Catherine Cashmore

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Take a cursory look through the international press and reports on housing related matters, and it could be merged it into one text as property cycles become increasingly interrelated and investors search for ‘safe havens’ off-shore.
Overwhelmingly, affordability, bubbles, the rise of Asian investors, and fears of a new breed of non-home owning ‘renters’ dominates, and although headline chasing would place any sensationalist report front of line, the reader comments and related dialogue that follow present a familiar picture for the ordinary home buyer – no matter what reforms are taken, it never seems to get any easier. 
You could be forgiven in thinking it’s by some abject force of nature, bustled in at the time of the ‘big bang’ that property (or as I pointed out <a href="https://catherinecashmore.com.au/wp/?p=494" target="_blank">here</a>, ‘land’) is deemed unaffordable. Outpacing wage growth and inflation through the course of a cycle, subject to the whims of a bank’s propensity to lend - burdening buyers with one of the most stressful experiences they’ll go through in life. 
Or in the bleak words of the eminent poet <a href="https://www.youtube.com/watch?v=Lin-a2lTelg&amp;feature=kp" target="_blank">Leonard Cohen</a>:
“Everybody knows… That’s just the way it goes.”
This is what the real estate and finance industry would have you believe as they navigate through the fluctuations of the property cycle with authoritative analysis, on what and where to buy.  And no doubt, it’s been a prosperous affair.
The number of property investment <a href="https://www.propertybooks.com.au/">books</a> written by the ‘<a href="https://www.propertybooks.com.au/">I Did It - And You Can Too!</a>’ experts, belies belief. And yet, becoming successful in the game isn’t incredibly hard for anyone with an ounce of locational common sense. The authors are simply singing their own interpretation of an age-old song titled ‘Monopoly’. 
Over the course of a business cycle, which is both lead by, and correlated to the housing cycle, the gains – more correctly termed economic rent or “earnings from land,” alone - by far and away surpass those that can be gleaned from other more productive investments.
This was stressed in a recent submission by <a href="https://www.earthsharing.org.au/" target="_blank">Earthshare Australia</a> to the upcoming Senate enquiry into housing affordability:
“Unearned incomes in land increased a whopping $187 billion in the December 2013 quarter alone (<a href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0" target="_blank">ABS 6416</a>). Total yearly dividends (2013), for investors engaged in risk, was recently reported at $84 billion – $103 billion less for an entire year.
(Leading them to question) “Why invest in small business or the ASX when one can earn more for less risk at a lower tax rate as a land speculator?”
These gains occur primarily because we choose to leave the larger proportion of ‘economic rent’ (mistakenly termed, ‘capital growth’ – however in this context, we are talking about the unimproved value of the site) locked in the land, rather than recycled back into community – from where it evolved.
Hence why housing is so expensive – the financial benefit derived from improving the surrounding facilities, is not effectively utilised – and our tax and supply policies do little to assist.
The Henry Tax review was not slow to <a href="https://taxreview.treasury.gov.au/content/finalreport.aspx?doc=html/publications/papers/final_report_part_1/chapter_12.htm" target="_blank">point this out</a>, when it suggested progressively scrapping a vast array of ‘bad taxes’ (payroll, insurance, vehicle registration, stamp duty, and forth, as well as reducing those that reward speculation) and instead, collecting more of the economic rent of natural resources - significantly land. (Notwithstanding, it was another government review which fell largely on deaf ears.)
Yet, historically, the capture of economic rent (through land tax and to some extent ‘betterment’ taxes) financed some of the most remarkable infrastructure we have. Sydney Harbour Bridge being a case in point.
The tale of a bridge and our accumulated wealth
It was <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/radionational/programs/rearvision/tony-abbotts-big-plans-at-odds-with-infrastructure-history/5404212" target="_blank">acknowledged</a> at the time, that residents on the north shore would benefit significantly from an increase in their property values as a result of this essential piece of infrastructure.  Therefore, a framework was set in place to capture a proportion of the uplift – approximately one third – to assist with funding. 
