The Irrelevance of the Prime Minister to Australia’s Property Market

The Irrelevance of the Prime Minister to Australia’s Property Market

Earlier this month, an Aussie family sold their former apple orchard in Wantirna South, a suburb in Melbourne. It’s been with the same owners since 1922.

The selling price? Reportedly close to $100 million.

The buyer is a Chinese property developer.

This is a perfect example of the stupidity of the Australian tax system and why Australia’s latest bout of political instability is mostly irrelevant in the long term.

It also has important investment implications.

Where the boom-bust nature of the economy comes from

The reason that this land is receiving such an enormous asking price is because of its desirable location on the city fringe and the fact it has Commercial 1 zoning approval, which removes permit requirements among other things. That means housing lots are sure to follow soon.

Germany has a far superior system. It freezes the value of land — at the agricultural price — when land is zoned for residential development.

The subsequent uplift in value of the land can then be used to fund local infrastructure and spending. Inferred from this is that taxes can be reduced and not even required.

Here in Australia we hand the windfall to whoever owns the land. Unproductive taxes make up for the forgone revenue.

A myriad of consequences spring from this.

One is the Australian preoccupation with speculating on property and using unproductive credit creation from the banks to do so.

This is where the instability, fragility and boom-bust nature of the economy — and its sensitivity to higher interest rates — springs from.

For a superb overview of this, the central role land plays in the economy and the myriad consequences that spring from it, I urge you to read a book called Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane.

It’s not a snappy title, but the book is an excellent introduction to this vital issue, making reference to the UK primarily.

If you were blindsided by 2008, you’ll know why after reading it. You’ll also be armed for the next housing collapse, which could be due sometime next decade if current trends persist.

The trends that drive the economy — mostly land rent and bank credit — are not new. In fact, they’ve been running riot since the end of the Second World War. The book shows this quite clearly.

Whether Malcolm Turnbull or Peter Dutton is in office will change nothing about this unless genuine tax reform is enacted. Yet it’s reasonable to assume this won’t happen.

The Henry Tax Review, commissioned last decade, argued for higher revenues to be taken from land. It was mostly ignored.

The status quo will not be tampered with in any meaningful way. That’s my guess, going on historical precedent.

What’s more, Dutton is said to have a multi-million dollar property portfolio with his wife. Turnbull also has a substantial and profitable history in real estate. In fact, the ABC found last year that most of Australia’s politicians are heavily into property.

I don’t blame them. It’s the sensible thing to do in Australia’s renter economy.

But the idea that anything significant will change depending on what happens in Canberra is laughable. I’d be holding my stomach if I wasn’t already wiping the tears from my eyes.

To his credit, when Turnbull became Prime Minister in 2015, he argued for the sensible policy of ‘value capture’ to be implemented around publicly-funded infrastructure projects. The policy debate quickly died away.

It’s one thing to reach a position of power, but quite another for interested parties to let you use it.

The benefits of these taxpayer-funded projects are taken in the nearby real estate. A large number of taxpayers have their wealth transferred to a small group of landowners. This is broadly a case of modest income workers subsidising the wealthier, who can afford to accumulate these assets.

The name of the economic game in Australia is to front-run these infrastructure projects to capture the free uplift. Cameron Murray, an academic in Queensland, revealed how this also distorts rational planning, at least in Queensland. Insiders lobby to have projects built near their properties, and not in the place that provides maximum benefit to the public.

A new profession comes to Australia

The authors of Rethinking the Economics of Land and Housing provide a checklist of factors that mark how vulnerable a country’s property market is to volatility.

Australia ticks all of them.

Don’t misunderstand me; I’m not saying Australian property market is going to crash anytime soon.

But the long-term consequences of our system are quite easy to forecast: higher private debts as well as growing inequality, as those left out of the housing market fall further behind.

The mainstream press is unlikely to point any of this out. And some of the explanations given for this are absurd.

Robert Doyle, the former Lord Mayor of Melbourne, used to appear on the radio often. I once heard him blame Melbourne’s homeless problem on ‘professional beggars’. The idea was they trained it into work every day, made a day’s labour asking for coins, and then went home to a nice suburban home.

I suggest you read Rethinking the Economics of Land and Housing and make up your own mind. Then pass it on to anyone you care about.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia