Adam Schwab wrote up our fourth report on speculative vacancies in Crikey yesterday.

Shortage or glut? Feast or famine? The question of whether Australia is suffering a housing shortage continues to be hotly disputed, with the real estate and construction lobbies arguing a desperate shortage exists, while other independent bodies, such as Prosper Australia, disputing the notion of a shortage.

The housing glut argument is led by Earthsharing Australia, which last year produced a report suggesting that the vacancy rate in Melbourne (until recently, one of Australia’s hottest property markets) was about 5%. In fashionable suburbs, such as East Melbourne or the Docklands, vacancy rates exceeded 8%. Earthsharing’s report, which was based on water statistics provided by City West Water and Yarra Valley Water, suggested that more than 60,000 properties lay vacant in Melbourne — substantially more than the reported vacancy report suggested by the real estate lobby.

While not a perfect measure, there is a degree of commonsense to Earthsharing’s report. Rather than attempt to guess whether there is a housing shortage based on economic assumptions, the group simply checked whether to see water was being used in a property — it is not unreasonable to suggest that if no water is being used for a length of time, the property is unoccupied.

That view was contrasted by a report released by the National Housing Supply Council, which echoed the sentiments of construction groups and claimed Australia was in the midst of a housing shortage. In fact, according to the council, the shortage actually increased by 28,200 to 186,800 during 2011. Even worse, the alleged shortage is forecast to widen to 640,000 within 20 years.

The National Supply Council is a strange beast — formed by the federal government in 2008, the organisation is a strange mix of academia, property developers and the even respected Saul Eslake. Included in the council are Mark Hunter (CEO of Stockland Residential), Nigel Satterley (property developer and BRW Rich List member), Ruth Spielman (executive officer, National Growth Areas Alliance) and Simon Norris (Clarendon Homes Queensland).

The council’s rationale for deeming a housing shortage is worth considering further. That is because rather than look at actual demand for housing, the council uses “underlying” demand. This leads to strange results.

Last year, the population of Australia increased by 320,000 — this was through a combination of immigration and births (less deaths). This figure is sourced from the ABS, so we can assume it is about a correct a figure as we can locate. According to the council’s report, there were 131,000 dwellings added last year (this figure is lower than what other sources claim, but we’ll accept it).

The council’s own report noted that there are 8.7 million households in Australia — with a population of 22.4 million, that means there are 2.6 people per household. Using fairly simple arithmetic, that means with 2.6 people per dwelling, and 131,000 new dwellings, enough housing was built last year for 340,000 people.

But wait, the population only increased by 320,000 people — that means, despite the council’s claims, there is a surplus of housing being built (even with dwelling construction being less than forecast). This appears to contradict the council’s finding that the shortage increased in 2011.

The council claimed that “on the demand side, at any given point in time underlying demand may not feed through directly into effective (actual) demand” — basically, what that appears to mean is that while there isn’t really a shortage, it will make some assumptions that allow a shortage to appear.

Later, the council noted that “the level of underlying demand is driven mostly by migration and other demographic factors”. Essentially, it appears the council is claiming that demand may increase in coming years (even though immigration levels are falling, rather than increasing), and that is why a shortage exists. The fact that a surplus of housing was built last year is disregarded.

More mysteriously, the Supply Council also claimed that “there were about 8.7 million households in Australia in June 2010. The number of households is projected to be 12 million by 2030, representing a net increase of nearly 3.3 million households between 2010 and 2030″.

This alarming forecast again doesn’t appear matched by recent facts.

Based on household numbers, the council is predicting an Australian population of 31.2 million in 19 years. That’s an increase of 9 million from the current level. The problem? That would require Australia’s population to increase by 473,000 per year — 42% more than the population increased in 2011. In fact, that’s a higher population growth rate than Australia has ever recorded. The claim is more difficult to justify given that Australia’s population growth and migration is slowing after spiking in 2008 and 2009 (see table below).

House prices haven’t increased because of increased demand from migrants outstripping dwelling construction — rather, prices have risen because bank lending has created false demand. Supply factors have played little, if any role in the recent house price growth. As soon as bank lending is restricted (and this is happening already), it is likely the illusion of a supply shortage will disappear. Just like what happened in Japan in the 1990s, or California and Ireland after the recent financial crises.

“With 46,220 properties vacant in Melbourne, the myth we have a housing shortage cannot go on much longer,” Earthsharing Australia spokesperson Karl Fitzgerald said today.

Earthsharing’s Speculative Vacancies report highlights that tightness in rental stock does not equate to a lack of housing. The much quoted REIV’s 1.7% vacancy rate (Nov 2010) only refers to dwellings for rent, a subgroup of Melbourne’s total housing stock.

“Victoria’s Minister for Planning Matthew Guy is relying on poor data in contemplating to sprawl Melbourne even further when 46,000 homes lie dormant.

“Capital gains for Melbourne properties averaged $120,000 in boom years like 2009. Why would all investors bother to rent out a property for $17,000 when they could hold some of their portfolio empty to enhance massive capital gains?” asked Fitzgerald.

“When iconic suburbs like Carlton South have Estimated Genuine Vacancy rates of 11.5 per cent, Melbourne East 18.5 per cent and Docklands a staggering 23.32 per cent, there is something wrong with the economic incentives society feeds off” Fitzgerald said.

The report analysed 64 per cent of Melbourne’s residential stock using water meter data supplied by City West Water and Yarra Valley Water. Dwellings using under 50 litres a day for 6 consecutive months were deemed vacant.

“Extrapolating this to all Melbourne real estate, there are over 61,000 empty homes and apartments lying empty.

“The Speculative Vacancy report is an urgent warning to potential buyers. This is not the time to make a life-long commitment to buy a home – the market is flooded with stock as investors bail out of the market. With supply overwhelming demand, prices must fall.

“First home buyers are being told it is a ‘buyer’s market’. “Transitioning from one of the world’s biggest property bubbles into a genuine buyers market is a process that takes years, not days.

“SQM Research’s figures on the volumes of Melbourne houses offered for sale shows a staggering increase. March volumes are up an enormous 48 per cent compared to last year; April is up by an even larger 68 per cent over 2010.

“Buyers are being deliberately misled by incomplete statistics further transformed by real estate ‘spin’. We urge the federal government to instruct the ABS to collect and publish a monthly statistical series on housing vacancy rates in the interest of a fully informed market”

“Experienced players in the land game know the bubble has peaked and have already sold out.” Fitzgerald concluded.