This was in no way detrimental to the property owners. 
The increased advantage of economic activity coupled with the rise in prices resulting from the enterprise, more than compensated. A win-win if you like – and readily accepted by the public as fair.
Over time, changes in the way both state and federal government collected tax moved focus away from land values, onto productivity, effectively, placing a fine on labour and doing a good job of keeping us asset rich and income poor.
It’s great for the haves – but not the ‘have-nots’ (our growing pool of tenants.)
Consequently, the wealth locked in our residential land market, through the process of this accrued speculation – sits at post $4 trillion (add the buildings on top, and it’s an estimated $5.02 trillion).
It’s so large a number; it’s almost meaningless in real terms.
In comparison, the UK housing market is assessed to be $5.2 trillion with a population of around 60 million, so the distribution across a population of 23 million, is telling.
It’s this, that enables publications, such as the <a href="https://www.credit-suisse.com/ch/en/news-and-expertise/topics/wealth.article/article/pwp/news-and-expertise/2012/10/en/global-wealth-report-locating-the-super-rich.html" target="_blank">Global Wealth Report</a> produced annually by Credit Suisse, to assess Australian’s to be the ‘richest in the world’ in median terms. 
In other words – if you stand everyone in a long line, richest to poorest, the middleman has more asset wealth than any other country assessed.
It should therefore come as no surprise that our wealthy know where to bank their dollars - and it’s not down the high street.
As economist <a href="https://www.project-syndicate.org/commentary/adair-turner-explains-how-a-fresh-wave-of-automation-is-transforming-employment-and-much-else" target="_blank">Adair Turner</a> and others have pointed out in response to a recent report by Oxfam, which demonstrates how Britain’s five richest families are wealthier than the poorest 20% of the population.  The riches are only in part derived through productive activity – the vast ‘wealth’ however, has been derived through ‘rents’ (unearned gains) in land.
If you thought wars were about religion – think again.
The compounded rent is effectively what we pay for when acquiring real estate – a calculation that takes into account expectations of future growth, minus expenses for the time held – along with a range of other variables such as wages and borrowing rates.
Yet capturing a greater percentage of annual land values, whilst at the same time reducing those on productivity holds much in its favour.
<ul>
<li>It reduces the propensity of boom/bust housing cycles. 
</li>
<li>Encourages timely construction and effective utilisation (good for both the economy, employment and consequently, our welfare state). 
</li>
<li>Aids infrastructure financing. 
</li>
<li>Supports decentralisation. 
</li>
<li>Assists in keeping the cost of shelter affordable – levelling to some degree, the playing field between non-owners and owners. 
</li>
<li>And importantly, in regions where it’s been implemented with <a href="https://catherinecashmore.com.au/wp/?p=414" target="_blank">success</a> - Pittsburgh and Pennsylvania being examples - most owners pay less tax when there’s a shift from productivity onto land, than would be the case otherwise.</li>
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Change ahead?
Of course, to change the mindset of any nation that has been encouraged to use their housing investments as leverage for economic activity, a welfare fund for retirement, collateral for the advancement of business and commerce, and an ATM for family emergencies, is no easy task. 
Not to mention the many vested interests in both government and the property industry, all of which derive their income from the promotion of it.
However, it’s vitally important we do so – because it sits at the very base of everyconversation government is current having regarding the welfare state, cutting pensions, and increasing the working age until retirement.
Even in our technological age of driverless cars, lasers that can change the weather, 3D printers that can produce substitute body parts, and solar farms that can produce enough energy to run a small city, nothing is possible without the land which gives us the food we eat, the water we drink, the air we breathe, and a rich array of commodities to fuel our appetite for ‘growth.’
There is nothing to be gleaned in from the hording of land, and whilst secure private tenure of property is vital in so much as land needs to be cared for, cultivated, and effectively utilised, a proportion of unearned economic gains that come from the locational rent of the unimproved value alone – should not be privatised to the extent that prices escalate through the inducement of speculative gain.
