The Buyer’s Pyramid

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Renegade Economists Show 335

As broadcast on 3CR Wednesday April 16th, 2014

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An extended podcast with journalist Catherine Cashmore discussing her experience on both sides of the real estate game. Why is it so essential for the public to understand the importance of economic rent?

After insight into the world of real estate agents and buyers advocates, we analyse the state of the current land and housing market. It’s not often the show offers an extended interview, but Catherine was in fine form.

Will the bubble mentality continue? What forces are propping it up? Where are the agents for change to come from?

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Excuse the recording quality on my end.

Photo – James Hetherington

Housing Inquiry Submission

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Earthsharing’s Senate Housing Submission is now online. 149 submissions have been uploaded so far, with (it seems) more to come. We were particularly pleased to see a number of our members submitting their own policy reform agenda. Survey the submissions from the Parliamentary website.

The submission:

Senate Submission into Housing Affordability

14 Deterrents to Affordability

by Karl Fitzgerald, Project Director, Earthsharing Australia

  1. Investors constitute nearly 40% of housing loans, up from 12% in the mid 80′s. This does not include cash purchases by foreign investors.

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  2. Incentives for investors include interest only loans. Some 60% of investor related loans are interest only. This encourages short term capital gain strategies. The savings on a typical 10 year interest only loan are 54% compared to principal and interest.This encourages further distortions from economic fundamentals.

    Inherent in the argument that investors are key to affordability is the fact that land is fixed in supply. Incentives for investors can only act to crowd out genuine FHB’s by pushing prices higher.

    Interest only loans should be limited to small scale developers in the production process.

  3. SMSF capital gains exemptions: the 2010 move to allow capital gains exemptions for SMSF owners in their pension phase (over 55) helped place a floor under Australian property prices – at a time when a correction was underway. Whilst SMSF investment levels are still comparatively small, the signal to the marketplace is undeniable – property speculation is the easiest domain to earn wealth in an age of corporate concentration. With baby boomers already owning 47% of all residential property wealth, this will further enhance inter-generational inequalities.

    Such CGT exemptions should be removed.

  4. A well funded campaign for additional land supply to solve the affordability crisis has failed, especially in Victoria. The Urban Growth Boundary acts to push prices up inside the boundary and down outside it. This suits the development industry in that it benefits from higher land valuations for land zoned residential. It also assists in negotiations with farmers outside the UGB for lower option contracts.

    Despite this, the Victorian government has provided the most extensive land supply re-zonings in our history. The result? In Whittlesea, when land prices were falling at the second fastest rate since 1936 (June quarter of 2012), the AFR reported that developers pulled 58% of the land supply from the market in one quarter alone. Further evidence on supply manipulation can be seen here, here and here.

  5. Part of the problem lies with the accuracy of vacancy figures. Current vacancy statistics analyse only those properties available for rent on the market. However, many properties are bought and sold only for capital gains. This wider subset must be included in vacancy measurements. When capital gains have delivered some $30 – 40,000 p.a and rental incomes only $17,000, there is little motivation to risk having a kitchen damaged.

    For five years Earthsharing Australia has measured vacant properties, using water consumption as a proxy for vacancy. Our findings are generally three times higher than mainstream analysis.

    In 2010 the Chinese State (Grid) Power company mimicked our methodology to find 65.4 million empty homes. Rising land prices encourage over building. Our current analysis gives little forewarning of such dangers. The cost in terms of the Global Financial Crisis was trillions in lost growth.

    I remind that the GFC was precipitated by the March 2006 quarter fall in US land prices that led to credit write-downs by mid 07. The risk of such trends to the global economy has now returned with the Chinese property sector suffering from ghost towns.

  6. The ACCC recently garnered national headlines by targeting supermarkets for anti-competitive behaviour. However, we have been lobbying the ACCC for three years to investigate the challenges posed to affordability by ‘staged releases’ in the real estate sector. Pre-WW1, 200 properties would be sold off at 2.30pm on a saturday afternoon in a land sale. Today some developers boast to investors of 17 years of staged releases in a single development. Each week you can see these major developments drip feeding some 4 properties to the market. Surely this is a market manipulation?

    The ACCC responded to our requests by asking for more evidence. Unfortunately compiling such evidence is very costly. Prior to the 1970s land sales data could be accessed for free. In the US you can still access the data free online. We recently paid $6,000 for just residential sales turnover figures. This is not amenable to any form of checks and balances on the most powerful industry in the nation.

    However, there is much evidence available via print media. One of Melbourne’s most prominent sprawl developments is Atherstone (Melton South). They have zoning for 55,000 properties. However, barely 50 properties have been sold. The development has been mothballed rather than reduce prices to clear stock – as would happen in any other market. There is debate that the mothballing is a tactic to strongarm the State government into building the neighbouring Toolern train station. This will deliver a windfall gain to the developers – an unearned income. This hints at the real motivation for the ‘land supply’ debate – to force government to deliver the golden pen tick via re-zoning.

    Staged releases should be outlawed as a form of market manipulation.

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Perma-Nomics Possibilities

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Renegade Economists Shows 329 and 331

Broadcast each week on 3CR radio. Recently ranked 109th podcast in the world. Subscribe to the free show to keep us moving up the ladder.

Perma-Nomics revisited: Listen

Featuring music by Formidable Vegetable Sound System.