Read the report

Australia’s endless debate about property prices pivots on the balance of supply and demand.

Earthsharing’s Speculative Vacancies in Melbourne 2010 Report demonstrates that nearly five percent of all houses in Melbourne are simply empty and unused.

The report identifies and measures the scale and extent of speculative vacancies – properties held out of use in the pursuit of capital gains – using water meter data collated by the various utilities.

“The REIV consistently points to it’s Rental Vacancy rate of 1.7 per cent as the sole measure of vacancies in Melbourne,” Earthsharing Research Director Karl Fitzgerald said today at the release of the report. “Our survey shows one in twenty houses and apartments are just sitting there vacant.

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

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

“More than 20 suburbs surveyed had estimated vacancy rates in excess of 8 per cent. There are notable hot spots in Docklands, Williams Landing, East Melbourne and Truganina,” Fitzgerald said.

“Supply and demand in these suburbs is significantly mismatched and should be monitored carefully for distress as housing prices recede.

“Docklands (23.3 per cent vacant) is particularly interesting as builders there have been obliged for some years by their financiers to offset risk by pre-selling a very substantial proportion of apartment before commencing construction. The vacancies there are largely owned by individuals, many of whom paid a very small deposit and signed a water-tight contract obliging them to pay the remainder on completion. These contracts are coming due just as the price trend turns down decisively,” Fitzgerald concluded.

Read the report

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

For four years we have been pointing to the hidden supply of privately held speculative land as a major issue for the ‘nowhere to live’ media cycle. Instead of sprawling outwards, we should be utilising the land we have to its highest and best use.

The State Grid Company of China recently released data using a similar utilities-based survey of land and housing usage to find a staggering 65.4 MILLION empty homes . Watch the SBS special.

Tohm Curtis was arguably the first in the world to use utilities (under 50L of water per day) as a proxy for property use with his 2008 I Want to Live Here report. Come and hear the young man deliver the facts to a most interesting issue.

2009 report summary

photo credit: Ian Sane

On the one hand, the market delivers the best for the least cost.
But on the other hand…. few are willing to call it as it is.

Yesterday’s National Housing Supply Report used coded language to hint at a ‘possible over-supply of housing’ due to housing investor tax breaks (p50).

However the usual suspects were missing from analysis when commenting on the role of vacancies:

Specific purposes include vacant stock awaiting sale, demolition or replacement, and holiday homes.

“Awaiting sale”. How very polite! People are screaming for housing and this is the best the nations peak body on housing supply can come up with?

Census data was used to show 830,374 properties as ‘awaiting sale’ or as holiday homes.

The said analysis focused on ABS statistics, which don’t include vacant land. This figure could easily be doubled if the nation’s residentially zoned land banks were included.

To bring the rental vacancy rate back to 3% – the rental market equilibrium, it is stated on p87 that:

The Council estimates that an additional 26,000 vacant private rental dwellings, mainly in New South Wales and Victoria, would be required in 2008.

We identified 14,149 here in Melbourne in a survey covering just 44% of Melbourne’s housing stock.

The ubiquitous Productivity Commission was quoted regarding the changing of the capital gains tax:

… has added to the recent housing price boom by encouraging investors to reduce current income in favour of longer term capital gains.

Only 830,000 vacant properties….but yet there is a possible shortfall of 200,000 dwellings by 2026???

And over at Rupert Murdoch’s Australian, Housing Shortfall Locking Out Thousands, the usual lines are run:

In a carefully worded criticism of the tax system, the report said the rules were skewed towards home buyers and mum and dad landlords at the expense of investors to build more medium-density housing for the future.

Medium density is mentioned twice in the report but from what i can see never is there a carefully worded mention along these lines.

Lower yields are of course mentioned. Is that why housing supply is dropping? What is the other hand saying? Shhhh…..

That’s what happens when you have a land boom. The pursuit of capital gains ensures that rental yields drop (slowly increasing rental income compared to Melbourne’s Dec 09 $70,000 jump in land prices).

In the final pages (p176), the report states:

In 2008, Port Hedland had a capital growth rate for property as at March 2008 of over 37 per cent according to Residex statistics.

Rising incomes and the Law of Rent demands that landlord’s can demand higher rents, as miners have the capacity to pay. It’s either that or go live in a shipping container house in 45 degree temperatures.

The Age’s Jason Dowling states:

The report also noted a large proportion of Australian homes were empty. It found one in 10 homes were unoccupied and that a quarter of these were holiday homes.

If one quarter of all vacancies are holiday homes (a mysterious stat we have been yearning for), this implies that 7.5% of Australia’s stock are speculative vacancies.

The pursuit of justice demands that we calculate the supply of speculative vacancies. Why didn’t the National Housing Supply Council? What was this ‘committee’ set up to do? (Fair enough they do say they will next time…when the bubble has popped)

That total is 622,781 properties.

622,781 speculative vacancies are holding the market to ransom, demanding their capital gain.

To emphasise, that is 3 times the supposed under-supply predicted in the far future of 2026.

To re-re-emphasise, these speculative vacancies could add 350% more to supply than was needed in 2008.

Until housing is seen as a human right rather than a speculative kite, the housing supply analysis will always have one hand behind its back.

Will Ken Henry have the ticker to recommend that higher and flatter land taxes replace payroll, halve income taxes and fund the abolition of the regressive GST? That is what is needed to restore the Great Aussie Dream.

The 2009 I Want to Live Here report reveals how speculative vacancies are overlooked in housing supply analyses.

“Inner city suburbs such as Richmond (7.40%), Princes Hill (8.76%) and Flemington (8.83%) had Genuine Vacancy Rates more than five times greater than the REIV’s vacancy rate of 1.4%” stated Earthsharing Australia spokesperson Karl Fitzgerald.

“By including speculative vacancies and under-utilised properties in our analysis, the genuine state of play in the property game is unveiled.”

“Speculative hot spots such as Carlton (11.05%), West Melbourne (16.56%) and Carlton South (28.96%) reflect how capital gains dominate the mindset of investors rather than rental returns.”

“When a speculator makes three times the capital gains over any rental income, writing off negative gearing is a petty consideration when hoarding saves on hassles and delivers bucket loads of cash.”

“With major infrastructure projects continually planned for these areas, speculators know they are onto a sure winner.”

