Welcome back Kohler

By Leith van Onselen

Back in 2004, Alan Kohler penned a ripping article in the SMH on the pernicious impact that the Howard Government’s decision in 1999 to halve the rate of capital gains tax (CGT) had on Australian house prices:

Five years ago Treasurer Peter Costello told Australians: “Work for a living and we’ll tax you at close to 50 cents in the dollar; speculate and we’ll only take 25 cents.

“Not only that but, as a special deal – while stocks last – we’ll pay half your speculating costs.”

Naturally a million Australians have started speculating on real estate. When the money ran out they borrowed more, much more. Prices doubled, so did debt…

To quote last week’s report on first home buyers by the Productivity Commission: “Like many participants [in its inquiry], the commission has concluded that these general taxation arrangements [capital gains tax, negative gearing, capital works deductions and depreciation provisions] have lent impetus to the recent surge in investment in rental housing and consequent house price increases.”

To quote Costello in response to that report: “There is no conclusive evidence that the taxation system has had a significant effect on house prices.”

To quote Blind Freddie: “Yeah, right.”

As that gentleman well knows, the effective halving of capital gains tax in 1999, combined with negative gearing and deductibility of depreciation and capital works, clearly has had a huge effect on the property market, and was also a huge mistake.

It’s been eight years, but Kohler has returned to the fold lambasting the high household debt levels that threaten Australia’s economic and social well-being:

I’ve been wondering for a while whether there is any underlying problem in this country, or just lots of little things with the exchange rate among the biggest of them.

The only thing that makes sense as a single cause of Australia’s misery is excessive debt.

Australia’s household debt as a percentage of disposable income has been stuck at 150 per cent – the highest in the world – for about five years. Twenty years ago it was 50 per cent. In other countries it has come down, albeit painfully. Interest paid as a percentage of income has doubled in 20 years.

Spot on, Mr Kohler. Australia’s household debt level is indeed very high and has tripled over the past 20 years; although it is not the highest in the Anglosphere – that honour goes to the UK (see below chart):

Kohler then moves on to questioning the high cost of land in Australia – something that I have written about many times before in relation to artificial constraints on urban land supply:

And the underlying cause of this is the high price of land in Australia. It is one of the mostly sparsely populated nations on earth, yet the cost of land is among the highest in the world, crippling the citizens with massive debts and leading to hugely profitable banks.

The combination of rising population, a lack of arable land and artificial restrictions on residential development in cities has led to a six-fold rise in the median house price since 1986, from $93,000 to $550,000 now. Over the same period, average household incomes have risen 3.5 times.

Again, Kohler is correct on this point. The overwhelming majority of appreciation in Australian house prices has been caused by rising land values rather than construction costs. This relationship is shown clearly by the below chart, which estimates average land and construction values per dwelling using ABS and RBA data:

Back to Kohler:

It’s true, as ANZ Bank’s economists pointed out in a recent paper, that mortgage rates have halved over the same period, but that doesn’t account for the psychological impact of debt that is 1.5 times income, on average, nor, more importantly, the fact that averages like these imply that many people are above average, and deep in the poo.

I have always questioned the ANZ’s claim that virtually all of Australia’s growth in house prices is accounted for by the reduction in mortgage interest rates since the late 1980s in combination with the growth of household incomes. For if this were the case, average mortgage interest payments to average household disposable incomes would not be 50% higher today than in 1989, when mortgage interest rates peaked at 17% (see below chart):

Moving on.

The result is that it’s a major problem to means test the 30 per cent health insurance rebate so that individuals earning $124,000 and families on $248,000 won’t get any help. All of a sudden lots of people on that sort of money are battlers now. Why? Because of debt.

Yes partly, but also because the Howard Government, through its numerous forms of middle-class welfare and bribes, instilled a sense of entitlement among the electorate (remember ‘Howard’s battlers’?):

Successive governments have been using the tax proceeds of the mining boom to reduce personal income tax rates, to the dismay of economists and rational commentators. But the politicians have simply been responding to the insistent demands of the electorate to do that.

Other countries in Australia’s position build massive sovereign wealth funds. Australia has a relatively small one (the Future Fund) with a specific purpose: to provide for unfunded public service pensions.

Even if they had wanted to, Australia’s politicians couldn’t have done that because of the pressure to reduce personal taxes and not increase the consumption tax and not impose death duties or other wealth taxes.

I agree with Kohler on this point. However, let’s not forget that he and his Business Spectator colleagues led the attack on the resource super profits tax (RSPT), helping to bring about its downfall and in the process worsening the Government’s tax base.

And now there is widespread terror that house prices will eventually collapse and leave millions with no equity, as happened in the United States. As a result the savings rate has skyrocketed and consumers are on strike, putting money aside for Armageddon.

This point in my view is wrong. The savings rate has merely returned to long-run trend, as shown by the below chart from Bill Mitchell. The recent credit binge and low savings rates were the exception, not the norm.

Back to Kohler.

Debt is making everyone grumpy and hypersensitive. When ANZ put up its mortgage rate by just 6 basis points last week – 0.06 per cent for heaven’s sake! – there was national outrage and attacks in parliament.

The government’s success in dealing with the GFC and holding unemployment at 5.2 per cent is nothing compared to its failure to bring down mortgage rates.

Agreed. The obsession with interest rates and house prices in Australia is crazy, reflecting household’s heavy debt burden.

Welcome back, Mr Kohler.

