The Great Australian Household Debt Trap: LF Economics lobs first submission into HoR housing bubble inquiry
LF Economics duo Lindsay David and Philip Soos have lobbed their submission, titled The Great Australian Household Debt Trap: Why Housing Prices Have Increased as the first presentation to the House of Representatives Standing Committee on Economics 2015 Inquiry into Home Ownership.
But at the same time they claim this latest housing inquiry is a "transparent political ploy" to avert implementing a raft of genuine policies that would impinge upon the government-supported ability of the FIRE sector to siphon record-breaking profits from the economy and labour through the extraction of economic rents, primarily usury and land rent.
"Given that very few, if any, recommendations from previous inquiries have been implemented, there was little need to hold the recent inquiry into the housing sector," the submission says.
"There is no need, therefore, for this inquiry to take place at all, especially considering it has been known since 1879 with the publication of the world’s most popular economics book, Henry George’s Progress and Poverty, what the most effective approach is in terms of efficiency and equity in dealing with the issues that afflict Australia’s real estate market.
"The Australian public would be far better served if an alternate inquiry were to be held that investigated ways to democratise the clearly malfunctioning political system which regressively only assists Australia’s army of private monopolists, usurers, speculators, rent seekers, free riders, financial robber barons, control frauds, inheritors and indolent rich.
"It is high time the nation’s politicians, political parties, public executives, top-level public economists, regulators and bureaucrats have their power over policymaking significantly restricted by and for the benefit of the public and common good.
"It is this self-interest that has helped to perpetuate the largest debt-financed real estate bubble in Australia’s history."
They argue in the 9000 word submission that since 1996, property prices have outpaced inflation, incomes, rents and GDP, making it difficult for potential first home buyers (FHBs) to enter the market while lower income households and marginal groups struggle to afford decent shelter.
They add the Australian housing market shares similarities with countries that experienced real estate bubbles, such as the United States, Spain, Denmark, the Netherlands and Ireland.
"Government, the FIRE sector (finance, insurance and real estate) and the mainstream economics profession predictably deny the existence of a housing bubble, but Australia’s economic history demonstrates they occurred during the 1830s, 1880s, 1920s, mid-1970s and late 1980s.
"The bursting of these bubbles invariably caused economic recessions and depressions.
"Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record.
"Policymakers are caught between a rock and a hard place, as implementing needed reforms will likely burst the bubble, causing severe financial and economic fallout as residential land prices revert to mean."
They argue governments have worsened market inefficiencies by cynically enacting and maintaining policies to inflate housing prices.
"The inertia regarding housing and tax reform is due to the recognition from the first Rudd government onwards that the nation is in the midst of its largest housing bubble on record.
"The tolerance of housing policies that maintain bubble-inflated prices, ignore objective evidence, contradict the recommendations of earlier inquiries and erode housing affordability are entirely predictable.
"Property ownership and speculation has been elevated to the status of religion in Australia, compounded by a perverse culture of homeowner entitlement driven by a degenerate taxation system that penalises work and effort while rewarding unearned wealth and income."
The researchers noted previous inquiries into the housing sector in 2004, 2008 and 2015 identified both supply and demand-side variables as contributing to high housing prices: availability of finance, lower nominal interest rates and inflation, preferential taxation treatment for all land owners, developer charges and levies, the composition and rate of employment, demographic change (population growth, household size and age structure), cash grants to FHBs, rezoning policies and the returns from other investments.
"Current housing prices cannot be explained by these fundamental factors, however, as both the nominal rent to inflation and rent to income ratios have remained steady over the course of the housing price boom."
It is argued there are two primary causes for the housing bubble: a rapid acceleration in mortgage debt and perverse taxation policies encouraging speculation.
The duo make 15 housing market recommendations, (published below) and some 23 banking recommendations too.
Recommendation #1: More efficient use of the State Land Tax (SLT).
The SLT is an ideal tool to moderate both land price bubbles and their subsequent devastating busts, and is already in the toolkit of state and territory governments. Unfortunately, this tax has been rendered comatose by a host of exemptions and concessional treatments. The SLT requires broadening to include owner-occupied housing and agricultural land, calculated on a per-square-metre value basis. The narrow existing base and progressivity of the SLT incurs only a small deadweight loss; the complete removal of exemptions and concessions would reduce this deadweight loss to zero.
On the other hand, the federal government could take charge by imposing a comprehensive Land Value Tax (LVT) on all land. An increasing marginal rate schedule taxes the least valuable land at 0 per cent, with rising rates calculated on a per-square-metre value basis. Land taxes apply per land holding, but not on an entity’s total holdings, to encourage development.
Recommendation #2: Changes to municipal rates calculations.
Municipal rates should be levied using site value (SV) rating, taxing the underlying land only. Under the capital improved value (CIV) or net annual value (NAV) system, construction is taxed, suppressing building activity and imposing widespread deadweight losses.32 Use of Minimum Rates provides a direct subsidy to those owning more valuable sites. Ratepayers should oppose this wealth transfer - an impost on their capital values as well as annual charges. Rates should not be capped to the rate of inflation given residential land prices have far outstripped inflation.
Recommendation #3: Reform stamp duty tax.
Unlike most recommendations regarding stamp duty, it is a tax worth keeping. Theoretical studies on the deadweight losses of taxation will indicate stamp duty is an inefficient transactions tax, but this only holds on the unrealistic assumption that the housing market is efficient. As Australia is at the peak of its largest housing bubble on record (revealing the housing market is not efficient), stamp duty instead acts similarly to a Tobin tax: it reduces both prices and volatility. Evidence demonstrates stamp duty in Australia reduces housing prices equal to or greater than the value of the stamp duty, rather than increasing prices as is commonly believed.33 This is precisely why the housing lobby seeks to reduce and eliminate this tax.