“Student demand for apartments further solidifies the knowledge that these prime locations will always become more valuable.”

“Why sprawl the city when government policy should encourage us to build up, not out? Prime locations should be used for housing, not hoarding.”

“We call on governments at all levels to level the playing field between the productive and speculative sectors of the economy.”

“With the property industry benefiting from some of the world’s most generous tax breaks, our evidence shows they are squeezing the market. It is time for genuine tax reform.”

“Why tax houses? Abolish CIV and NAV rating so the family home is not subsidising the land banker.”

“Halve income taxes by flattening, widening and raising the Land Tax so there is less incentive for asset bubbles.”

“Lastly, give the RBA the power to implement Land Taxes so it removes this valuable policy lever from the lurches of lobbyists.” said Mr Fitzgerald.

The report sheds light on the poor utilisation of land by investigating the number of properties using little or no water.

2009 I Want to Live Here report (PDF 4.8MB)
Appendix 1 (PDF 4MB)
Appendix 2

Vacancies in Melbourne Report

Andrew Sadauskas

EXECUTIVE SUMMARY

- Broad Scope: Our research evaluated 652,695 properties across 23 different municipalities in the western, inner, southern, and south eastern suburbs of Melbourne. This represents nearly half of Melbourne’s 1,471,155 private dwellings.

- Genuine Vacancy Rate: The Genuine Vacancy Rate includes all vacant properties, including those not on the rental property market (i.e. speculative vacancies) in both residential and non-residential markets.

- 1 in every 15 Melbourne properties vacant: We found Melbourne’s Genuine Vacancy Rate currently stands at 6.86%. Many of these vacant properties are being withheld from the rental market in the form of speculative vacancies. This hoarding pushes rental prices up.

- Housing Bubble: The focus should shift from a housing shortage in Melbourne and towards the cause of housing bubbles. The rental crisis relates to a shortage of landlords willing to lease their properties. Encouraging speculative vacancies to become occupied properties would result in more affordable housing and place a downward pressure on rents.

- Federal and State Public Policy Failure: Government policy is based on the assumption that housing is being used efficiently and that there is a shortage of housing despite access to information that indicates the high proportion of genuine vacancies. This false assumption informs costly policies including the First Home Owners Grant (at the Federal level) and the Urban Growth Boundary Expansion (at the State level).

- Instant Housing supply: 14,149 houses could be made available for housing within days if more effective economic policy was adopted.

- 44,753 vacant properties were found across Melbourne’s inner, western, and south eastern suburbs: In comparison, this is similar in number to the City of Maribyrnong (covering Footscray, Maidstone, Maribyrnong, and Yarraville) which has 30,484 households in total.

- One in five commercial properties are vacant in Melbourne’s south east: In Melbourne’s south east nearly one in five commercial properties are vacant; a Genuine Vacancy Rate of 17.22%. This means that the Genuine Vacancy Rate for commercial properties is above the 15% office vacancy rate found in Boston.

- Rust-belt suburbs: We found significant vacancies in Moorabbin (9.85% vacancy rate with 44.5% of properties zoned non-residential), Dandenong South (10.33% vacancy rate; 91.19% of properties zoned non residential) and Bayswater (4.52% vacancy rate with 25.1% of properties zoned non-residential).

- Alarming inner city vacancy rates: Many inner city suburbs have high Genuine Vacancy Rates, including Collingwood (which has a 7.44% Genuine Vacancy Rate), Southbank (6.89%), and Princes Hill (8.76%). The most astounding results, however, came from the 11.05% vacancy rate in Carlton, the 16.56% Genuine Vacancy Rate in West Melbourne, and the 28.96% Genuine Vacancy Rate in Carlton South.

- Capital Gains trump rental income: The highest Genuine Vacancies are found in areas where high capital gains are expected due to new infrastructure projects (Dandenong South re Eastlink) and/ or the inherent demand found in cultural hotspots (Carlton South).

- Clear need for Tax Reform: Local Governments must switch from Capital Improved Value (CIV) rating systems to a Site Value (SV) rating system. This would re-balance the playing field between the family home and the speculative investor. Federal and State Governments must switch from ‘transaction taxes’ on land (e.g. Stamp Duty and Capital Gains Tax on property) to a Land Tax to discourage speculation.

- Turnoff speculative demand: Such tax reform would channel landlords towards focusing on rental income rather than capital gains.This would signal a preference for more building, more density.

- Conservative Methodology: We did not examine the possibilities for subdividing existing properties in this report.

Read the Press Release

INTRODUCTION AND BACKGROUND

This is the Third Annual I Want to Live Here report on the Genuine Vacancy Rate in Melbourne, Australia. In previous years, the report has focused on the Genuine Vacancy Rate in the Bluestone Ward in the City of Maribyrnong (2007), and vacant properties in inner and western Melbourne (2008). The 2009 report is more ambitious in scope, examining Genuine Vacancy Rates in 23 different municipalities covering Melbourne’s south-eastern, inner northern, and western suburbs. In total, 652,695 properties were evaluated during our investigation.

The 2009 report is particularly timely for three key reasons. The first of these is the ongoing rental and housing affordability crises in Australia, which has increased the real estate burden on home buyers, renters, and businesses alike. The second is the Global Financial Crisis (GFC), which has seen the housing bubble collapse internationally. Indeed, many of the leading economists who predicted the global financial crisis (including Fred Harrison and Bryan Kavanagh) have identified speculative real estate price bubbles as a key cause of the current crisis. The third reason for the importance of these findings has been key State and Federal Government policy decisions which have been taken in response to the GFC.

The ‘Genuine Vacancy Rate’ includes all vacant properties, including those not on the rental property market (i.e. speculative vacancies). In the context of this report, it refers to both residential and non-residential markets, except where noted otherwise.

The Vacant Property Shortage Myth and the Global Financial Crisis

Central to much of the discussion about the rental and housing affordability crises has been premised on the ‘vacant property shortage myth’. According to this myth, the primary cause of the rental and housing affordability crises is a lack of vacant properties within existing urban areas, with new housing construction not keeping pace with a growing population.

In light of the Global Financial crisis, the question of whether high land prices are a product of speculation (i.e. properties being withheld from the market) or a shortage of vacant properties has very severe ramifications for the health of the Australian economy.