Can supply policy solve it alone?
We talk a lot about supply, but whilst the status quo exists - rising land values being used as the primary driver for economic growth – high prices ensure land will only developed for profit, timed to capture the upward wave of a cycle, rather than developed to meet the immediate needs of a home buyer, which does little to deter the wasteful process of <a href="https://au.news.yahoo.com/thewest/business/wa/a/22865421/developers-choking-land-supply/" target="_blank">land banking</a>.
It is not insignificant that the burdens to supply policy, which we consistently criticise – the structural impediments to development - were implemented along side a gradual shift of the rental capture of land, onto productivity.
As <a href="https://www.bobday.com.au/PDF/Home-Truths-Revisited-May-2013.pdf" target="_blank">Bob Day asserts in his submission</a> to the Senate debate on housing affordability:
“The regulatory seeds of the housing affordability crisis were sown in the 1970s. Until then land was abundant and affordable, and the development of new suburbs was largely left to the private sector.”
The 1970s was not only the point at which urban zoning (a process of false scarcity) was imposed by state governments – it also came at a time at which any hope of tax capturing the fair uplift in land values to keep construction timely and offset soaring costs, had been truly eroded.
This, coupled with a shift in infrastructure financing – as private enterprise played an ever-increasing role and projects were no longer provided with capacity ahead of time, but required to prove revenue – ‘user pays’ whilst home owner benefits – was the beginning of the end.  
A Glance Back At Policy
Early settlers had rejected the British system of taxing both land and buildings, in favour of the methods advocated by the classical economist <a href="https://www.prosper.org.au/about/henry-george/" target="_blank">Henry George</a>, who had previously presented his ‘single tax' theory in Australia to thunderous success. 
However, over time, the government’s inept and poor administration in the regularity and standard of valuations, the creeping in of exemptions (including the family home) coupled with lobbying from large landholders - a group which have historically maintained the greatest political clout – significantly eroded the system, and by the 1950s an array of taxes were falling increasingly on productivity, rather than land. 
In 1953 when the Menzies government abolished the <a href="https://www.prosper.org.au/about/geoists-in-history/clyde-cameron/" target="_blank">Federal Land Tax</a>, rapid post war population growth had firmly laid the foundations for a thirst to profit through capital gain (mounting land values.
The then Labour party – which had historically always rallied in favour of raising revenue from the economic rent of land rather than productivity, were up in arms, prompting <a href="https://en.wikipedia.org/wiki/Arthur_Calwell" target="_blank">Arthur Calwell</a> to speak in opposition of the plan, passionately declaring:
“We have always believed in the land tax…The land belongs to the people, and its use must be safeguarded and protected at all times!” (Hansard, Vol 221, pp 165-170 passim)
However, it was the beginning of the end. Up until 1961 it was an integral part of the Labour platform. By 1963 however, the commitment had been omitted all together, apparently, <a href="https://www.cooperativeindividualism.org/cameron-clyde_how-labor-lost-its-way-2005" target="_blank">without conference approval</a>.
When Whitlam came to power in 1972 (see Bob Day’s comment above) he ignored any call to bring in legislation to collect the economic rent of land, instead of levying heavy direct and indirect taxes on income, and in so doing, a politically fabricated boom in land values was underway.
In the decades that followed, the promotion of negative gearing (1985), halving of the capital gains on investors (1999), onerous levies on development and upfront infrastructure costs passed onto buyers - grants, incentives and so forth, had little to do with the delivery of affordable housing, and everything to do with escalating land prices.
It should come as no surprise then, that large landowners and the commission side of the real estate industry, shy away from any changes to the tax system. The smoke screen debates on affordability and scrapping negative gearing are just that.
So what now?
Due to China-led resilience and economic stimulus Australia, although in no way unscathed, avoided the disastrous consequences of 2008, resulting in thousands of foreclosures across the US and Europe, whilst banks were bailed and families <a href="https://stephendonnelly.ie/betrayed-by-victorian-era-debtors-prison-mentality/" target="_blank">continue</a> to be evicted.
