties in greater metropolitan Melbourne.

How many are empty?

Reported vacancies of 1.7% reflect the rental market. These are published and acted upon by the Real Estate Institute of Victoria (REIV), as at November 2010.

This report seeks to measure the vacancies in reality, regardless of property rights. It looks at whether there is a ready and waiting housing supply to provide homes to people who want to live in Melbourne and which could potentially provide lower costs of living through greater competition in the rental market.

This report will be of interest to those concerned with social and economic justice, and those concerned that Melbourne may have a property asset bubble. Vacant properties can be used to create a supply side shock and deflate the housing bubble dramatically. The genuine vacancy rate is a key factor in determining how big that bubble is.

About Earthsharing

Earthsharing Australia is a self-funded non government organisation, of people from all walks of life inspired by the economic justice that can be achieved by distributing the wealth produced from land among the entire community.
www.earthsharing.org.au

Methodology

The Speculative Vacancy Report follows the methodology used in the ‘I Want To Live Here’ reports (2008 and 2009). This involves obtaining data regarding the consumption of water at serviced properties. Water consumption is used as a proxy measure of vacancy. In this, and in previous reports, we assume that an average daily water consumption of less than 50L over six months indicates vacancy.

There are limits to this methodology. The 50L/per day maximum is significantly lower than Victorian Government campaign targets for daily individual water usage. A leak, such as a dripping tap, can consume up to 200L per day. An unoccupied dwelling may have an active sprinkler system that pushes water use above 50L/day.

Conversely, somebody who commutes between residences (e.g. occupying their Melbourne dwelling on weekends only) may end up achieving a daily average less than 50L. Therefore, it is possible our figures can understate or overstate vacancy for any given property.

However, the simplest and most likely explanation for low water consumption remains vacancy. We therefore provide a ‘definite’ speculative vacancy rate for properties averaging 0L per day, and an ‘estimated’ speculative vacancy rate for properties averaging 0-50L per day.

Findings

We successfully obtained the required data from City West Water and Yarra Valley Water. A third provider, South East Water, did not provide the data requested.

Data was organised by suburb. Suburbs where the total properties serviced (by both providers) were less than 100 have been excluded from our findings. For example, East Keilor had three properties serviced, only one of which met our definition of vacancy. This would lead to a 33% vacancy finding, which we feel misrepresents the true state of vacancies in the suburb. Therefore East Keilor has not been included in this report.

Overall, 935,305 properties were included from 261 suburbs. This represents 64% of the total dwellings captured in the 2006 Census for the Melbourne statistical division. Of these, 15,237 properties consumed 0L of water per day over the last six months and are definitely vacant. We estimate true vacancy to be as high as 46,220 properties or 4.94%. Almost 5% of properties consume less than 50L of water on average a day.

Our estimated total speculative vacancy rate is more than double the REIV’s published figures for rental vacancies for the November quarter. The REIV employ a different methodology to determine vacancy. They take the number of rental properties listed to let and divide it by the total number of rental properties listed with their member real estate agents. This method only captures vacancies that are made available to let.

Compared to the previous ‘I Want To Live Here’ Reports for 2009 and 2008, the findings suggest that the vacancy rate has dropped. This may be due to the more conservative exclusion of suburbs with less than 100 dwellings. Each year the sample size has increased, providing a more reliable picture of the speculative vacancy rate.

We believe it is an error to equate ‘rental vacancy’ with ‘genuine vacancy’. It overlooks the practice of speculating on the housing market. Speculation is the practice of buying property purely for anticipated capital gains, not rental income.

Top 20 Vacant Suburbs

Our estimated speculative vacancies represent the number of houses that could flood the market given a downturn in confidence. Many suburbs boasting high vacancy rates are in prime inner city locations. Given their preferential location, this would have a domino effect on house prices in more distant suburbs.

Limitations

It is beyond the scope of this study to detect ‘land banking’. Land banking is property that is completely undeveloped and not serviced by a water company. The practice of land banking contributes to urban sprawl but does not provide immediately available housing. We cannot detect these properties because if they have never been connected to water utilities (i.e. have no meter) they will not show up in the data.

