The Federal Budget, the Property Market, and the ‘Law of Economic Absorption’

The Federal Budget, the Property Market, and the ‘Law of Economic Absorption’

I managed to pin my eyes open to watch the budget speech the other night. It reads like Christmas morning for the property sector, including:

  • An extension of the First Home Guarantee program that allows people to put down a 5% deposit without being hit with lenders mortgage insurance.

It also includes new commitments to road and rail projects:

  • Brisbane to Sunshine Coast faster rail
  • Sydney to Newcastle faster rail
  • The METRONET project in Western Australia
  • The North-South Corridor in South Australia
  • Great Eastern Drive in Tasmania
  • Central Australian Tourism Roads in the Northern Territory
  • Melbourne Intermodal Terminals to increase the efficiency of the national freight network
  • More than $500 million for local councils to deliver priority projects and $880 million to better connect regional Australia with ports, airports, and other transport hubs

The fuel excise is to be cut in half.

The low-income tax offset is to be extended.

The list goes on…

UK economist Fred Harrison coined the effect of infrastructure spending on the housing market the ‘Law of Economic Absorption’.

US veteran economist Mason Gaffney takes it one step further with the acronym ATCOR — ‘All Taxes Come Out of Rent’.

The term ‘rent’ refers to ‘economic rent’ — the earnings from owning land.

Both are central to the land theory of the 19th century economist Henry George.

The Law of Economic Absorption and ATCOR may sound a bit complicated, so let me try and put it in simple terms.

It will help you understand how the economy works and why we have a property cycle at all.

Despite great technological advances, it’s always the owners of the locations that capture the most wealth.

This includes access to the electromagnetic sphere for telecommunication, etc.

Noting that ‘land’ in economics refers to all natural elements — minerals included.

Well-facilitated land is always short in supply and high in demand.

Therefore, as society gets richer, the land market in the areas people most want to live is bid up in price.

This is why Henry George’s 1897 magnus opus was called Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth.

No matter how much progress we have, whilst the owners of land are allowed to reap the gains, poverty will always exist.

In the housing market, labour taxation takes some of those riches before they reach the land market — reducing a buyer’s budget.

Therefore, it follows that the removal of labour taxes (note: 90% of current taxation falls on labour) naturally washes up into higher prices for real estate.

If we were to capture this rise with a land tax, then in theory, it would leave the resulting rise in the economic rent of land ‘just’ enough to replace the forgone revenue.

To put it plainly: Get rid of labour taxes and land prices rise!

But equally, if we get rid of taxes on buildings, land prices rise.

Removal of Stamp Duty (as the Property Council desires) and land prices rise.

You get the idea. In other words — All Taxes Come Out of (land) Rent — ATCOR.

The only way to counter this is with a broad-based land tax that takes the gains before they’re pocketed.

Something the FIRE (Finance Insurance and Real Estate) sectors will never permit.

They would rather a labour tax.

Your labour tax bill is the biggest bill you pay in your lifetime.

This knowledge is how you can get all your income taxes gifted back to you.

A chap in the UK, Don Riley, documented how he did this in his book Taken for A Ride: Trains, Taxpayers and the Treasury (2001).

Don worked in the computer industry for 40 years.

He duly paid his taxes to Her Majesty’s Treasury throughout that period.

However, when the millennium came, as he puts it, ‘a miracle happened’.

The government returned every penny he had ever paid in taxes — and more. How?

Britain’s taxpayers generously funded an extension to the Jubilee line (JLE) on London’s Underground rail network.

Two of the stations were located close to Don’s office properties.

That raised the value of his properties significantly.

In fact, the £3.5 billion invested in the JLE by taxpayers caused the price of houses near the line to soar by an estimated £14 billion upon opening.

Don’s calculation showed the rise in value for his two properties gifted back all the tax payments he had made over that entire 40-year period.

Land takes the gains — never forget that.

And the tax cuts and infrastructure spending gifted in the budget will keep the land cycle pumping through to our forecast peak in 2026.

Find out more by clicking here.

Sincerely,

Catherine Cashmore Signature

Catherine Cashmore,
Editor, The Daily Reckoning Australia