land-costs

At first glance The Australian Greens’ announcement that they would abolish the negative gearing ₁  tax break, in a bid to increase government revenue through increased taxation and improve homelessness and housing affordability looks like the right move. I have, however a few questions about this.

Firstly it must be pointed out that the Australian Greens advocate that the new tax regime be “grandfathered” so that current negatively geared investors could continue to be so, but that no new investors would be entitled to this. Two sets of tax rules would apply side by side.

I wonder if borrowing to buy a property would be as attractive to a potential investor if s/he could not negatively gear. Presumably, The Greens do not advocate NO tax deduction on an income-generating investment but just to the point where it goes into the red.

I see from the policy document that their ruling would apply to all asset classes. At least here is some consistency.

Negative Gearing applies to non-property investments too

Negative gearing is usually only discussed in the context of property, but of course it applies to other investments too. At present one can borrow to buy shares, which will generate an income since they pay dividends. These dividends are subject to income taxation, in many cases offset by company tax already paid, in the form of imputation credits to the investor. Any shortfall in the income from the shares compared with the interest on the loan is tax deductible. With The Greens’ policy presumably this would only work up to the point that the investor is not going into the red.
One needs to look at why people borrow to invest in any asset. The sensible reason to do this is that the investor believes that the investment will rise in value, such that equity in the asset increases and the loan starts to look small by comparison. The investor can profit in two main ways:

1. With housing, as the value rises, the rent will also increase. Eventually the investor who was negatively geared could become “positively geared” and hence will pay tax to the government.

2. The investor who sees that s/he has made a paper profit can realise this gain, pay back the bank and pocket the profit minus Capital Gains Tax.

I cannot see that abolishing negative gearing will free up housing for non-investor home buyers nor that the tax gains for the government will be as significant as the Australian Greens believe. The abolishing of negative gearing would affect Australian investors, but it would not affect foreign investors who have borrowed from elsewhere. How would that be addressed?

Greens proposal fails to address land-costs – the biggest part of housing unaffordability

The Australian Greens advocate the use of prefabricated houses as a part solution to the terrible problem of homelessness in Australia. I don’t see anything in the document about the land required to put the prefab house on. Land-costs are the major component of housing in cities and these costs are more marked in areas which would be considered to be in a “good position.” The actual house is a relatively minor thing. If people had their own land, probably most would manage to erect some sort of shelter for themselves!

The Australian Greens, in deciding that “negative gearing” is to blame for Australia’s housing woes (and the complete evaporation of “the Australian dream”) fail to address the demand factor which is fundamental to the issue of unaffordable housing.

Where do the demands for Australia’s housing come from?

1. Australians as they reach adulthood tend to need housing apart from their parents . Only about half as many people die in Australia as are born here in any one year so there are roughly only half the number of houses available from that source as there are young Australian people looking for them. Thus there is a built-in shortfall because of our demography.

2. In addition to this, with high immigration, there are likely to be more migrants invited to Australia as business migrants, as skilled workers, students or for family reunion, than there are young Australians looking for their first home.

Penalised Australians would retreat and foreign investors advance

These two groups compete in the same housing market. If Australian would-be investors retreat from the housing investment market because the advantage of negative gearing is not there, I think as long as the total demand for housing does not slump then non-Australian investors will fill the gap left by locals and compete with local home-seekers. With large numbers of people needing housing and a short-fall in supply leading to very high purchase and rental prices, home-seekers and would-be renters will “fall through the cracks.”

Scott Ludlam says that 7,000 houses “for the homeless” will be supplied by 2020. That’s great, but people need housing now. There are 105,000 homeless people on any one night in Australia, according to Salvation Army figures and according to “Kids under cover”. Family breakdown is blamed for a lot of this but if housing were abundant, as it should be, a family breakdown would not result necessarily in homelessness.