[email protected]

www.twitter.com/Leithvo

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

        • Yes – those comments were interesting. It appears that finally the significance of private debt levels is starting to register quite broadly.

          Perhaps the penny will finally drop that there is a relationship between interest rates and the balance of private debt and savings in the economy. The next step will be the recognition that improving the balance is not going to be easy or painless.

  1. My response to Alan’s article. Not sure if it will get past the editorial team, but this is the toned down version.

    The whole point of the article is completely lost in those last 7 words. I’m not even sure he believes it (because it doesn’t fit with the rest of the article) or if he’s just toeing the new business spectator editorial line (see Gobby’s article from yesterday). Noting appeals to bogans like the promise of lower interest rates.

    “Alan,

    Finally I thought you had seen the light. Finally I thought here is someone who understands the issue with Australian’s lack of confidence. Ridiculous and unmanageable levels of private debt. Exacerbated by successive Governments (federal and local) that have stocked the fires of demand and frozen supply. Unmanageable debt tied up in unproductive housing (existing houses are unproductive). Clearly the solution is a reduction of the levels of debt through a managed reduction in land and house costs. Along with the switch to investment in productive assets which generate income for the people of Australia. And then you lost it. Your solution was to reduce the interest rates.

    Alan, I expected better. Please ask yourself exactly how lower interest rates will benefit Australian’s. The RBA has the unenviable task of managing the soft landing for the Australian housing market. Their job is made so much harder when self serving commentators take upon them selves to score some cheap points.

    I expected better and your article deserved better.

    Ian”

    • General Disarray

      I doubt that would get through, but you never know.

      If you added some ALP bashing it would have increased your chances 10 fold.

    • If your referring to the line where he says

      “The government’s success in dealing with the GFC and holding unemployment at 5.2 per cent is nothing compared to its failure to bring down mortgage rates”

      I think he may have meant “mortgage debt”. It my have just been an editing problem or a he just missed it.

      That’s my opinion anyway as it goes more so with the tone of his article.

        • When i read the quote it seems to me he is trying to tell us that all the good the government did by saving Australia from the GFC is meaningless because the government did not do anything to lower mortgage debt.

          Anyways ill stop now >< it says rates so it must mean rates.

        • “No, he meant rates. It’s a point about the people not caring that we prospered through the GFC because they’re depressed about interest rates being higher…”

          I agree. I don’t think he’s saying that’s what he believes – he’s saying that’s what many people believe (and implicitly arguing that it’s our own fault for having so much debt).

  2. In his 2004 piece, Kohler wrote:
    “Prices doubled, so did debt…”

    Shouldn’t he have said:
    “Debt double, so did prices…”

    Steve Keen has shown the high correlation between acceleration in mortgage debt and increase in house prices
    http://www.businessspectator.com.au/bs.nsf/Article/inflation-housing-euro-debt-crisis-economy-GDP-pd20120130-QZ5UK?OpenDocument&emcontent_spectators

    Keen writes for Business Spectator. Seems that Kohler doesn’t read his work. Instead, Kohler falls back on unproven (unprovable?) statements such as this:

    “The combination of rising population, a lack of arable land and artificial restrictions on residential development in cities has led to a six-fold rise in the median house price since 1986, from $93,000 to $550,000 now.”

    • +100

      Research the most crappy towns in Australia. Towns with zero growth in any way shape or form and ask thyself why have house prices quadrupled (or higher)in 15 to 20 years (7-10% annual growth)?

      • The MOST crappy towns should be analysed separately. Extremely depressed prices can bounce for all kinds of reasons.
        However the situation of many towns that have had zero growth and large price rises are explained by govt choking supply.
        Put simply, the govt makes no room for extra people so extra people cannot come. The high price FORCES OUT people who would otherwise have stayed and caused the town to grow.
        You make a common “shortage-denier” mistake of ignoring the victims in your data.

        • Every single small town in Australia has seen a similar surge in prices (I know, because I’ve looked at about 50 of them all over the country). There is no supply choke in these towns. You are still pushing your idea that the bubble is a result of a land shortage, despite numerous people, on several forums, proving you are conclusively wrong, Claw.

          • What you should do is this:
            1 – locate a town where housing has risen enormously in price
            2 – use google maps to locate a large block of land (eg farm) nearby that town
            3 – ring the local council and make an enquiry. Say you are considering buying this block or similar and would like to build extra houses on it. Would this be possible?
            4 – report back here.

            TP: thats a better response Claw – I deleted your other post.

          • report back here.

            Now you’re talking about zoning. Typically I find that most small towns have lots of properties on the fringes where subdivision into smaller lots has already been approved, but the blocks won’t see. The developer then tries to on-sell the property with the pre-approval as a selling point. This spells oversupply to me, not shortage.

          • No it spells of a land racket as no doubt the rural landowners adjacent to the zoned land that you speak of are not allowed to subdivide into urban lots. Hence, the zoned developer land owner has quasi-monopoly rights and can hold-back supply for maximine price. Place him under competition from rival landowners and this sort of behaviour becomes unprofitable.

          • Hence, the zoned developer land owner has quasi-monopoly rights and can hold-back supply for maximine price.

            Nope. In several cases the developer had already tried unsuccessfully to sell the land, in other cases he could not carry the development costs (infrastructure). I’ve been looking at these issues for some years now, so I’m pretty sure of my facts.