Not so the recession that marked the early 1990s.  
Affecting 17 out of 18 comparable OECD countries, high unemployment, a large current account deficit and elevated level of foreign debt left many economists gloomy Australia would ever achieve long lasting economic recovery.
Endless debate was given to the causes and consequence, which left policy makers reassuring the community that lessons’, would be learnt! However, as the then Governor of the RBA, <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/radionational/programs/saturdayextra/ian-macfarlane/3378434" target="_blank">Ian McFarlane, later summed up in his 2006 Boyer lecture</a>:
“Any boom built on rising asset prices financed by increased borrowing has to end.”
And considering the date this lecture was given (2006), the following comment was insightful:
“No-one though has a clear mandate at the moment to deal with the threat of major financial instability associated with an asset price boom and bust.”
It’s unfortunate that “no-one” happens to be our most influential political and economic policy makers – and indeed, we’re not alone. 
After every economic crisis, there is always the promise that events will never happen again – safe guards are put in place and eventually the wreckage is cleared. however happen they do, and reforms that promise otherwise repeatedly fail.
Significantly, globalisation, the interrelating of major economies, is adding to the volatile nature of each economic downturn.  As Wayne Swan asserted in his speech <a href="https://ministers.treasury.gov.au/DisplayDocs.aspx?doc=speeches/2009/006.htm&amp;pageID=005&amp;min=wms&amp;Year=&amp;DocType=" target="_blank">“A Future Of Promise”</a> given at The Sydney institute in 2007:
“It is, truly, the sharpest synchronised global downturn in living memory… And it's being inflicted on good Australians through no fault of their own.”
No cycle is exactly the same, but while history may not exactly mirror the past, patterns do emerge. 
There’s only one reason we have devastating house price booms and busts –  and that is speculation induced, in this case, through the privatisation of unearned gains.  And whilst some continue to reap a windfall from exploiting the process, we really need to pause and ask – Who is it really benefitting?
It’s time for change. 
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catherinecashmore-6LXia3pPQj

Who is really benefiting from the property cycle, and at what cost?

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I had the good fortune to meet two investors from Dallas, Texas last week - visiting in part, to survey the Australian real estate terrain and in return, provide a unique opportunity to glimpse the madness of it all through foreign eyes.
A cursory look through the press paints a colourful picture for our visiting observers.  Obviously, the spectacular rise in Sydney’s valuations has come under incredible scrutiny over the past 12 months or so. 
Like any upswing in the property cycle, it’s been exacerbated by a mix of forces, culminating in a shortage of effective supply against a bull run of speculation, which all agree has an inevitable end by date and no doubt subsequent correction when the tide changes (‘when’ being the operative word.)
The latest stats from RP Data’s capital city Home Value Index for the first quarter of the 2014 have evidenced “a near record level of growth throughout the month of March” rising in excess of 2% coupled with an “ongoing escalation in housing finance commitments”.
Sydney dwelling values are now reportedly 15.8% higher than their previous peak, some distance from Melbourne, which shows a more ‘subdued’ 4.7% ‘post peak’ increase (movements, which in industry speak are neatly termed a ‘recovery’.)
In response, the RBA, are like a read blowing in the wind, employing the same old wooden tools they’ve always relied upon as they warn investors in their latest <a href="https://www.rba.gov.au/publications/fsr/2014/mar/pdf/0314.pdf" target="_blank">Financial Stability Review</a>, - (like <a href="https://www.rba.gov.au/publications/fsr/2013/mar/html/bus-house-bal-sheet" target="_blank">last year’s</a> review, when stating how “undesirable” it would be “if households were to exhibit less prudent behaviour than they have over the past few years”) - that the:
“Cyclical upswing... cannot continue indefinitely” and any ease in lending rates holds the “potential to encourage speculative activity in the housing market”.
