Following my recent post, Blame your leaders, in which I explained why high house prices are partly the result of high property taxes I was asked by a voice of sanity in my household: “How can you keep a straight face and propose that one of the demand driven causes of driving up house prices, is over taxing the value of the house and land?”. Good question I thought and perhaps I should provide some evidence, or I should probably shut up on the subject. Is there any real evidence and how does it fit my proposition? This is a task of some magnitude for an individual but with some deduction I think I can provide some support.
Firstly, and as asked, I’ll summarise my proposition (but not the solutions) and also answer an important question.
- The banks and other ADIs have set very high and risky levels for the maximum median house prices (MMHP) by over qualifying borrowers through too low serviceability and deposit levels.
- The Banks have been able to fund these over qualified borrowers, cheaply, through mortgage rehypothecation which is the continual recycling of risk capital against house price increases on current mortgages to fund future borrowers. However, this has resulted in undercapitalized banks and the creation of serious systemic risks.
- Since 2008 the federal government has been complicit with the banks on the raising of easy credit through both explicit and implicit guarantees. These guarantees are not paid for at market value causing the socializing of losses or risk of losses with the privatisation of gains. The federal government guarantees have enabled the MMHP to rise to systemically risky levels.
- State governments use the MMHP ceiling to push up values in order to maximize revenues primarily through both stamp duty and land tax. This is done through the controlled release of land (not necessarily undersupply), but through a mechanism that suppresses competition. State governments use this overpricing of new land releases to effect value government sanctioned increases across the board.
- Local governments also work the system to fill any gap between land prices, building prices and the MMHP (ie the effect of demand) with infrastructure costs. It’s irrelevant whether these charges are able to be justified as value. The question should be asked about what is absolutely necessary not what’s nice to have. Local governments across the country can then justify increasing rates based on increasing values as per state governments. Although as DE has pointed out they’re now even breaking out of that constraint.
- Australian banks are not well capitalized or well regulated. If the measure of capital is the difference between assets and liabilities, then according to RBA Statistics Australian banks have about 6.5% capital in total. Don’t confuse assets with risk weighted assets. As I’ve pointed at previously, the big 4 Australian banks are rorting the use and requirements of the advanced Basel II methodology for calculating risk weighted assets. Please refer to my post More Dodgy Disclosure.
So what’s the evidence to support my house price formula proposition? I’d like to refer you to the research of Professor Geoffrey West, a physicist and former president of SantaFe Institute. On The Edge website is an excellent 50 minute video of West where he partly focuses on his work in the scalability of cities and urban environments. Here’s a relevant quote
The great thing about cities, the thing that is amazing about cities is as they grow, so to speak, their dimensionality increases. That is, the space of opportunity, the space of functions, the space of jobs just continually increases. And the data shows that. If you look at job categories, it continually increases. I’ll use the word “dimensionality.” It opens up. And in fact, one of the great things about cities is that it supports crazy people. You walk down Fifth Avenue, you see crazy people. There are always crazy people. Well, that’s good. Cities are tolerant of extraordinary diversity.
For me there was an enormous amount to be gained from this video including his work on corporations which is in stark contrast to the behavior of cities. But for now we’ll stick with cities.
In essence West’s research shows that as cities increase in size they become more efficient in use of resources but not just haphazardly, in both a predictable and constant way. That research in itself has large ramifications for urban planning but its his extended research that made me take notice. Not only are cities more efficient with size. Social, economic, educational and cultural benefits of cities increase at exponential rates as size increase. I admit you’ll have to dig much deeper if you want to see the numbers but to highlight my points, the overview of the evidence as outlined is sufficient.
The notion of supply and demand arguments for Australian housing seems to me to be framed in a far too general format for any meaningful debate to occur. What is housing supply? Please define what you are supplying? Demand for what? A bedroom with a bathroom for every person? Or a simple means to make money? Even in my world, there is a shortage of supply of Ferraris, well, affordable Ferraris. There is no shortage of housing for all in this country it may just be that most of us can’t have everything we want. There is a bed for every Australian, there just not in a mansion on Sydney harbour for all.
When I think of West’s research in the terms of supply, demand and the price of housing, I can’t help feel that reality is being strongly distorted as the politico-housing complex manipulates society’s structure. If cities become more and more efficient with size, it follows that “brick for brick” housing should become increasingly cheaper relative to income not more expensive. But people love cities, they thrive in cities and not in urban or country wastelands.
So if the research shows that housing should become cheaper in growing cities. Cities like Sydney, Melbourne, Brisbane, Perth that we love, want and thrive in, how did we get into a situation where government policy distorts what should be a logical economic course? Policies create expanded isolated suburbs with unwanted green zones which reinforce the isolation but with unsustainable pricing and a loss of efficiency? Add on the question about how inner city efficient housing is somehow also priced out of reach of most, when practically, it should be relatively cheap? And I’ll give you evidence of government manipulation and taxing policies which entrench rising house prices as bribes for the populace to toe the line, until of course the borrowers reach breaking point and the new entrants to the game disappear.
My proposition is that increasing tenants rights will remove incentives for short term speculation by landlords and therefore not allow government policy at all levels to dominate revenue raising through ever increasing house prices fits with West’s research. Why, because most of us want to live in cities with all the economic and social benefits that brings. This is better abled to be maximized by having housing at reasonable affordability levels and renters with longevity of tenure.