Research by Dirk Bezemer, a Professor of Economics at the University of Groningen in the Netherlands found that the Global Financial Crisis was successfully predicted by the models used by twelve leading economists. In examining the common features of their models, Bezemer noted that:

“A broadly shared element of analysis is the distinction between financial wealth and real assets… A concern with debt as the counterpart of financial wealth follows naturally… There is a recurrent emphasis (e.g. Baker 2007), that home equity-fuelled consumption has in recent years sustained stable growth… Their view was that as soon as debt growth slowed down – as it inevitably would within years – growth would falter and recession set in… The bursting of the international housing bubble was seen to have a severe impact on the world economy”

In other words, the twelve economists who predicted the Global Financial Crisis did so by noticing a bubble in land prices. They examined the debt levels associated with such bubbles, and predicted the economic impact of such land price bubbles bursting.

Internationally, particularly in the US, this is indeed what has happened. Consider California, where house prices have dropped 41% between March 2008 and March 2009 on the back of foreclosures, and have continued to fall since (a further 12% in August alone). Retail vacancy rates in some parts of the US are now so high that whole shopping centres have been abandoned, as cataloged on websites such as www.deadmalls.com. Office vacancy rates stand at 15% in Boston, 18% in Philadelphia and 21% in Austin, Texas.

And that’s even before we consider Detroit; a city which has seen 30,000 people move out in the past year alone. The population of the Detroit metro area is believed to currently stand at 827,000; less than half its peak population of nearly 2 million. (The reasons behind Detroit’s rise and subsequent fall are discussed in an article by economic historian Mason Gaffney entitled “What’s the Matter with Michigan?“).

In contrast to the housing bubble collapse seen overseas, land prices in Australia have apparently hit record highs. According to a recent REIV report – for example – the Melbourne median house price recently hit $520,000. Much of the analysis of the strength of the Australian property market compared to the falls experienced overseas have been premised on the vacant property shortage myth; that property prices in Australian capital cities won’t fall like cities overseas have because we have an under supply of housing and land.

However, if a significant supply of land and housing is being withheld from the market, land prices in Australia may be far more vulnerable to a price collapse than is commonly anticipated (should this vacant land be suddenly released on to the market).

State Policy Responses

The vacant property shortage myth has also been central to recent Government policies at both a State and Federal level.

At a State Policy level, pressure to alleviate the supposed vacant property shortage has led it to recently announce an expansion of the urban growth boundary, allowing 41,000 hectares of additional urban sprawl on Melbourne’s outer fringe. Linked to this policy are a series of new freeways, including the E6, Peninsula Link, Banyule Tunnel, and Outer Metropolitan Ring Road – all designed to service the transport needs of this new sprawl.

This new policy appears to be a significant deviation from the previous State Government planning policies outlined in Melbourne 2030, released in 2001. According to this earlier policy, “variation of the urban growth boundary will be infrequent,” (Melbourne 2030, p. 59) proposed that “Higher-density housing will be encouraged in and around Neighbourhood Activity Centres,” (ibid., p. 49.) and noted that “the average density of the metropolitan area at around 14.9 persons per hectare (pph) is low by international standards. Montreal has 33.8 pph, for example, and Toronto has 41.5 pph.” (ibid., p. 58). This higher density has also facilitated an increased modal share for public transport, with the report stating that “the proportion of motorised transport trips taken on public transport will more than double, from the present 9 per cent to 20 per cent.” (ibid., p. vii)

This proposed expansion of the urban growth boundary (with its associated freeways) has, quite understandably, generated significant grass roots opposition across Melbourne. In Melbourne’s south, the proposed Peninsula Link (which will cut through the 220 hectare Pines Flora and Fauna Reserve in Frankston North) is opposed by the Pines Protectors, who argue that bulldozing trees to build more freeways and sprawl is inappropriate given the seriousness of climate change. To the north, the Protect Our Heritage Group opposes the bulldozing of homes in the towns of Woodstock and Wollert in order to build the E6 freeway. And the Protectors of Public Lands oppose green wedges around Melbourne’s outer fringe falling into the hands of private developers.

This report will examine whether (in light of vacant properties within the existing Urban Growth Boundaries) the proposed sprawl and associated freeways are really as “necessary” or “inevitable” as currently claimed. It will also examine whether possible policy alternatives exist based on better utilisation of currently vacant properties within the existing Urban Growth Boundaries.

Federal Policy Responses

The vacant property shortage myth has also influenced politicians at the Federal level, most notably in the form of the First Home Owners’ Grant (FHOG).

The fundamental problem with the grant is that it increases demand for housing and land, and therefore places upwards pressure on the price of land. The net effect is to reward speculators who are withholding land from the market with higher prices, rather than encouraging them to sell and therefore putting downward pressure on the price of land.

Purpose of Study

Against the background outlined above, the purpose of this study is to expand the scope of previous I Want to Live Here reports by examining the number of genuine vacancies in the south-eastern suburbs, as well as the inner northern, and western suburbs of the Melbourne metropolitan area. The south-eastern suburbs are particularly interesting in that they cover a range of different categories of suburbs including industrial suburbs, upper class inner suburbs, middle class middle suburbs, and new outer suburban areas. Including the south-eastern suburbs also gives us a clearer picture of which suburbs have the most speculative vacancies.

METHODOLOGY

The key methodology for the 2008 I Want to Live Here Report was as follows:

“In order to determine the net volume of vacant houses in the inner suburbs we researched objective measures of occupancy that may be collected by an existing organisation. As an essential human need we chose water consumption as being the most indicative of a speculative vacancy at a given property…. 50L per day averaged over the first 6 months of 2008 was chosen as the maximum usage cutoff point. Leaking water systems can consume as much as 200L per day which means vacant housing can still consume water.

The 2009 I Want to Live Here report uses the same key methodology, with the survey period in the first six months of 2009.

For suburbs in Melbourne’s south-east (615,546 properties), we have improved upon this methodology in several ways:

1) We have divided residential dwellings into two categories: units (including flats, apartments, etc.), and houses (larger stand alone dwellings).

2) We have also included non residential properties (including offices, factories, warehouses, and shops) in our figures.

3) In addition to these, for each of our key statistics, we have also calculated a residential total (combining the figures for houses and flats) and an overall total (combining the figures for flats, houses, and non-residential properties).

4) For each suburb and municipality, we have calculated the number of vacant properties in terms of units, houses, non residential properties, the residential total, and an overall total.