Community service groups hurriedly rush to Canberra, flagging a wealth inequality crisis, presenting yet another shandy of submissions to the rinse and repeat sequel of the last Senate inquiry into housing affordability,
And as Barclay’s Chief Economist <a href="https://www.smh.com.au/business/the-economy/australias-house-prices-flashing-red-debt-to-income-ratio-at-record-levels-20140404-362bz">Keiran Davies</a> sounds the alarm, reporting household debt to disposable income has hit a record “177% peak”, the public outcry against foreign investment bidding up prices has prompted the Coalition’s conservative version - reminiscent of Kevin Rudd’s 2010 <a href="https://news.domain.com.au/domain/home-investor-centre/blogs/domain-investor-centre-blog/what-housing-policy-20120621-20pcl" target="_blank">‘1-800-I-SAW-AN-ASIAN-AT-AN-AUCTION’ </a>debacle - to assess <a href="https://www.dailytelegraph.com.au/news/nsw/fears-chinese-investors-are-pricing-firsthome-buyers-out-of-the-market-will-be-investigated-by-parliament/story-fni0cx12-1226855755918">“what is happening on the ground”</a> and stave off the growing concerns that seem to indicate rules are not being adhered to.
The analysis my two new friends from Texas would hear from economists in response to the above backdrop is equally schizophrenic.
Whilst the Governor of the RBA <a href="https://www.theaustralian.com.au/business/economics/fitch-affirms-rating-warns-over-property-boom/story-e6frg926-1226874747119" target="_blank">Glenn Stevens is telling audiences</a> that a modest overheating in housing markets could have “long-term negative consequences for economic growth.”  AMP’s chief economist <a href="https://www.ampcapital.com.au/article-detail?alias=/olivers-insights/April-2014/Australian-housing-to-the-rescue-%E2%80%93-but-is-it-too-h" target="_blank">Dr Shane Oliver</a> is assuring the “normative” response to low interest rates producing a sharp surge in established house (land) prices, is “great news for the economy!”
According to Oliver, housing may show an “overvaluation criteria for a bubble,” but, we’re not in one yet, otherwise “property spruikers [would be] out in a big way” or “buyers rushing in for fear of missing out!”
Obviously Dr Oliver has not been attending many auctions or property seminars of late – otherwise he’d have plenty of evidence of the above practices (at least in the two biggest capitals.)  They’re all but engraved into Australian culture.
Notwithstanding, <a href="https://www.smh.com.au/business/the-economy/housing-bubble-fears-property-prices-could-fall-10-to-20-per-cent-20140331-35sg7" target="_blank">Christopher Joye</a> is back to the task of boosting his readership figures, evidencing the quite the opposite - warning overvalued prices could see “unprecedented 10 to 20% losses across the board” when/if the market 'normalises'.
Grave concerns indeed, albeit, it whistles the same tune as most industry commentary regarding affordability, with anxieties only going so far as to ensure an already inflated platform can be sustained (through prudent lending, of course) without open and strong advocacy into the policies that would stop these cyclical peaks and corrections, which result in numerous crash predictions, inevitable pain for new home buyers, a real wealth inequality crisis – for what seems to be for no more than generating publicity, whilst maintaining the status quo. 
“Build more houses!”
Unfortunately, the assumption – both here, and overseas – remains, that the only way to make houses more affordable, is to increase the supply of new dwellings.
Building more accommodation seems like an easy prescriptive cure, with supply verses demand being a well-tested economic model – that is, until it comes to the land market.
We can’t seem to deliver this supply at normative prices for the locational price/distance trade off.
Speculative activity, further promoted by a constipated planning system, has resulted in ever increasing land values, on ever decreasing lot sizes.
Analysis by RP Data shows vacant land prices over the past 20 years, have lifted from a median rate of $76.47 per square metre, to $507.70 per square metre, as of the end of 2013. Whilst the average ‘lot’ size has dropped from 700 square metres, to 500 square metres – and in some states, less than 400 square metres over the same period.