            There is on town where artificial land supply choking is driving prices up though: Alice Springs. I could tell you a good story about that place…

    • This is a common mistake made by shortage-deniers who look for correlation in data instead of using logic.
      If you want the strongest correlation you will find that the number of dollars passing through Realtor trust accounts is most highly correlated to house prices. It is more highly correlated than debt, zoning regulations, immigration, vacant dwellings or people per dwelling. Does this mean that Realtor trust accounts are causing the high prices?
      Does my rooster’s crowing cause the sun to come up?

  3. Yeah I remember some crackers from Kohler in the mid-noughties. Lets hope his return to form continues.

  4. “Debt is making everyone grumpy and hypersensitive. When ANZ put up its mortgage rate by just 6 basis points last week – 0.06 per cent for heaven’s sake! – there was national outrage and attacks in parliament.”

    This is simply untrue. The outrage was fabricated by the media, and as usual the politicians played along. Most people quite rightly probably saw a 0.06% rate hike as trivial.

    As for “attacks in parliament”: so what? They happen every day. They’re bullshit.
    I think most people know this.

    • Yes Phil but it is a terrible tragedy that our leaders (either side) are not capable of anything better.

  5. I have always questioned the ANZ’s claim…

    me too.

    I’m confident that if the ANZ were to publish how it got that result, step by step, it would reveal that they did the equivalent of waterboarding the data until the data agreed to give them the result that they wanted. In other words they tortured the data into submission.

  6. It’s nice to conclude that the house price basically is an land price rise, but next we should ask: how did that happen ? was it the intended result of a policy ? who profited from it/is it fair ? is this sustainable or good for the stability of country in the long run ?

    My answers:
    – politicians THOUGHT ever rising prices were nice for the electorate
    – they THOUGHT this is good for the country, which actually is not true
    – ever rising prices constitute a transfer of wealth from the starters (FHB-ers) to the ones already on the property ladder; something the electorate probably would assess as unfair and undesirable
    – as a result of all the new credit and ever increasing money supply inflation becomes a problem
    – ever rising prices are not sustainable, unfair and cripple the starters on the market with a life-long burden of high-mortgages

    House prices, like every other good, should ideally keep track with general inflation, not more, not less. …

    The general thought that somehow the nation collectively can get rich by just investing in property and keep selling the same houses around is deeply ingrained in AU society and needs to get rid of.

    • Um…you gonna give the electorate a free ride on this one? Didn’t they vote for increasing house prices?

      • Fabian AlderseyMEMBER

        I don’t remember voting on that issue. Maybe it’s a new-found awareness on my part, and I didn’t notice at the time. Which major parties made it a big part of their election campaigns, stating that they’d abolish negative gearing and preferential tax treatment if elected?

    • “The general thought that somehow the nation collectively can get rich by just investing in property and keep selling the same houses around is deeply ingrained in AU society and needs to get rid of.”

      It will fall by the wayside. Whether the majority/property trust/politicians like it or not.

  7. The start of this article gets back to the core debate Australia (for some mysterious reason) just doesn’t seem to want to have.

    Why on earth are we encouraging the use of property tax shelters through high tax rates and negative gearing. Effectively punishing workers, primarily young workers that a) don’t have the asset backing to manipulate their tax rate through high levels of gearing, and b)have to fork out a bomb to buy a house!

    And it’s neither here nor there that late entrants might get burned by falling asset values. You only have to look at the idiotic behaviour of investors in the forestry schemes to know this.

    Australia’s top marginal rate in combination with the discounted CGT rate encourages the search for shelters. People never act rationally when seeking tax shelters because the risk to the investment is lost within the hype of the tax saving in the shelter.

    • “People never act rationally when seeking tax shelters because the risk to the investment is lost within the hype of the tax saving in the shelter.”

      +1

      Reminds me about the tradie that buys a new drill every year to claim it on tax and ‘beat the taxman’, despite having half a dozen working drills at home. It’s amazing that people are more willing to spend up on tax deductions (still forgoing after tax dollars) just to end up paying less tax. Go figure!

    • The “idiotic behaviour of investors in Forestry Schemes” is hardly idiotic, especially in view of the exceptionally poor performance vs. rick profile of other investment schemes. OK Great Southern investors were burnt (some lost everything) but there are far worse examples of poorly performing Agribusiness – such as the business sector contributing to our own “Wine Lake”.

      At least a proportion of timber from these investments is marketed overseas – i.e., a REAL product, being exported for REAL inward income, rather than swapping expensive property and feeding the banking sector via their guaranteed revenue streams.

      At least selling a renewable resource might be more sensible, and even sustainable, in comparison to our present preferred option of “digging holes in the ground”.

  8. Easy to forget about the synchronous rises in household debt-to-income ratios in the other anglophone countries. Did they experience the same tax concessions and restrictive land policies I wonder?

    The global credit binge has something to do with the rises obviously, and maybe equity markets performing so poorly in the US and UK during the naughties (as an alternative asset class).

    Trying to separate all the factors (global credit, tax incentives, FHOB schemes, and land restriction) is doing my head in….

    • Actually, I have written extensively about the US housing situation (for example here, here and here) and shown that states/cities where urban land was restricted via government policies/regulations experienced far bigger house price rises/falls than those where urban land supply is not restricted via regulation.

      Of course, land supply on it’s own is not the sole cause of land/housing bubbles – credit also plays a major role. But when you combine restricted land supply with easy credit, you make the problem so much worse.