5) For each suburb and municipality, we have calculated the number of occupied properties in terms of units, houses, non residential properties, the residential total, and an overall total.

6) For each suburb and municipality, we have calculated the total number of properties in terms of units, houses, non residential properties, the residential total, and an overall total.

7) For each suburb and municipality, we have calculated the Genuine Vacancy Rate in terms of units, houses, non residential properties, the residential total, and an overall total.

For each suburb and municipality, we have calculated the capacity for population growth within the existing housing stock assuming two residents per unit and three residents per house. We have also calculated a total capacity combining these two figures.

9) For each suburb and municipality, we have calculated the percentage of properties which are residential, and the percentage which are non-residential.

10) For each suburb and municipality, we have calculated the percentage of vacancies which are residential, and the percentage which are non-residential.

Notes on Methodology

The vacancy figures described in this report will be inherently conservative. The methodology does not count sites which could be created through sub-dividision – thus achieving a higher population density – if properties were used more efficiently. A vacant land holding is counted as just one vacancy, despite current trends for two – three dwellings to be placed on a typical suburban block.

Another example – were large sprawling open air car parks replaced with multi-level car parks or parking under buildings, those sites could in turn be subdivided. Therefore, the potential population of each of the suburbs and municipalities in this study is significantly higher than even the Genuine Vacancy Rate suggests.

Another point to keep in mind in regards to water consumption is that water meters are installed in the property as soon as the land owner applies for it. In general, these meters are read 3 months later; whether the building construction is completed or not is not recorded. During the construction period the builder will use water. This small amount of water use will be recorded on the meter.

Perhaps the most conservative of all is that dripping taps in vacant dwellings further water down the Genuine Vacancy Rate. Some taps drip up to 220L p/day. Our 50L per day cut off does not include such sites.

Exclusion of Land Banking

As The Age’s Ben Schneiders and Royce Millar uncovered in 2007, a major form of land speculation comes in the form of ‘land banking’ by developers. This is the practice of developers stockpiling vast supplies of undeveloped land and then drip-feeding it into the market slowly in order to maximise prices. In the 2006 / 07 financial year, for example, it was revealed that the six largest property developers acquired 38,000 more lots than they sold, and had managed to acquire $70 billion dollars worth of land, predominantly on Melbourne’s outer fringe.

The figures quoted in this report do not include the number of properties which could be built on ‘land bank’ holdings. This is because (as stated above) the methodology used in this report only counts existing subdivisions. If possible subdivisions were included, the Genuine Vacancy Rate would be significantly higher than the figures quoted in this report. For this reason, the figures quoted in this report will inherently be conservative.

KEY RESEARCH FINDINGS

The raw data of our research can be found in Appendices 1 and 2.

Genuine vacancies in the CBD have increased from 7% to 8.63% over the last year. We are repeatedly told that vacancies are at 1.4% or less in the CBD.

We found that the Genuine Vacancy Rate currently stands at 6.86%. This means that approximately one in every 15 Melbourne properties are currently vacant.

The vacancy rate is significantly higher than this in a number of suburbs and municipalities. These include the City of Melbourne (8.63%), the area around Tullamarine Airport in Hume (7.99%), and the City of Yarra (7.03%). The worst offender in this regard was Cardinia in Melbourne’s outer south-east, which currently has an extraordinary 20.87% vacancy rate.

The suburbs we examined in the City of Monash (the only municipality left employing Site Value Rating) had a vacancy rate of 3.65%; roughly half the Genuine Vacancy Rate of the 6.86% rate we found for Melbourne as a whole.

The State Government has recently pressured Monash into switching to the less efficient CIV rating system.

In total, we were able to identify 44,752 vacant properties. To put this number in to context, the City of Maribyrnong (covering Footscray, Maidstone, Maribyrnong, and Yarraville) has 30,484 households in total, while Hobsons Bay (covering Altona, Laverton, Newport, and Laverton) has 35,891 households in total. In other words, speculative vacancies are effectively withholding the equivalent of a whole municipality from the property market.

The biggest surprise was the sheer number of vacant shops, warehouses, factories, and offices revealed. Unlike the western suburbs of Melbourne, Melbourne’s south east is overwhelmingly residential. While non residential properties make up one in nine properties in Melbourne’s south east, nearly half (42.61%) of all property vacancies in Melbourne’s south east were non-residential. In effect, non-residential properties were four times more likely to be vacant than residential properties.

Alarmingly, nearly one in five non-residential properties are vacant in Melbourne’s south-east; a non-residential Genuine Vacancy Rate of 17.22%. This means that the vacancy rate for non-residential properties is above the 15% office vacancy rate found in Boston, at the centre of the global financial crisis. That such a glut is allowed to persist in light of the rental and housing affordability crises should be a serious concern for governments at all levels. In total, there are over 10,000 vacant shops, factories, offices, and warehouses in Melbourne’s south east.

The high non-residential vacancy rate has seen the emergence of a string of formerly industrial ‘rust-belt’ suburbs across Melbourne’s south east. These include Moorabbin (9.85% vacancy rate with 44.5% of properties zoned non-residential), Dandenong South (10.33% vacancy rate; 91.19% of properties non residential) and Bayswater (4.52% Genuine Vacancy Rate with 25.1% of properties zoned non-residential). Worse still is the result for nearby suburb of Lyndhurst, which has an astronomical 18.59% vacancy rate.

Finally, many properties remain vacant in the new developments in some of Melbourne’s gentrified inner suburbs. These include Collingwood (which has a 7.44% vacancy rate), Southbank (6.89%), and Princes Hill (8.76%). The most astounding results, however, came from the 11.05% vacancy rate in Carlton, the 16.56% vacancy rate in West Melbourne, and the 28.96% rate in Carlton South.

ANALYSIS

Speculative vacancies are motivated by capital gains being disproportionately higher than rental returns. While median house prices in Melbourne have climbed by $30,000 in the three months to September this year (The Age, 24th October), Melbourne’s landlords currently make a 4.2% return on the median price of a rental house (The Age, 7th July). Even with the power to write off costs under negative gearing, the variance between capital gains and rental income is often three to one.

Speculative vacancies also have lower holding costs than a properly maintained rental property, both in the form of lower property upkeep costs, and lower council rates (under a CIV system). In addition to these low holding costs, the withholding of properties over prolonged periods is motivated by high transaction costs on properties (in the form of stamp duty on the purchase of properties and Capital Gains Tax on the sales price of properties).