This potentially applies to the entire Melbourne ‘Urban Growth Boundary’. This survey is unable to measure, advance or record how efficiently this land is released to the market to achieve housing affordability.

Conclusion

Our findings show increases in house prices since 2007 are mostly attributable to speculative market behaviour rather than a housing shortage.

Demand does exceed supply, but housing is not being used efficiently to accommodate our population. These speculative vacancies are inflating housing prices and driving urban sprawl.
Melbourne has a Property Asset Bubble, with a potential supply shock of housing ready to enter the market and reduce prices, given a loss of confidence in property. Speculative behaviour is unpredictable in nature but is definitely occurring. Property speculators are foregoing rental income in the hope of realising capital gains.

The myth of the housing shortage is being perpetuated by equating a ‘lack of housing to let’ with a ‘lack of housing’. The response from government has been to make more land available for residential development without addressing the underlying inefficient use of housing in Melbourne.

Recommendations

As in previous ‘I Want To Live Here’ reports we find a pressing need for regular and comprehensive gathering of data on the Genuine Vacancy Rate to be referred to by government so that policy can be formulated in response to real and accurate figures.

We urge people to consider the risks of buying property in Melbourne given the potential for a sudden increase in supply to generate a crash in property prices.

We urge all levels of government to rethink their taxation policy and the impact it has on the efficient use of land. Speculation occurs largely because property speculators can afford to sit on vacant housing given the low holding costs and tax incentives to do so. We call for a shift in taxation bases from income and consumption to land and natural resources as per the Henry Review recommendations.

Appendix 1:
Further International Vacancy Studies

The interest in housing vacancies has increased following the US property crash that precipitated the global financial crisis.

Californians were convinced in the mid 2000s that affordability issues were due to lack of land supply. ‘We need more re-zoning’ was the catchcry from developers.

In 2006, Thousand Oaks Acorn reported:

The California Building Industry Association (CBIA) continues to express alarm over what it calls an ongoing housing crisis in Southern California.

“lan Nevin, the association’s chief economist, projected in a 2006 CBIA Housing Forecast that only 185,000 to 205,000 building permits will be granted this year, far short of the 240,000 new homes needed each year.” 

By April 2009, this building industry call was dispelled – houses were bulldozed in California’s ghost estates as a means to re-balance supply and demand as property prices were in free fall.

The importance of an accurate, unbiased source for housing supply figures has gathered importance. There are many different techniques.

Syracuse, USA relies on $400,000 software to track vacancies.

Some enlist homeless aid groups to survey the land on foot in New York.

Ireland’s UCD Urban Institute Ireland has deducted there were 170,000 vacant homes in 2010.

They extrapolate Census figures.

“The number of housing units completed from 2006 to 2009 has been aggregated from DoEHLG data. The numbers vacant and occupied have been estimated by use of data on population and population to stock ratios over this period allied with discussions with financial and market sources indicating that over one third of additional stock over the period remains vacant.” (p16, Managing an Unstable Housing Market Williams, Hughes and Redmond, 2010).

Watch the related youtube clip

The State Grid Company of China recently revealed another tactic, releasing data using a similar utilities-based survey of land and housing usage, this time with electricity usage. They found a staggering 65.4 MILLION empty homes using zero power over six consecutive months.

Watch the SBS special

Appendix 2:

Tables of all 261 suburbs and their water usage, vacancy rates.

Download the 2010 Speculative Vacancies in Melbourne report

Renegade Economists Show 175

Broadcast on 3CR, Wed March 30th

Listen to the show
Subscribe to the podcast

As the Don’t Buy Now campaign hits fever pitch, the Age had our campaign as the lead story for most of the day. Google News Australia ranked the Buyers Strike at no1 , as did Yahoo. The day started with David Collyer interviewed by Red Symons, (as you will hear).

Other audio snippets related to the campaign were also played, including a summary piece by Chris Zappone and a reading of some of the more colourful comments from the Fairfax article by Prosper Secretary Anne Schmid.

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