      • But when you combine restricted land supply with easy credit, you make the problem so much worse

        This does not explain my research results, which are that isolated town –with nary a hint of land supply restrictions– have seen the same enormous jump in prices.

        I suspect it’s game, set and match to Mr Keen on this one.

        • Perhaps you could share with us just one tiny fragment of your research. Could you mention by name one of these towns?

          • They won’t get that – I live very close to there…the market up here is depressed. And the restrictions on development here are IMMENSE. You can’t subdivide at all. Huge supply restrictions – but also not a lot of land to be developed either, all across the range.

            Case in point, in-laws have 9 acres but can’t cut in two and sell off, so they will likely sell and buy a smaller acreage.

            EDIT: but the price increase sounds about right – the Sunshine Coast had 3-4 years of bubble prices – up 20-30% each year and then flatlined from 2008 onwards, down 20% from the high in most areas.

          • That may not be the best example if that’s what you say, although I have also seen properties nearby with pre-approved subdivision, so I think you need to check on your statement about “immense” restrictions. But this is merely one example of many .. I can give you similar examples from places 300km from a major city as well. Do your own research, you’ll see I’m right.

            IOW it’s easy money and tulip mania at work, and land supply choking is a minor player.

          • Yep not the best example because the major towns of Maroochydore/Caloundra etc lie only 30 mins from there and it makes the hinterland unique.

            The restrictions are definitely there, it takes years for DA’s and land sales/divisions are extremely rare.

            You are talking to someone who has watched this area INTENTLY for four years, on an almost daily basis!!

            However I’m in UE’s camp – its both restricitons/inflexibility of supply and availability of credit that fuel bubbles.

            Hervey Bay is a better example – almost zero physical restriction to build, but massive classic housing bubble due to inflexibility of supply.

            Too much easy credit (particularly Victorians coming up with huge equity in their overpriced MElbourne houses….) then inflated it and pricked the bubble when valuations were unsustainable.

          • And BTW how can anyone in their right mind possibly justify a nearly 600% increase in the price of this place in 10 years? It’s absolutely insane.

        • Turn it up. Find me a town where rural landowners are easily able to develop land – ie. without council restrictions, painfully slow approval processes, up-front development charges, etc – and I will find you a pig that can fly… backwards.

          My dad bought a block in Nagambie – a small town in regional Victoria (40kms from Shepparton). You would not believe the amount of council planning approval processes that he had to go through to gain a permit. Took him a year – and that was for a block adjoined to the town that was already zoned urban! Good luck if you are a nearby rural landholder…

          • I agree with you on this. It’s is slow and painful to subdivide. And perhaps should be, to protect amenity. But while this may impact on the speed at which the market can respond to demand, let’s look at the demand instead. What demand is this? Families needing homes? Or speculators with hard-ons because of cheap credit? Take away the cheap credit, and the demand evaporates, and along with it the perceived problem with slow development responses. It’s all about identifying the chief culprit…

      • ‘Of course, land supply on it’s own is not the sole cause of land/housing bubbles – credit also plays a major role. But when you combine restricted land supply with easy credit, you make the problem so much worse’

        Exactly Unconventional. It’s the positive feedback between these factors (including political incentive to prop up prices) which is the scary part.

      • UE – those analysis pieces on the US land use are compelling but the problem is still one fundamentally of credit and a finance/ tax system that favours passive speculation in residential housing.

        Unfettered land use might defuse the problem somewhat but the environmental, ecological and social cost of massive urban sprawl spawned during speculative booms is worse than the disease.

        (but what would a humble raniformis know 😉 )

        • +1000

          I’m a little concerned by the MB commentators’ views on simply throwing open zoning restrictions. Particulary given the historical construction rate of infrastructure…

    • “Trying to separate all the factors (global credit, tax incentives, FHOB schemes, and land restriction) is doing my head in”

      There is no need to separate the factors. We all should complain loudly about all of the factors.
      This is what annoys me most about shortage-deniers. Instead of lobbying for govt to fix the debt or whatever they dislike the most, they waste their time attacking and denying what I dislike the most (choked supply).

  9. Between 1995 and 2005 Australia’s population grew by 10.6%…bubble caused by arable land shortage?

    Between 1960 and 1970 Australia’s population grew by 21.8%…no bubble no arable land shortage despite twice the pop growth?

    You had to beg for a loan in the 1960s (and have a decent deposit). Thats probably irrelevant, its obvious that available land was thrown into a tumble dryer mid 90s.
    http://www.populstat.info/Oceania/australc.htm

    • Did he mean ‘arable’? Arable land is land you can grow crops on – a small part of our landmass indeed, but I haven’t heard that blamed before as a reason for higher house prices.

      • “The combination of rising population, a lack of arable land and artificial restrictions on residential development in cities has led to a six-fold rise in the median house price since 1986, from $93,000 to $550,000”

        Why Mr Kohler have towns in the middle of nowhere, towns nowhere near arable land, towns with no redeeming qualities had phenomenal house price growth?

        • “Why Mr Kohler have towns in the middle of nowhere, towns nowhere near arable land, towns with no redeeming qualities had phenomenal house price growth?”
          Simple – artificial restrictions on residential development IN THOSE TOWNS.
          An exception would be if the prices rose from below replacement cost. This could happen even if development was not restricted. Eg Detroit prices could double next year.