Something needs to be done much more urgently about this problem, one which used to be practically unknown in Australia. We all, including The Greens, think we have a silver bullet for this problem but it seems clear that the demand side of the equation still needs to be lightened. This can be addressed easily and quickly at little or no cost. We should not be bringing in large numbers of skilled immigrants to compete against local young people for both housing and jobs. In maintaining very high immigration we are doing our young people a terrible disservice. Surely they deserve better than this?

NOTES

#fn1" id="fn1">1.#txt1"> ↑  "Negative gearing is a form of financial leverage where an investor borrows money to invest and the gross income generated by the investment is less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments)." Source: en.wikipedia.org/wiki/Negative_gearing

Republished here to give background to Sheila Newman's remarks in her debate with Steve Bracks on the Jon Faine show 19-4-2010. You can comment on Jon Faine's "Population Forum" about the debate here and you can listen to the podcast here. The sector in Australia that has the most costly dependency ratio must be the property sector, since it costs all Australians an enormous and unreasonable amount just to cover the cost of land for housing, business and agriculture. Most of the very high costs involved are completely unnecessary, except in the eyes of greedy developers and their hangers-on

Mr Salt, wrong again

Yesterday (4 Feb, 2010) the Australian had Bernard Salt raising the alarm about the dependency ratio (again). But the man is hopelessly misinformed. Elderly people are not the big problem. And children (who are more dependent and for longer and who outnumber elderly people) are not the problem either.

The sector in Australia that has the most costly dependency ratio must be the property sector, since it costs all Australians an enormous and unreasonable amount just to cover the cost of land for housing, business and agriculture. Most of the very high costs involved are completely unnecessary, except in the eyes of greedy developers and their hangers-on. The only reason that the costs are so high is that the industry wants it that way and our state and federal governments are in cahoots with it.

The housing industry is making life in Australia miserable

Australians pay these monstrous costs first and must deduct them from their disposable income. These unnecessary costs affect the amount of hours we must work and how hard we must work and whether we can afford to take holidays. They affect our health and happiness. The high prices affect the cost of doing business, of manufacturing, of storage, garaging etc. When these costs are inflated they take away from other economic and social obligations, which are to provide education, hospitals, child support and retirement funding in the form of pensions and superannuation. Yes, even for self-funded retirees, the cost of doing business is inflated by the cost of land and is deducted as a variety of costs from any profits which devolve to shareholders.

Australia's inflated land-costs

Australia's inflated land-costs mean that small business has had increasing difficulty surviving and that for an increasing number of Australians, survival itself - in terms of accessing shelter and having enough money left over for food and clothing - has become difficult and sometimes impossible. For more Australians each year, transport to get to work or education to train for employment, are luxuries. Yet all this could be changed if property development and housing were no longer considered as private profits but as public expenses and the factors that contribute to their inflation were adjusted accordingly. These factors are those which drive up demand. Demand is affected by births, deaths and immigration and, to a lesser extent, by household size, location and position, which may all be to some extent discretionary.

What drives the high cost of land in Australia?

The most noticeable adjustable drivers of demand are overseas and interstate immigration. Interstate immigration can be dealt with by adjusting building permits at local levels. Overseas immigration can be dealt with by State Governments ceasing advertising for new immigrants and by National Government revising immigration quotas downwards. For maximum reduction of costs, land and housing availability should be exactly equal to demand.

In a steady state society, houses would become available as people died, with some overlap, at very little cost.

It is Australia's housing industry which is responsible for elderly people being scapegoated instead of honoured and supported to enjoy the long and happy lives that we should all be able to look forward to.

ABS data

"For most Australians, whether buying or renting their home, the provision of adequate housing for themselves and their families involves substantial ongoing expenditure throughout much of their lives. Housing costs are often the largest regular expenses to be met from a household's current income.

The housing costs measure compiled from the Survey of Income and Housing is defined as the sum of:

* rent payments,
* rates payments (general and water), and
* mortgage or unsecured loan payments, if the initial purpose was primarily to buy, add or alter the dwelling."
Source: 1301.0 - Year Book Australia, 2008

It is always very difficult to get information from public sources on how the cost of land affects the cost of living in Australia because the Australian Bureau of Statistics refuses to treat land as a 'commodity' and our cost of living measure, the consumer price index, only factors in the cost of 'commodities' - other things you buy.