Non Residential Vacancies and Rust Belt Suburbs:

The alarmingly high rates of non-residential speculative vacancies and the emergence of a number of rust-belt suburbs cascade into detrimental impacts on businesses, the economy, and the residential property market.

The speculative vacancies in a number of ‘rust belt’ suburbs in Melbourne’s south east distort the commercial and industrial property market by withholding properties from the market. This in turn pushes up land and rental costs above what the prices would be were these properties available for sale or rent on the open property market. This has the flow on effect of making it more expensive for businesses to finance the purchase or rent of premises to conduct business.

The result is that a higher proportion of business revenue is devoted to financing the purchase or lease of property than is otherwise necessary. This revenue may otherwise have gone towards additional wages or jobs, investments in plant and capital, or higher dividends for shareholders. Alternatively, higher real estate costs are passed on to consumers, making Australian businesses less competitive in a global economy while putting inflationary pressure on the economy at large.

High non-residential vacancy rates and non-residential speculation also has an adverse impact on the residential property market. If there are properties which are surplus to the requirements to commerce and industry during a tight residential property market, then there should be a clear and straightforward process to redevelop vacant commercial and industrial properties for residential use.

It is worth noting that creative redevelopment and subdivision can yield a number of residential properties from a redeveloped warehouse or commercial site. In Melbourne’s former rust-belt inner city suburbs, such conversions (into loft-style apartments) have become quite fashionable. These have demonstrated the multiplier effect of one commercial or industrial property yielding several residential properties.

With increasing signals from Canberra that Australia’s future wealth is in the mining sector, the prevalence of non-industrial vacancies commands policy perscriptions to encourage infill.

Upmarket Suburbs:

The relatively high Genuine Vacancy Rates in several desirable inner city suburbs (including Collingwood, Southbank, Princes Hill, Carlton, West Melbourne, and Carlton South) suggests that property speculation is withholding housing from the property market, artificially pushing up real estate prices in these suburbs. This has the flow on effect of ‘pricing out’ people who would otherwise be interested in purchasing housing in these suburbs, and therefore increases demand for properties in the sprawling suburbs. A key priority must be to discourage speculation so these properties are released onto the market.

KEY RECOMMENDATIONS

An independent body (such as the Australian Bureau of Statistics) should gather Genuine Vacancy Rate statistics regularly so that the true state of housing supply is available.

Current Government policies aimed at addressing the housing and rental affordability crises (at both a State and Federal level) are structured to encourage more housing supply. Yet such policies do nothing to prevent this new supply being tied up in speculative vacancies.

However, there are public policy alternatives open to government at all levels (Local, State and Federal) that can address the structural issues causing vacant properties to be withheld from the market.

Local Government Policy: Council Rating Reforms

At a local government level, the most immediate structural remedy is to adopt a property ratings system which encourages disused properties to be released to the market.

The objective here should be to implement a property rating system which reduces the burden on households and businesses which effectively use their properties, while increasing the costs on vacant landholders to discourage speculation. In effect, all classes of property holders are then on an even footing.

To this end, economic historian Phil Anderson has noted in his comprehensive research into Victoria’s Municipal Ratings Systems (PDF 2.03MB) that:

“When Site Value Rating is the system in operation, the following classes of ratepayer generally pay more: vacant land holders, any sites with development potential, properties with a higher land to building ratio. The following pay less: extensively improved properties on small sites, owners of flats and units, ratepayers working in office suites, shopping centre lessees, properties with a higher improvement to land value. When CIV [Capital Improved Value] is the rating system in operation, the question of who pays more and who pays less is generally the reverse of that above.”[xxi]

A Capital Improved Value (CIV) rating system charges rates for both the underlying value of land holdings as well as any improvements to the land, making it cheaper (in terms of council rates) to hold a completely vacant block of land than it is to have a well maintained and effectively utilised property. The perverse consequence of this (as Anderson points out above) is to encourage more properties to be withheld from the market than would be the case under a Site Value Ratings system.

In contrast, a Site Value Ratings (SVR) system charges only for the underlying value of the land being held, and excludes the value of any improvements from the assessed rates for properties. This reduces the council rates on extensively improved properties, while increasing the burden for those withholding property from the market. This, in turn, discourages vacant land speculation and therefore discourages properties being withheld from the market.

Home-owners should not be taxed for developing their sites. Families should not pay higher taxes than land banking speculators.

State and Federal Policy: Tax Reform

At a State and Federal level, there is also scope for structural reforms to help rectify the problem of properties being withheld from the market.

The most notable structural cause of speculative vacancies at a State and Federal level is the imposition of transaction taxes on the sale of land. This occurs in the form of Stamp Duty at a State Level, and Capital Gains Tax at a Federal level. These transaction taxes insert a perverse incentive into the market in that they tax people who wish to make a vacant property available to the market, while not taxing people who withhold vacant properties from the market. This delays the turnover of property.

These State and Federal transaction taxes should be replaced with an improved State or Federal Land Tax. The Land Tax should be broader and flatter than at present. It is important to note that the introduction of a higher and flatter Land Tax should be coupled with revenue neutral tax cuts on Stamp Duty, Capital Gains Tax, and Payroll Tax. At a minimum this should be implemented to fund a 50% cut in income taxes.

These structural reforms would remove the government imposed market distortions which systematically encourage the withholding of properties (in the form of speculative vacancies), and encourage buyers and sellers to meet in the market place in order to transfer property and satisfy demand for accommodation.

CONCLUSION

Speculative vacancies continue to hamper the housing supply crisis.

Melbourne’s CBD vacancies have increased over the last year from 7% to an 8.63% Genuine Vacancy Rate.

The vacant property shortage myth must be corrected so that economic policy can be more effective. With the government’s preference for rapid population growth and the continual signals that Australia’s economic future relies on the development of ‘quarry Australia’, seaboard governments must seriously address the role of land hoarding in the affordability crisis.

With small business the largest employer in Australia, the role of speculative vacancies in the non-residential sector is of national significance. This is akin to a 17% unemployment rate for land. The higher rents this enforces on small business is a sleeping issue that will rise rapidly as businesses battle for a price advantage in the global marketplace. With interest rates the RBA’s only policy to cool the housing market, the high dollar will continue to sacrifice the manufacturing sector.

The role of land prices in the affordability crisis must be questioned when a 3 bedroom fibro house in the mining town of Port Headland costs $870,000.

It is time for governments to look at the speculative side of the housing supply issue in order to understand the market in detail. If housing is a human right, then our tax policies must genuinely reflect this.

Read the press release

Download 2009 Report PDF

Appendix 1
Appendix 2

photo credit: euzesio

Mason Gaffney

February 2009

“Phantom faces at the window.
Phantom shadows on the floor.
Empty chairs at empty tables
Where my friends will meet no more” – from Alain Boublil, Les Mis

Many stores have closed in the last year; they stand empty behind signs reading “Available”, “For lease”, or “First month free”. So have many industries, their gates locked, their girders rusting. The capital in them is wasted, poured down a rat-hole. Multi-million dollar freighters are mothballed, with no cargos to carry; others sail with unfilled capacity. Vast warehouses stand half-empty. Fleets of trucks wait for loads that never come. Redundant McMansions stand waiting for buyers, some advertising “Bank-owned”. Freight trains haul too many “empties going back”.

It’s not just the capital that’s wasting. There is land under and around those empty buildings, often more valuable than the buildings themselves. It might better be vacant, for then at least the owner would not feel committed to speculate in the old building as well as the land. It’s more than the land literally under the building, too. Even residences have yards, garages, and driveways; some have palatial grounds. Retail and wholesale and industrial buildings have vast parking areas and aprons attached for employees, customers, and deliveries. When city planners count up vacant lots, if they do, they usually see just lots without buildings, of which there are many, but nowadays there are as many or more invisible vacant lots under and attached to empty buildings.

We worry about attacks from Al Quaeda, and invasions of immigrants from Central America, but these empty spaces and vacant lands might just as well be ceded to the Taliban, or drowned like the lost continent of Atlantis, for all the good they are doing us. Osama bin Laden’s attacks are pinpricks compared with the damage we do ourselves by mismanaging our economy: we are doing his work for him.

Trivializers tell us that abandoned lands in declining cities are worthless, noting that the median house in Detroit now sells for only $35,000 or so. However, that is to misunderstand three important matters. One is that Detroit not long ago was our fourth biggest city, home of the assembly line, core of the “arsenal of democracy” and the locus of our biggest industry. Its location has not worsened, but improved with the St. Lawrence Seaway opened and global warming lengthening its ice-free season.

The second is that Michigan’s leaders can renew Detroit and their whole state any time by shucking their terrible counterproductive “modern” tax system and returning to the system that sparked Michigan’s spectacular growth, as documented in this writer’s previous Insights column, “What’s the Matter with Michigan?”. The third is that urban renewal in a free market proceeds from the fringe of a slum in towards the center. Richard Hurd taught us back in 1903 that land values are marked by continuity in space, because developers seek to anchor new neighborhoods to the best of the old. The heart of a slum may be hopeless, if you try to start renewal there, but the edges are always renewable, and revival proceeds inwards from there.

But hold on, what’s the use of new buildings when so many old ones are empty? To be sure, new ones may replace old depreciated and obsolete buildings, there is always some of that, but many of these unsold buildings today are brand new themselves. Supply has outpaced demand, leaving us with a great housing crash. There were some 2.3 million foreclosure filings in 2008. It’s not saying much that it’s the greatest crash of this millennium so far, but going back to the one before it’s worse than 1990, worse than 1975, worse than 1958 … it is rightly being compared to 1929, for like 1929 it has brought the banking system down with it, and the rest of the world as well.

This brings into sharp focus a weakness in local-oriented Georgism, which emphasizes the benefits of modifying local property taxation to untax or downtax buildings. Not long ago the local Building Industry Association approached me to help them lobby to lower various fees in lieu of taxes imposed on builders. I could have used the money, and easily repeated the litany of Georgist arguments against taxing buildings, when it occurred to me we have too many buildings already.

I do not fault and I seek no quarrel with the many Georgists who give such splendid service in the cause of downtaxing buildings to uptax land values. But please consider this. It made more sense when Henry George wrote because the property tax was the major tax levied by both state and local governments, and federal taxes were small by comparison. Also, taxable property included “personal” (movable) property as well as real estate, while most states today have exempted all or part of personal property from the base. Reforming the property tax was reforming a major part of the whole tax system, in George’s day.

Today we have sales taxes, business taxes, personal and corporate income taxes, payroll taxes for social security and medicare, employer responsibility for workmen’s comp and, in many cases, pensions. We have an income tax system, federal and state, that has turned owner-occupied housing into the greatest tax shelter while simple basic labor bears the brunt of what housing does not pay. On top of that we have subsidy programs for housing, while no one subsidizes the overtaxed worker for working. Income from commercial buildings is mostly untaxed, too, as Hudson and Feder’s work for the Levy Institute has shown. This is done through a combination of accelerated depreciation, avoidance of the capital gains tax, and sequential depreciation of the same building. It’s not buildings per se that are overtaxed. It is USING the buildings that is overtaxed. That is why we have more buildings than are being used.

It also helps explain why we have such high unemployment. Construction makes jobs, yes, but not nearly as many jobs as using the buildings once constructed. Using buildings, in turn, depends on entrepreneurs’ raising funds to hire workers. Turgot perceived in 1767 (Réflexions) that investing is the independent force that “animates all the work of society”.

Adam Smith, who learned his economics from Turgot and the Physiocrats, put it this way:

“A capital employed in the home trade will sometimes make 12 operations, or be sent out and returned 12 times, before a capital employed in the foreign trade … has made one.”

Wealth of Nations, Republished, 1937, pp. 338, 341, 349.

Adam Smith is here referring to capital as cargo, a form of stock in trade. For generating employment, fixed capital frozen in buildings or turnpikes was so sterile as not to be worth Smith’s mentioning: the payback is too slow. Time has not changed that much. One modern desk worker occupies about 200 s.f. of floor space. The cost of constructing that is roughly $100 per s.f., or $20,000 per desk worker. Some 20%-30% of on-site construction cost is labor, say $5,000 per desk worker. If the mean desk worker earns $30,000 a year, and the floor space lasts 60 years, the labor input in using the space comes to $1,800,000, or 360 times the construction labor. It is using floor space, not building it, that makes most jobs and produces most goods and services.