          • Simple – artificial restrictions on residential development IN THOSE TOWNS

            But most of these are towns with no growth pressure, Claw. There is no need for more land release, no demand. Yet still prices have skyrocketed. I now this destroys your entire raison d’être, but if the cap fits, wear it.

          • “No growth pressure”. How do you know? Growth pressure not only comes from population growth, but also demographic demand (smaller household sizes) as well as credit demand. If this demand cannot be met through increased LOW COST new home construction (brought about primarily via affordable land that is free to move from rural to urban uses), then prices will rise significantly. And if demand falls for whatever reason, prices then drop significantly.

            This aint rocket science.

          • Price skyrocketed is demand pure and simple.
            Give me the name of one town where residential houses cost more than cost of building plus cost of farmland and no zoning restrictions and I WILL personally go there and build more housing for my profit and will bring the prices down.
            This is the way an ordinary market functions. As Rick Rule says “the solution to high prices is high prices”. Of course Rick is not referring to a market where supply is choked by government.

          • There are no towns anywhere that have “no zoning restrictions” (as you well know), so that’s a disingenuous demand, Claw. And you’d be throwing money away building in a town with no demand. Just accept it: there are towns with no demand, houses for sale for years, yet still the house prices are high! Fact! Why? Easy money.

          • “No growth pressure”. How do you know?

            Because in many of the towns I looked at, population is falling, sometimes drastically. This is not a supply and demand situation. Keen is right on this. Easy money begets high prices. That’s not rocket science either.

          • Explain to me then why the cities of Texas and Georgia – which had the highest absolute population growth in the 2000s and similar access to credit as everywhere else – never experienced anywhere near the house price growth of slower population growth markets with restrictive urban planning?

            Keen’s a smart bloke and a genius on credit, but he completely mis-understands the feedback loop between credit and supply. Sure, easy credit on its own will cause prices to rise. But add supply constraints that prevent low cost land/housing from being supplied to disipate the extra credit demand and you get a bubble.

          • Yes and Nathan completely missed the point there. Atlanta’s house prices. despite massive sub prime lending and huge population growth (1 million in the 2000s) peaked at 3 times incomes versus 11.5 times incomes in low population growth (but severely supply restricted) LA. Atlanta’s house prices have since fallen to 1.9 times incomes, representing a $ loss of around $80k. LA’s prices have since dropped to 5.7 times incomes representing a loss of $250k.

            Atlanta’s prices never rose as far or fell as hard due to it’s more responsive supply. It’s homes also remained affordable throughout the credit boom. The same cannot be said for LA, which has had “smart growth” urban consolidation policies in place since the 1970s and whose media multiple has remained at or above 4.0 times since 1980.

          • Prices in towns with stationary or falling population have probably risen similarly to prices elsewhere because anyone who leaves needs to ask a high price so they can finance the purchase of a house in the place they have moved to.

            Towns like this often have very restricted supply as well, because there is low population turnover. The only houses coming on to the market are from the few that do move and people dying. The falling population is due to young people moving to bigger towns/cities to find work.

          • How often does this debate happen when I’m not looking ;-)?

            I don’t think I need to reiterate my opinion, but I want to share something I’ve learnt reading Leonie Sandercock’s quite intriguing book entitled The Land Racket (it’s Australian).

            She examines three land bubbles of the 19th century in Australia. Remembering of course that town planning as we know it was not really invented/implemented till the 1920s at the earliest.

            The bubble of the 1850s led to prices up 6-10x in many urban areas, at the same time a s a massive glut of subdivisions occuring on the city fringe. In fact, with the benefit of hindsight it was estimated that the land subdivided in Melbourne in 1854 was sufficient to cater for the population in 1900. Yet prices then fell from their peak of around $1000 per acres to around $100 per acre.

            Surely, in the absence of any such thing as a town plan, and with 46 years of urban land already subdivided (and of course, the population growth that actually occurred probably far exceeded any expectations held in 1854), this whole misadventure was the result of a credit explosion?

            Well, that’s pretty much Leonie’s finding, and it was the establishment of new banks, ironically called Land Banks, which were a way of channelling investor funds into land speculation, that were the real culprits. Even a half century of land supply, and no zoning could stop it.

            Oh, and there was the 1890s land boom as well, again prior to any town plans.

            Also, it’s pretty easy to find examples that disprove the land supply explanation. Russell Island in Moreton Bay was fully subdivided into residential lots in the 1970s on the expectation of a bridge being constructed. The population at the time a was 500, and 20,000 lots were subdivided.

            In 2002 lots were still around $2,000 a pop, and by 2005 they were $30,000 a lot. Probably less than 1000 out of the 20,000 are used for housing, the rest still remain vacant. I see no evidence of any supply constraint, yet the credit fuelled speculation on prices still managed to create ridiculous price movements.

        • +1 VR
          The reason prices have risen in 1 horse towns unlikely to attract people is related to 4 words not found in Mr Kohler’s analysis
          “The availability of credit”
          The more they can borrow, the higher they’ll bid. Especially in a market perceived to be rising.
          As for talk of governments being responsible, they’re stuck between a demographic rock and a hard place. Higher prices will help minimise the support dollars required for retiring Baby Boomers. Lower prices, and they lose through the necessity of increasing handouts. Developing more land is a paraphrase for ” a bigger Australia”. The jury’s still out on that one..

          • So that would explain why the price of DVD players and TV’s in Dick Smith has been bid up so high. Credit. Dumb buyers just pay more because they can borrow more.
            Let me see. The Chinese build LCD TV’s cheaper and cheaper, but Australians pay 4 times the old price because they can borrow more. Is that what happened?

