Author’s note: I wrote this in 2003, to the Tasmanian Minister for Housing. It fell on deaf ears. It was correct then, but has become even more pressing in the years since; the mountain of debt attached to the property market led directly to the Global Financial Crisis. Australia has not seen the full effect of that crisis yet. We are doomed to repeat our failures unless the underlying problem of land price is recognised, and the remedies are well understood. There is no sign of that yet. Leo Foley
The problem outlined
Why, in this modern age, is a simple human need such as housing so terribly difficult to meet?
Affordability is at record lows, while the proportion of lower income earners who can afford a home is falling. Not only are first home owners being pushed out of the market, but many others, who may have chosen to temporarily vacate the market for lifestyle reasons, or been forced to sell due to family difficulties or divorce, cannot re-enter the housing market, and are forced to live the remainder of their lives at the margin.
After expending billions of our tax dollars on an unending variety of programs, we still have the problem that there is not enough "affordable housing". Yet another inquiry is under way.
Even the so-called home owner is in trouble. Equity, the portion of the home's value that belongs to the owner, is falling. We don’t have homeowners any more -- we have people with debts!
Home sweet debt!!
The result of low affordability, low equity, and high debt, is a social disaster in the making, with increased bankruptcies, divorces, and ruined lives. Tasmania is now a microcosm of the world. . Policymakers must address this growing social problem.
The critical omission
There is a serious omission in the debate on housing affordability. Perhaps it is because it is a 4-letter word, but it needs to be spoken out loud. The omission is the price of land! We talk of property prices, or the price of houses, but it is not the price of the house that has escalated in recent years, but the land that it stands on.
The ABC News reported, 4 August 2003, that the Federal and State governments each blamed the other's tax regimes for the high price of housing. Stamp duties versus GST. But the ABC gave an example of a $507,000 "house and land" package, showing that total taxes on the package were $109,000, including stamp duties of $18,000, and GST of $34,000. The cost of the house was approximately $150000. That leaves $248000 for the price of the land.
While the debate raged over the impact of stamp duty and the GST, the cost of land was totally ignored. Land is nearly half of the total cost!! The problem is obvious, yet we dare not speak its name.
Houses depreciate over time, unless substantial maintenance and renovations are undertaken. Land however, increases in value, whether it is developed or not. The price of real estate is determined by its location. It is that location or advantage over another site that gives it its value. Economists call it the "economic rent." The shop next to a bus terminus will sell more goods than a shop away from the bus route. The difference is economic rent. The same principle applies for residential land, based on location.
Identical houses may differ widely in value according to where they are situated, and the difference is the difference in the value of the plot of land that each stands upon. Since the value of bricks and mortar is the same anywhere, and is related to current building costs, the residue of the total value of the property is the value of location.
The value of land is sustained by the community at large. Land values are established by the surrounding infrastructure, the proximity of schools and employment, parks and the general attractiveness of the area. House prices rise fastest and furthest in places with a pleasant environment. Most of this amenity, as well as police, fire and other services is paid for from taxation. That is, the community creates the value!
Author’s note: This article continues with an extract of a separate submission to the Minister. It promotes the concept of the Community Land Trust to assist home ownership.
The graph (below) shows all anyone needs to identify the problem of poverty and the reasons for the housing affordability crisis in Australia. While wages have risen just 117% in real terms over 40 years, taxes have risen nearly 900%, and land has risen over 2000%.
Wages, GDP, Taxes and Land Value, 1950 – 2000: Australia
Source: Land Monopoly and Income Polarisation in Australia 1950 to 2000 - Tony O’Brien
How land prices can be ignored, in the face of this evidence that they are escalating far in excess of any other economic indicator, defies belief. It is obvious that any strategy to improve housing affordability must focus on the price of land. But, despite numerous inquiries recommending just that, it is still ignored!
Land values rise more rapidly than wages, so workers must borrow to pay for the land. Thus the landless must pay interest to landowners in order to buy land. It is clearly unjust, and without economic justice, there can be no social justice.
Governments are responsible for skewing the land market. Their fiscal policies are biased against people who work and save, and they favour people who pursue unearned capital gains from land.
Taxation, instead of encouraging free enterprise, penalises investors – who create jobs – while rewarding the shrewd operators who corner the market in those locations whose values are heightened by the growth of the surrounding communities. There seems to be little point in admonishing speculators who take advantage of existing laws, if the law-makers rig the rules in favour of pursuits that militate against both the enterprise economy and robust communities.
To recover land value, governments could either transform their property transaction taxes into a land tax or replace it and other taxes with land dues or land use fees. To share the recovered land rents, government could replace subsidies with a dividend paid to citizens. Alaska does this already to distribute its oil wealth. Replacing taxes with land dues and replacing subsidies with rent dividends is Geonomics. Once implemented, geonomics changes the dynamics of the land-price cycle and the whole economy.
To pay the land dues, owners use their land efficiently, while owners who had been speculating get busy and develop. Local governments would get busy, too, facilitating better land use and encouraging more home building, thus increasing supply and dampening prices.
Better still, as government recovers the land dues, owners are left with less land rent to capitalize into land price. Hence buyers need not borrow so much. Banks could not flood the economy with cash.
What would speculators use to blow up the price of land? Nothing. They couldn’t.
Land would still rise in value: with every discovery of a nearby natural resource; with the opening of every new bridge; with every jump in income and drop in crime, land value rises. But no longer will it create a bubble. Because every rise would find its way – via land dues and rent dividends – into everyone’s pockets. Rising land values would no longer wrack the nerves, but delight the spirit. With the extra income, one could finally add on that deck or shrink the workweek – or both. Alas, some day…...