Given the inefficiencies currently wrought in the housing market, stamp duty is likely to be welfare-enhancing, and thus should be retained. A reformist approach would be to increase stamp duty on the more speculative transactions, for instance, owner-occupier and investment property purchases with a loan to value (LVR) ratio above 80%, rising further if interest-only loans are used, while reducing stamp duty for transactions with lower LVRs and amortizing principal and interest mortgages. If a sufficiently large, broad-based LVT proved it could quell an inefficient housing market, stamp duty could be gradually reduced. It should also be noted that the incidence of stamp duty results in a portion falling on the dwelling structure, which results in inefficiency as with council rates based on the CIV or NAV system.
Recommendation #4: Reform housing tax expenditures.
The capital gains and land value tax exemptions for owner-occupiers and the capital gains tax discount for investors should be removed.34 Owner-occupier mortgage interest deductibility is ruled out because it is the equivalent of the negative gearing benefit for investors, and therefore likely to encourage larger private debt burdens.
SMSF tax concessions should be modified by bringing them into line with the benchmark treatment for property investment.35 Provisions allowing SMSFs to borrow for investment purposes are removed to limit risk and losses during future real estate corrections.
Recommendation #5: Quarantine negative gearing.
Negative gearing is a Ponzi-amplification mechanism that provides incentive to increase mortgage debt to speculate on the movements of future capital prices. The ability of property investors to write off net rental income losses against labour income tax should be disallowed. The ability of investors to claim depreciation on buildings should be reviewed, as it allows income that otherwise would have been taxed at the full rate to be converted into capital gains that are only taxed at 50 per cent of the nominal rate.
Recommendation #6: Removal of all first home buyer subsidies.
The FHB grant and boost, including the first home savers accounts, should be removed. These housing subsidies act as a demand-side stimulus that further erodes affordability. When combined with highly-leveraged mortgages, the result is rapid housing price inflation that substantially outstrips the size of the grant. These grants are a gift to vendors, not FHBs.
Recommendation #7: Prevent superannuation lump-sum withdrawals.
Disallow the use of lump-sum withdrawals from superannuation accounts to finance purchases of owner-occupied property or to prevent foreclosure (while allowing SMSF purchases as noted above). The former acts like a FHB grant, while the latter is another gift to bankers.
Recommendation #8: Increase the Commonwealth Rent Assistance (CRA) scheme.
The CRA should be increased to assist low and moderate income tenants, and index it to nominal rental price growth. The CRA is better targeted than NG and the NRAS because it provides direct cash assistance to tenants. The program may place upwards pressure on rental prices as it increases eligible tenants’ purchasing power.
Recommendation #9: Greater investment in public housing.
A substantial increase in funding for public housing would assist long-term, low-income individuals and families reliant on social welfare to exit the private rental market, ameliorating their financial stress. We have an obligation to look after those who have difficulty managing their affairs.
Recommendation #10: Tenancy law reform.
Australian tenancy laws should adopt the higher standards enjoyed by other Western nations. Tenants’ limited rights include less stability and security in tenure due to shorter lease terms (6 to 12 months on average), lower rental vacancy rates favouring landlords during contractual negotiations, termination of leases for no reason, and requisite landlord permission for minor alterations and pet ownership.
Recommendation #11: The adoption of ‘right to build’ laws.
This policy encourages timely development of residential property. Planning delays and uncertainties may raise land costs, thus, this effect is negated by a right (positive presumption) for developers and home builders to undertake activity, within specified local and state government guidelines. If a development is opposed, then the onus is upon the aggrieved party to take the developer to the civil tribunal to modify or prevent construction.
Recommendation #12: Elimination of state/local government infrastructure charges and levies.
Governments should reverse its preference for imposing direct charges on developers, instead financing local infrastructure directly. Governments can either adopt the Texan Municipal Utility District (MUD) model or return to the original system of issuing municipal bonds to finance local infrastructure and paying down debts through council rates.
It should be noted that developer levies and charges do not feed through into higher housing prices as is commonly believed; rather, developers subsume the levies and charges through lower profit margins which explains why they oppose them. Regardless, those who benefit from local infrastructure should finance its provision through the benefits-pays system: landowners through council rates and SLT/LVT.
Recommendation #13: Streamlining of zoning processes.
Land subdivision and zoning vacant land for residential use in capital cities takes too long, generating considerable costs, uncertainty and reducing developer competition. Comprehensive betterment taxes should be applied to agricultural land that is rezoned for commercial and residential purposes.
Recommendation #14: Removal of most urban growth boundaries (UGBs).
Except for ecologically or culturally sensitive regions of land, there is no sound rationale for UGBs, as only a tiny fraction of Australia’s land mass is urbanised. Building further out on the fringe may lower housing costs, but this will likely be more than offset by the rise in transportation costs.
Recommendation #15: Establish the ‘Right to Rent’ program.
The Right to Rent program allows any household in danger of foreclosure to remain in their home for a period of 5 to 10 years (or longer), paying the market rate of rent to the new owner (the bank). This policy helps protect owner-occupiers from the injurious effects of lenders’ control frauds. The plan does not bailout the banks or home owners, can be implemented straight away, does not create more bureaucracy and protects property from theft, squatting and vandalism. It also gives owner-occupiers more power in working through mortgage modifications, potentially reducing the number of delinquencies, insolvencies and foreclosures.