Perma-Nomics: The Flexibility Seed: Listen

These recordings are based on the recent Perma-Nomics presentation at the Sustainable Living Festival.

The second show comprised an interview by permaculturalist Katie Christiano (2nd from right in thisTime Magazine Occupy Wall St photo) as we delved deeper into the issues. Scarcity or abundance – what did nature intend – and why isn’t our economy more flexible?

The concept was to paraphrase the twelve principles of permaculture (as espoused by David Holmgren) into a common sense economic system. See more detail on the principles here. This is re-interpreted via Geonomics, the earth based economics system.

Some of this material challenges Holmgren’s economic stance, but with better understanding of the need for a three factor model (by including the earth in the function of production), further improvements can be made to ensure permaculturalists are paid for the improvements they make to the community.

Note: My family runs the POWer Plants community nursery, utilising the tremendous knowledge of the permaculture movement to provide low cost seedlings to support our community’s food autonomy.

EU’s 11 million empty homes a speculators paradise

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Here at Earthsharing we could argue to be world leaders in the measurement of vacant housing. For 6 years we have quantified vacant housing with the Speculative Vacancy report. For five of those years we have been using water consumption as a proxy for vacant housing.

This was a likely inspiration for the Chinese State Grid Power company to use electricity consumption as a proxy for vacancy. In 2010 they found 65.4 million empty apartments.

We have been advocating for similar groups such as the UK’s Empty Homes to adopt the water consumption method as a vacancy measure. Here in Australia we have been lobbying the ABS and other government agencies.

Unfortunately there is slow progress to report, despite the fact the global economy is screaming head first towards another land bubble so soon after the last one catalysed the GFC. Vacant housing is a sure sign that the economic fundamentals have departed from reality as insiders chase ‘unearned incomes’.

We should have learnt more from the GFC. Instead, we have increased taxes on our food in the UK, Spain, Greece, Japan, over 300 times in US states, NZ and soon here in Australia. This is exactly the opposite to what we should be doing – shifting taxes off our food (GST is regressive), off our productive work (incomes) and onto the naturally rising value of the earth (and natural monopolies). The tax system then has the ability to reward producers whilst operating on a progressive basis.

Wealth is redistributed to those who employ and create rather than those who hoard and wait.

Vacant housing would significantly fall as the tides of investment money are channeled back to the productive economy.

Long time member and Treasurer Karl Williams penned this excellent letter to the Guardian regarding their recent EU article.

GUARDIAN WEEKLY 14 February 2014

Aren’t homes places to live?

Are homes meant to be investment opportunities or places for people to live? Anyone reading Scandal of EU’s empty homes (28 February) would wonder whose interests Europe’s decision makers are serving.

But if one casts an eye at the west’s tax systems, one can only conclude that we have governments of the speculators, by the speculators and for the speculators. Honest work is frequently hammered by the highest tax rates, whereas those who “reap where they do not sow” are beneficiaries of tax favouritism.

Australia’s sweeping 2010 tax review recommended that properties be encouraged to be put to optimal use by a substantial federal land tax, which is almost impossible to avoid no matter how large one’s battalion of tax lawyers. Why are we not surprised that our system of lobbyocracy soon committed nearly all of these recommendations to oblivion?

Karl Williams
Melbourne, Australia

SLF Wrap

Office Manager Jess Wright

Office Manager Jess Wright

A warm welcome to our new visitors from the Sustainable Living Festival. Over 90,000 people visited the SLF and we were snowed under with interest, with many expressing an interest in what the Next Economy could be. Of course the answers were there with Land Value Tax as the bedrock to a new economy prioritising the productive sector over the current speculative frenzy seen in land, mining related shares and water rights to name a few. The Next Economy must reflect our economic as well as democratic rights. As our zine (below) mentions, if we are all born onto the planet as equals, why aren’t we all shareholders to the earth’s naturally rising value? This would reduce incentives to pillage and slow down the intense growth mantra economies are forced to abide by.

With this recognition of the commons, the common-wealth (the land, the water, the air and all other gifts from nature) would be more respected. Economic interest would develop a sense of stewardship for future generations. Accompanying this would be the knowledge that our publicly built assets, our infrastructures such as dams, gas and power piping and the like are valuable public commodities. If they are well managed, all of society benefits with the lowest cost operating system. Low utility prices give our industry an advantage over neighbors.

However, in today’s world, if it’s not available for the FIRE (Finance Insurance and Real Estate) sector to profit from, then a full frontal attack on our last remaining public utilities is activated (as is currently underway) to ram through more privatisations. The public loses out due to these newly privatised entities having a legal mandate to return shareholder dividends – first and foremost. This leads to maintenance cutbacks and reliability suffers. Listen to a recent Renegade Economists show on Energy Price Gouges with fmr CSIRO researcher Chris Mardon. There are over 10 different ways we are being gouged, something I hope to spell out online soon. These are much more substantial than the effects of the carbon tax on pricing. A convenient smokescreen.

This leads nicely to the other tenet to a New Economy – the need for a charge on pollution. As Christine Legarde (IMF chief) said over the weekend:

“I do think that climate change issues and progress in that regard are critical and are not just fantasies, they are real issues…..I would hope that it (Australia) continues to be a pioneer (on Carbon Tax).”

We had much interest in our More Trains poster. It was excellent to see the interest in the issue continue to build, with much help from the Melbourne Transport Forum. Here is our new poster describing the process:

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Opportunity and Equity