Obviously reforms to the planning process would greatly assist, however contrary to common belief, it would not alone provide a cure.
To truly restore housing back to fair value, we would have to remove the level of speculation manufactured into the structural design of our housing market and this is one side of policy reform Government has repeatedly refused to address.
Speculation
To be clear, an increase in the natural price of land, is an expected result when economies are improving due - for example - to capital investment in infrastructure, as is the case in Australia currently, with Tony Abbot’s desire to be knighted the ‘Infrastructure Prime Minister.’
Infrastructure intensifies the use and demand for land as the population grows, assisting job creation and collaboration between individuals.
Therefore, taken alone, rising values should be a ‘good’ thing for our country – (and economy) – or at least they would be, if the gains truly benefitted the community.
Any manufactured improvement to a location’s public amenities, gifts a beneficial trade-off to the owner, who receives a windfall in remuneration as the resulting economic impact boosts productivity.   
This increase in values is what economist’s term 'economic rent', although expressed rather misleadingly in popular vocabulary as capital growth.
To clarify – capital infers something that can be reproduced through productive activity, however we know from housing data, that the true gain in house prices is really collected in the rising cost of land, which takes up a 4.1 trillion dollar share of our 5.02 trillion dollar housing market.
 <img src="/images/2014/04/11/cashmore-april-11-two.jpg" alt="">
Land cannot be reproduced because it can’t be moved, it’s fixed in supply, and therefore any financial benefit derived from improving the surrounding facilities, is merely soaked into the ground.
This is why land banking is <a href="https://propertyupdate.com.au/land-banking-the-property-development-strategy-of-the-pros/">promoted</a> within the industry as a popular investment strategy – although to be clear, it’s not investment at all.
Investment implies the creation of wealth, whereas speculating is a zero-sum game; the wealth is not created, the landowner does nothing – and for the homeowners in Australia, lucky enough to be situated close to the best seats in town, it’s a generous tax-free unearned windfall.
Unwontedly or not, land bankers who hold their underutilised plot in lieu of capital gains, are free loaders on the economy and building activity does not respond to demand, but is only boosted when values are assessed to be on an upward trajectory.
Policies such as negative gearing, depreciation, capital gain exemptions, the encouragement to acquire properties and gear against them in self managed super funds, as well as the use of the family home as a wealth reserve for retirement, enforces speculation into the foundational makeup of our property market.
Land cycles
But I’m not informing Australian’s of anything they don’t already know.  People have become acclimatised to property being expensive, and our housing has become expensive because its value is derived from its accumulated and speculated future capital gains - correctly termed economic rent.
According statistics, home buyers typically move every 10 years or so. The price they are prepared to pay, is balanced against the price they expect to achieve, minus expenses – and in all my years assisting buyers, (barring the odd downsizer) I have never met a single one who calculated otherwise.
This is why property cycles – this is what promotes speculation. 
The banking sector, which has a monopoly on this process (after all, how many can purchase a property without a mortgage?) increases the volatility of this cycle markedly, however banks, lending, money (credit) creation, lack of regulation does not cause the cycle, (or stop the cycle).  Speculation does. 
We had land booms and busts before the evolution of our modern banking system – and without a change to the structural makeup of our housing market, we’ll continue to have them.
Lending restrictions can mitigate risk, but due to the vested interests of banking system, it will not remove it to the degree needed to stop the cyclical impacts.
Easy Earnings
Notwithstanding, for those home owners and investors who purchased over the last decade or so, making money through buying, holding and acquiring property (land) has been a far more effective in accumulating wealth by way of earning income and channelling it it into productive activities.
The BRW rich list is littered with examples, and for those who are not involved in the business of property, land is where they invest their dollars.
Of course, for the first home buyer on a single wage priced out – the mantra resumes that we just need to build more dwellings, the process of which contains just as much speculative activity in its design (including how we fund for infrastructure) so as to exacerbate the problem.