          • If urban landholders adjacent to those towns were easily allowed to subdivide and build houses in response to the extra credit demand, I bet prices would not have risen anywhere near as far.

            If you want evidence of this, read my collection of articles on the US housing market. Those markets with more restrictive land-use regulation suffered large $ price rises/falls, whereas those with more liberal land-use regulations did not. Yet all markets had similar access to credit.

          • UE, supply choking is a factor, but the overwhelming underlying cause of the bubble is cheap credit.

        • Thanks.

          “If urban landholders adjacent to those towns were easily allowed to subdivide and build houses in response to the extra credit demand, I bet prices would not have risen anywhere near as far.”

          Many of the really remote towns I speak of with 7-10% annual growth have no rural ownership other than the crown.

          Somewhere not quite remote you urban Sydney and Melbourne philosophers may have visited: Port Augusta, less population now than in 1996 and in continuous steady decline. 13,200 people, no real industry. 209 houses for sale. House prices up 250% since 2000.

          • Velociraptor, and Revert2Mean,

            I have been travelling around Australia for the last eight years (Port Augusta many times), and have had the opportunity to witness first-hand the phenomena of which you speak.
            It is something that makes this current boom stand out against all others.
            As wonderful as this site is, there is a tendency here to reject the simple explanation in favour of the more sexy complex and convoluted one.

          • I’m sorry. Maybe I should reject the notion that there are two sides to every market – a demand side and a supply side – and only look at the demand side.

            Wow, the world is so much simpler when you only have to look at one factor in isolation – credit – and neglect everything else.

          • Have you ever read the Port Augusta Development Plan Rota? It’s as restrictive as any major city, complete with urban growth boundaries, strict zoning, and urban consolidation requirements. In fact, the PA Council has even admitted that it has failed to cater for unforseen growth:

            “…it appears that the residential population of Port Augusta is growing at a much faster rate than anticipated when the previous Section 30 Review was being prepared.

            For these reasons, it is now time to review the planning policies, which were prepared in a time of economic downturn, to ensure that Council has a Development Plan which is able to encourage appropriate development within and outside the city.”

            And how about this from PA’s Urban Growth Development Plan Amendment:

            This DPA is proposing to amend the policies within the Port Augusta Development Plan to ensure that there is sufficient land available to accommodate an expected substantial growth in the population of Port Augusta. Currently, there is a limited supply of residential zoned land around Port Augusta and Stirling North. Projections indicate that the current supply of land will be unable to keep pace with demand as the population of Port Augusta grows.

          • Rubbish. A fast supply response is vital to preventing irrational exuberance from taking hold. Just look at Texas and the other markets in middle America that never bubbled despite having access to easier credit than Australia. Or are they more rational than Americans in the growth constrained states?

          • UE – I think you look to Houston a tad uncritically.

            Houston is located on and surrounded by a vast gulf coastal plain. Its geography readily allows for urban sprawl. Many cities have hills, mountains, sea, forest hemming them in – natural barriers to expansion, let alone policy barriers.

            Furthermore, Houston has LVR restrictions that would have dampened the demand side of the equation. So their more affordable housing is not simply a by product of more liberal planning measures.

            Construction costs are low in Texas,partly because minimum wage rates are so low ($7 per hour). There’s plenty of Hispanic immigrant labour willing to work at such rates. Do we want that here?

            I’m not disagreeing that planning regulation has a lot to answer for, and that it shouldn’t be reformed. Its just I think the issues are more complicated and nuanced, and that you need to be careful to compare Houston with other cities as its not necessarily comparing apples with apples for a number of reasons, including those above.

          • Houston is a coastal city encroaching on Galveston Bay. And Texas does NOT have LVR restrictions on housing mortgages – only Home Equity Lines of Credit (HELOCs). Even now buyers can purchase homes in Houston with only 3.5% deposit – ie. on MORE generous terms than Australia. Yet new large family homes still cost only $150,000 and have changed very little in years.

            I really don’t get what you are on about criticising me for looking at housing systems that work – i.e. provide stable affordable housing. Australian policy makers should be studying places like Houston and Germany and adapting their policies for local conditions. This is what world’s best practice is all about.

          • It’s amazing isn’t it, Mathhias.

            In any discussion about the factors at play in the Australian housing market, all roads inevitably lead to Houston.

            Whilst I enjoy, and learn, from the many graphs, charts, reports, surveys and, yes, even Development Plans, presented on this site, I still get the feeling that some of the contributors here could do with a little bit more time out of the office.

            Sometimes what seems real on paper, doesn’t quite stack up with what’s really going on out there.

          • People with blinkered views on the housing market ARE THE PROBLEM. That’s why we need to examine overseas housing markets that work to provide stable and affordable housing. Otherwise housing policy in Australia will never change and policy makers will continue to apply incorrect policy prescriptions that pump demand and strangle supply.

          • Come on Leith, quoting the Port Augusta development authority? You have to be kidding.

            Less people than 1996. The population is SHRINKING!!

            NO ONE IS MOVING THERE (nett)!!!

            209 houses for sale inflated 250% from 2001.

            13,000 people and 209 for sale if that doesn’t scream over supply what will (do the ratios)?

          • What are you smoking? You pull some obscure example and try to use it to show that land/housing supply doesn’t matter (a delusional proposition in itself). Then I pull up the official planning documents pertaining to PA, pointing out your errors, and then you dismiss them because they don’t fit in with your argument.

