photo credit: BK59

Last night saw the media highlight two essential points. On the same day that BHP announced it’s fifth consecutive record profit of $17.8 billion for the year, 4 Corners discussed how high land and housing prices in the mining town of Port Headland were strangling the community.

Both media pieces overlooked the fundamental role of the community in creating the value that naturally accrues to natural resources. Over the last 5 years of record profits for BHP, the ratio of royalty related payments to dividends has averaged 50.6%. In 2003 shareholders received 61% more in dividends than all tiers of government from resource rents. It was around this time that BHP CEO Chip Goodyear chided the business community with comments like ‘Our hard work has paid for your tax cuts’. In 2007 the community received 56% of the amount paid to shareholders. Why should shareholders get more than the rest of the community?

We ask here whether so called owners of resources are entrepreneurial geniuses or just extremely privileged to benefit from the gifts of nature? For that reason, Government should have the courage to withstand the criticism to any changes in royalty rates. Since when did mining companies and land developers become royalty? Why should mining companies have the right to demand meetings with government to ‘negotiate’ what it will pay?

Port Headland demonstrates the danger of allowing what is technically known as economic rent to accrue in land prices. Watch 4 Corner’s The Money Pit: A Boom town running on empty and put the 2 + 2 we discuss here together.

photo credit: megananne

Here we go again! The Reserve Bank is worried it raised interest rates too high. Is that what has caused this downturn?

The real cause of this looming recession is the rampant over investment in land. This has pushed land prices to double the long term average in Australia, at 6.6 times the average wage, rather than than the 3.3 long term average.

The further this divergence is maintained, the uglier this downturn will be. Fannae Mae type bailouts will not help. To answer why, we return back to elemental economics. The more we spend on rent to meet these high land prices, the less is left for investment and consumption. This flows through to a reduction in job opportunities and the closing of small businesses. Wages often fall as business struggles to meet its’ rental obligations. Properties are then foreclosed. Tears are shed. This happens repeatedly, approximately every 18 years. Read Fred Harrison’s Boom Bust to explain why.

Rental payments need to naturally fall back to the long term average of 3.3 years average wage. We can only live on easy credit for so long. Prolonging land prices at their current highs, like the Japanese tried to in the 90’s, will only prolong the recession. Let the market work it out.