This kind of information is about the best we can get from the ABS (see below). It doesn't tell us very much. Most of the information is in the private sector and costs a lot to see.

It also doesn't tell us how much people who have businesses pay for rent and buildings on top of the money they pay for their own housing.

The ABS doesn't admit that land is like a commodity in Australia

Yet land is treated like a commodity in Australia, and we know for sure that for many of us it is our greatest burden:

“The development of stock mortgages and wool and crop liens in Australia represented legal ingenuity in that on traditional analysis, a property transfer was taking place with respect to something which would only come into existence in the future – the crop or wool to be grown.

In Australia land was not in itself a source of power but an asset capable of producing wealth. Improvements, particularly fencing, represented a high proportion of the value of real estate and borrowings on the land seem to have been greater than in England. It is thus argued that land in Australia was always viewed as a commodity, see Davidson and Wells, “The Land, the Law and The State: Colonial Australia 1788-1890” (1982) 2 Law in Context 89 AND Whalan, D., The Torrens System in Australia p.98.” Source: Adrian J Bradbrook, Susan V MacCallum, Anthony P Moore, Australian Property Law, LBC Information services, 1996, p.1.103:

Is the Property Development industry becoming an embarassment to its members?

Mr Salt recently argued that the property sector was being too timid. He implied that they had become somewhat embarrassed by bloggers highlighting the industry's reasons for promoting high immigration. He urged them to weigh into public debate and wondered why usually high profile growth lobbyists were acting like such wall-flowers.

"... I must say the “growth vs no growth” issue is ascendant and is likely to remain so during 2010. What disappointed me about this debate was the lack of supporting comment emanating from the property industry. No-one that I could see was out there putting the case for growth.

And I suspect the reason is that “big (property) business” doesn’t want to draw attention to itself on a contentious public issue. There seems to me to be almost a timidity in property individuals getting involved in public debate about growth. The logic seems to be don’t rock the boat."

Who would want to admit they are in this industry?

Well, maybe, the property industry is becoming a little more self-aware and less inclined to shoot from the mouth. Perhaps some of the younger people in the industry are becoming ashamed of the role the industry plays in creating and increasing poverty and inequality. Perhaps some of the young planners and builders aren't too keen on trashing the countryside. Maybe when young property developers, engineers, planners and developers you go to parties these days, their mouths go dry and they blush when some nice girl or bloke asks them what they do for a living.

I mean, what do you say? "I make my money out of unaffordable housing." "My boss is a land-speculator." "I serve the land-lords of the world." "We're in the business of overpopulation. It's good for our profits." "Oh, your mother protested on the steps of parliament last week?" "You hate people who bulldoze trees?" "Um, you think we cause most of the carbon gas increases in Australia?" "Well, I didn't choose to have small animals flee at my approach." "Gee, I might be responsible for people dying of thirst in a few decades, and I'm already responsible for animals dying of starvation, but hey, it's a job."

"The only way to offset the impact of the baby bust next decade is to grow the tax base through immigration. That’s why we need a big Australia, at least in the short term. And, make no mistake, this trajectory is good news for the property industry," writes Bernard Salt.

Well, no, Bernard. There is another way and it involves downsizing the property development industry so that we can afford what any normal functioning society can expect to provide for its children and elderly.

I look forward to some intelligent and responsible leadership from those young people who are currently embarrassed by their industry.

Anticipating the counter-argument

Basic economics requires profit to be made from land so that society can have publicly available infrastructure. Land commodifiers and speculators use the need for a profit margin to justify the buying and selling of land at unreasonable prices and for government and business conspiring to inflate those prices. But, when the costs of land are so high that they make business impossible, the time has come to say good-bye to the private housing and development industries.

NOTES

First published here 2/6/2010 but republished to give background to my remarks on Jon Faine Show - 19-4-2010