            Now you are quoting PA’s past falling population and economic decline, saying that iprices shouldn’t have risen. Yet a 30 second Google search reveals that PA was expected to benefit significantly from the mining boom, which is just as likely to have led to increased investment/speculative demand from outsiders looking to cash-in on the coming boom.

          • UE
            Please calm down!
            Firstly, on the positive I’ve loved your blogs for some time!
            But I’m not sure why you are so very defensive? You seem to be offended if anyone even slightly challenges the notion that comparing Houston with Australian cities is not necessarily comparing apples with apples.
            At the end of my post I acknowledged the problems with planning regulation – I am not a denier. Clearly Houston’s planning regime has been a big factor in its cheap housing.But I thought I made what were valid points about some important environmental, and financial differences between Houston and Australian cities which in part might also explain why Houston’s housing is cheap.
            I thought the point of these forums was to have considered debate. Freedom of expression etc. It seems that you find any prospect of a challenge to your seemingly increasingly fundamentalistic views on Houston a threat?
            I’m sorry but if you keep being so defensive, entrenched and unwilling to engage in non-childish mud throwing then I for one won’t be visiting these shores any more. Which I wouold be regretful of

          • UE
            It is somewhat of a distortion to call houston a coastal city. It’s CBD is some 30km from the coast. The main areas of growth have been inland in the plentiful plain lands to the north and west of the city,well away from the coast.
            Do you not think that their low labour costs are a factor in lower housing costs, considering labour costs are a significant factor in the costs of building houses and the necessary infrastructure to service subdivisions?

          • UE
            Thanks for clarifying on LVRs in Texas. It was my undnerstanding that they existed in Texas – clearly I was wrong.
            But what I know for certain, based on the advice of a mate who owns a property in Houston is that property rates are high in Texas – commonly 5% of the property value per annum.
            Again, correct me if I am wrong, but this must act surely as a disincentive to property investment? There would be bugger all net return when such high rates apply.
            Surely this must be a factor along with responsive housing supply in keeping house prices sane?

            Again, not dismissing the importance of liberal planning policy, just questioning another non-planning factor that may be part of the reason for lower prices there.

            Would be interested in your views

  10. “Australia’s household debt level is indeed very high and has tripled over the past 20 years; although it is not the highest in the Anglosphere – that honour goes to the UK ”

    Thank you for the article UE. Good stuff!

    IMO the UK is in much more serious trouble than most realise. They trot along printing money and no one seems to realise opr these days everyone thinks that’s OK. In my younger days, pre Margaret Thatcher, the UK was an economic basket case with huge BOP problems pressing on the pound. In rather serendipitous circumstance for conservative politics North Sea oil started to flow at about the same time as Thatcher came to power. Oil more than anything else, including Thatcher, was responsible for the following UK prosperity.
    The oil is now running out and the prosperity it generated has been largely wasted. The UK is left with massive debts that it continues to print pounds to cover. (can hear the MMTers in the bleaches yelling ‘see!’ 🙂 ) The pressure now on the pound is immense and its value vs USD will continue to decline. Given FOB prices out of China are rising rapidly the UK is in for a bout of very high inflation, or better put, stagflation.
    How will they raise interest rates to cover the inflation….they won’t

    The UK may well be a bellwether for what we all face in the medium to longer term.

    • I agree with you, and living there I’d get probably two credit card offers a month at least. Egg, and Capital One really got hacked off with me when I cancelled my cards as well. The situation that I see is that the UK know they are in trouble and everyone I know is paying down debt a fast as they can, but here in Oz I’m sure a reasonable number of punters think we’re immune.

  11. I note everyone, including UE 🙂 dodges around the problem of the biggest tax dodge of all…no CGT on the family home.
    In the past this has contributed to the house inflation bubble by making it very very profitable to over-‘invest’ in the family home. Hence we have these grand castles with two inhabitants.

    It’s a thorny one as interest paid is not tax deductible and probably the problem will solve itself if we can somehow kill this all-devouring RE beast.

    • not me flawsy – I think CGT should be applied on the PPOR, and moreover, not at the MTR, but at prohibitive rates – like 90% within 5 years, and then 50% within 10 years.

      Assuming gov’ts get rid of stamp duty (which apart from raising costs, inhibits labour mobility), it needs to be recognised that a house is a consumption asset – not a wealth asset.

      I would apply this CGT scale to investment property as well – but only to already established houses – not new stock, which should be as tax free as possibly, to be reflexive to supply requirements (and also to meet the “investment” criteria).

      • In Germany there is a similar rule. If you own a property for less than 10 years you pay the highest tax rate on all the capital gain, then after 10 years there is some kind of reduction.

        An German him owners care to clarify?

        • Can’t speak for Germany, but Switzerland certainly has that kind of system – brutal CGT taxes unless the proceeds are used within a short time (6 months, from memory) to purchase another PPoR, or the home has been owned for a long time (5-10 years).

      • I need to have a working holiday in Germany (family is from Bavaria)….they make so much sense with housing.

        I think all Anglo nations need to look at the cultural attachment to housing the Germans have, I remember a quote something like this:

        “UK and German ministers having a chat in corridor in EU Parliament, the UK minister has paper that says “HOUSE PRICES RISE”, the German says – you know, in our country, that would be bad news.”