The greater importance of building is that it gives labor better access to the location, which might otherwise go unused. In the absence of working capital, however, as today, even access to land via floorspace is not enough by itself. There must be “front money” too. There are two sources of front money: net new saving, and recovery of capital from sales of previously invested capital. The second item includes bank loans made from repayment of earlier loans. Most businesses, especially small ones, depend on lines of credit to finance day-to-day operations.

Consider retailing. Sales p.s.f. in modern department stores might be $300 p.s.f. per year – much more in downtown New York, less in smaller markets. Over 40 years, thus, sales total $12,000 p.s.f., or 120 times construction cost. The flow of capital through the store – the throughput – accounts for so many times more jobs and products than the capital in the store building that a macro-economist can nearly ignore building construction as a job source.

John Stuart Mill applied this insight to taxation, noting how a general sales tax would slow down investing.
“… if there were a tax on all commodities, exactly proportioned to their value,… there would … be a disturbance of values, some falling, others rising, owing to … the different durability of the capital employed in different occupations. 

… The gross produce of industry consists of two parts; one portion serving to replace the capital consumed, while the other portion is profit. Now equal capitals in two branches of production must have equal expectations of profit; but if a greater portion of the one than of the other is fixed capital, or if that fixed capital is more durable, there will be a less consumption of capital in the year, and less will be required to replace it, so that the profit, if absolutely the same, will form a greater proportion of the annual returns. 

… To derive from a capital of 1000 £ a profit of 100 £., the one producer may have to sell produce to the value of 1100 £., the other only to the value of 500 £. If on these two branches of industry a tax be imposed of five per cent ad valorem, the last will be charged only with 25 £., the first with 55 £.; leaving to the one 75 £. profit, to the other only 45 £. 

… To equalize, therefore, their expectation of profit, the one commodity must rise in price, or the other must fall, or both: commodities made chiefly by immediate labour must rise in value, as compared with those which are chiefly made by machinery.” – Principles, 1848, “Of taxes on commodities”.

Where Mill says “machinery” he clearly means durable capital of all kinds, including buildings, trees, breeding herds, freighters, oil wells, highways, airports … you can name a thousand examples. And where his numerical example contrasting two “branches of industry” is understated and abstract, let us contrast buildings with the “commodities made chiefly by immediate labor” inside the buildings. A building may last for, say, 50 years, and return the principal of the capital in it in, on the average, about 2/3 of that time (a little in the first year, a lot in the last years, according to the sinking fund depreciation formula of standard financial mathematics).

The “immediate labor” of workers inside the building adds value to materials to be sold in, say, a month, returning capital that the entrepreneur can reinvest immediately, for a turnover of 12 times a year. “Turnover” is the single word that epitomizes Mill’s labored prose, and “loan turnover” expresses its effect on bankers. Taxes on commodities tax capital each time it turns over. They “disturb The Force” (as Darth Vader might say) and push capital out of producing commodities “made by immediate labor”, hence more into commodities and services rendered over long periods by durable capital: capital of slow turnover.

Following Mill the baneful influence of J.B. Clark engulfed the profession like a miasma. In his tortured efforts to conflate land and capital, Clark deleted the turnover of capital from the professional consciousness, calling the product “neo-classical economics”. His main objective was to avoid singling out land for taxation, but a byproduct was to remove capital turnover from micro-economics.

Other economists struggled for a while to fit Böhm-Bawerk’s ideas into their neo-classical models from which time had been largely banished, only to reject or isolate such ideas when they could not fit them into their static, Clarkian models. From 1870-1920, “much of the economics was … an economic theory of a capitalistic production. Considerations of capital theory proper … simply disappear from the picture” (Robbins, 1934). It was Auguste Comte who wrote that all science consists of relations either of coexistence or sequence. Clark confined neo-classical economics into a box that shut out relations of sequence. Not until Keynes did they return, and then in distorted form.

Keynes picked up on Turgot’s insight, but in a twisted sort of way that loses much of its force. In Keynes, “investment” is the motor of the system, but it means net new investment only. He takes reinvestment and turnover for granted, as results of “consumption”, regardless of what is consumed – it could even be the services of land, for all he seems to care. He puts everything in monetary terms, with little attention to the corresponding flows of goods and services, as though their composition has no effect on the outcome. Thus for him construction is just as good as tailoring or cooking or delivering mail or waiting on table for making jobs, and maybe even better because construction soaks up the capital invested for long periods, and Keynes saw capital as being formed in excess of need – quite the opposite of today’s problem when businesses are starving for want of working capital.

In the previous Great Depression, as today, America was loaded with empty buildings and excess capacity. Empty subdivided lots went begging; owners abandoned many of them for back taxes. The Georgist message, locked into a paradigm from earlier times, seemed irrelevant and was shunted aside, where it has mostly remained.

What we need today is to attack taxes on Mill’s “commodities made with immediate labor”, and taxes on labor itself. We need to stress how taxes that “shoot anything that moves” keep things from moving. We need to show how removing such taxes will raise the value of empty buildings and lands, so we can replace such taxes with property taxes. We need to show that the present system, by seeking to spare property values, actually depresses them by more than would direct taxes on property, because of the “Excess Burden” of indirect taxes.

As we make this great shift we can also, of course, focus the property tax more on land, but as we do so let us give higher priority to untaxing work and turnover and cash flow and sales than to untaxing buildings. We already have empty buildings to burn.

photo credit: °Florian

C’mon you can’t be serious but that’s what the lobbyists are looking for with commercial property in dire straits in the US. The NY Times reports:

Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

Experts expect commercial vacancy rates at close to a shocking 20%. But as we have shown in the Melbourne residential market, vacancy rates here are at close to 10% due to speculative vacancies. Now that speculators have left the US property market, the prices paid at the peak of the market are uneconomic. But yet:

In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.

Here we have again some of the world’s wealthiest people pleading for a bailout on an investment that they paid too much for. It’s like giving  free money to a gambler. Even if developers get attractive re-lending rates, who will rent the property off them when there are so many vacancies? The market power that renters will have over the next few years will ensure they drive down prices.

This is a desperate move to try and pry open access to attractive interest only loans. The strategy will be to re-finance on a 5 year interest only loan, by which time the economy may have recovered and the resultant capital gains can pay off the principal with a timely ‘property flip’. But will this allow the property to remain vacant over this time? This will hold productive business to ransom whilst the speculative economy benefits from handouts.

Let the market work its’ magic.