    • Perhaps an imputed rent on the family home is warranted then? If you want to live in a MacMansion, by all means do, but pay an imputed tax on the capital value to do so. Tenants pay tax on their rent ( PAYE before paying the weekly cost) so home owner should as well.

    • Its only profitable if you can find a greater fool….we are in a new paradigm now in my view, and although it will take time to manifest, the necessary changes are underway.

  12. 1. It’s possible to sell an investment property CGT free so long as it qualifies as your PPR and you sell it within 6 years of moving out. This in addition to all the deductions claimed on the way through.. for up to 6 years!!

    2. Household incomes may have grown by 350%, but that generally includes 2 streams of employment income these days.

    3. CPI excludes the cost of land, which in turn lowers reported inflation and subsequent rate settings. Cheaper debt results in even higher land costs. Oh, the irony!!

    • 1. did that with my first house before the GFC… (I remember attending a tax seminar with a very berate ATO man who I asked this question in front of everyone – he said rather sternly, “Yes, you can do it, but you really shouldn’t”
      2. as UE as shown here before the 2 income streams isn’t as profound as you think.
      3. agreed – CPI is not a measure of inflation or inflationary pressure. There is more nuance to the deflation/inflation dilemma out there, again as shown with UE, construction costs are down and up because of better prices, but higher taxes, whilst the real inflation is land prices. Which is ridiculous, given the abundance of land available to be developed.

      Further, increasing council rates, energy costs and other non-discretionary household budget items are hurting….

      • Regarding 1. – you can only have 1 PPOR at any one time for tax purposes, however.

        You can’t move out of your house, rent it out, and buy a second house, then within 6 years later sell your the first house and still claim the second as CGT free when you sell it.

  13. “The overwhelming majority of appreciation in Australian house prices has been caused by rising land values rather than construction costs.”

    A question on the statement H&H or anyone that knows: A chippy mate of mine in Melbourne has told me that about 25K of cost has been added due to a whole range of new compliance and delays from council which adds to the costs, but does this data capture those costs?

    I’ve notices a huge rise in many building products over the last ten years so I wonder how accurate much of the data is. I totally agree on the high cost of land however.

    • I’ve notices a huge rise in many building products over the last ten years so I wonder how accurate much of the data is

      Also tradesman labour costs and general building costs are waaaay up. This will all reverse quick-smart in a major downturn, so I don’t see these as costs as being impediments in the long run.

    • I think it makes sense if building material costs have sharply spiked over the past decade – the “rennovate to flog off for a fortune” craze must surely have inflated the cost of such materials by a fair degree.

  14. I love Allan?, he helps explain to everyday people how hard equity markets are and if you don’t do your own homework you’re a bloody idiot.
    The biggest issue with ‘advice’ nowadays is that most people still base their decision to take advice based on the premise of ‘do I trust this bloke?, instead of the more logical premise of ‘is what this guy saying make sense and can he add value above his fee?

    I think he’s ok, but a Little cocky for a commentator basically.

    • instead of the more logical premise of ‘is what this guy saying make sense and can he add value above his fee?

      I can tell you from first hand experience, the type of financial adviser you describe above, ALWAYS loses clients to smoother talkers when clients go chasing bubbles on the way up.

  15. There is some evidence in the USA that those cities / communities with fewer land use restrictions did not experience the bubble phenomenon of the ones that did.

    Incidentally the money lost from the public purse thanks to negative gearing is somewhere in the magnitude of $10Bill annually. Some of that could surely be used to incentivize local governts into more liberal planning laws?

    • Indeed! Every young Aussie getting whacked with 40c in the dollar (or even 47) can rightly angry that they have only two choices – in addition to trying to pay off a massively over-valued house they can:

      1. Get slugged for busting their hump;
      2. Shelter the tax behind property (ie speculate)

      I’m surprised the major parties can even land a vote from those under 35.

  16. My wife is Japanese and she often comments that parts of suburban Australia resemble suburban Tokyo. Densely packed houses stretching to the horizon.

    Which makes me think that within a generation the ubiquitous game of backyard cricket may become only something that “granddad” used to do.

    If that’s Big Australia, I have no enthusiasm for it.

    • Agree. It’s not the Australian people chasing after this manic destructive hyper growth. And the reality is that there are plenty of Australian families getting left behind.

      For corporations population growth is the easiest market-share growth you can get.

      Is there anyone that grew up in Qld that doesn’t look at the unfettered coastal development and feel a deep sadness at the loss? Some of the Victorian coast-lines are still magnificent (but under intense pressure).

  17. Planning restrictions are important, but exaggerated. Regardless of whether urban limits apply there are many cities which are bounded by inappropriate topography for development or the sea ie. Natural barriers. These are de facto limits independent of planning. Don’t underestimate infrastructure costs for fringe development either

  18. The cause of the increase in land values is very intersting but historic at this point. I am interested in how the land value bubble reverses.
    A bust would happen if the RBA
    lowers interest rates and it fails to create more borrowings.If the RBA fails to re-inflate the debt growth game we will experience a once in a lifetime general de-leveraging. That is Debt falls slower than the fall in asset values requiring liquidation of assets to meet debt repayments. A negative feedback loop.
    It’s the reverse of the long-term debt growth cycle. So my question is will the RBA get to Zero interest rates with no increase in borrowing for property? Or has the RBA lost control of interest rates
    so it wont make a difference to mortgage rates if the RBA goes to ZERO?
    Cheers Punchy