But how does it look to our Texan friends?
Well let’s just say, they’re not rushing to move here.
Texas is one of the top locations for interstate migration in America.
As with Australia, the economy has been super charged by way of a commodity boom, but unlike Australia, industries such as tech, manufacturing and business services are thriving and hiring in droves. 
The expansive list my new Texan friend’s reeled off, highlighting the number of companies moving their central operations into the state (rather than ‘offshore’ as they do here) is impressive, and when I asked how much they would spend purchasing a ‘home’ I was told that “three times annual earnings” would buy the best in town, which was summed up by the comment “like the house my parent’s own”.
Most of the units and condos in Texas are rentals – owned by large investment funds for example, and used as a hedge against inflation and source of positive cash flow.
There are less family sized rentals (detached dwellings) albeit, because housing is affordable, there is also less demand.
Devoting earnings to building a property investment portfolio isn’t a consideration for most Texan residents.
The state didn’t experience a housing bust, because it didn’t experience a housing <a href="https://www.newgeography.com/content/001680-how-texas-avoided-great-recession" target="_blank">boom</a>. 
 <img src="/images/2014/04/11/cashmore-april-11-one.jpg" alt="">
The subprime crisis didn’t hit, because speculation was removed. 
This was in part due to liberal and well funded supply policy, which ensures housing is built on demand and essential infrastructure funded by way of a deductable municipal utility district tax, administered by residents, funded by a bond, and payed back proportionally over a lengthy period of time.  
The additional key however in what’s been termed the “Texas miracle” is low taxes on productivity, lack of state income tax and a good regulatory environment, offset by higher than average property tax.
It’s not perfect – Texas does not remove other taxes, such as sales tax, which has a destructive impact on commerce – and property is taxed as well as land (where as ideally, in a truly productive environment, only the unimproved value of land – the economic rent – should be subject to a tax, which is far easier to accurately assess than the total capital improved value). However it makes the point. 
Whilst Texas boosts and attracts productivity with lower taxes, discouraging speculation in the areas that destroy it, Australia leans to the opposite.
We’re not immune to real estate crashes and there is plenty of evidence to prove their increased severity when prices are allowed to escalate. But, the best way to mitigate the risk and protect against volatility, is to encourage the industries that advantage the working population most (manufacturing for example) and take the air out of those that advantage land speculators the most. 
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Looking at our housing market through foreign eyes

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As we approach the federal budget, once again we have to endure another round of economic nonsense as the Treasurer tries to convince ordinary Australians that the country is running out of money – facing a ‘budget crisis’.
So ingrained is this message, that few question it.
Instead, <a href="https://www.3aw.com.au/blogs/3aw-drive-blog-with-tom-elliott/my-fivepoint-plan-to-fix-australias-budget/20131211-2z5mw" target="_blank">talk radio</a> is flooded with callers outraged at the ‘debt burden’ they imagine will be passed onto their children. A lifetime of work and servitude lay ahead – not only charged with the responsibility of paying down their own debt – but the government’s debt as well!
For an administration that wants to retain leadership through blaming the last government for the ‘mess’ they’ve reputedly left us in, it’s a convenient message to sell.
‘Fiscal responsibility’ is the catch term of the day, cuts to health services, education, welfare, job seekers allowance, wages, and proposed back to work assistance for those laid off  from the car industry - you name it, it’s on the table. 
Everything that is, except the golden egg of speculative windfall gains that can be gleaned from the increasing value of land.
In countries such as <a href="https://catherinecashmore.com.au/wp/?p=400" target="_blank">Germany</a>, they have historically managed to divert speculation away from residential real estate, with the focus being on productivity instead. Here we’re all subject to an economy built on the retirement ‘wealth egg’ of land – our personal economic leverage for all lifestyle and business needs.
It used to be called Monopoly. Today its termed - 'Getting onto the property ladder'. 
The rules of the game are simple.  The player uses as much debt as they can borrow - to buy and hold as much as they can – and those who got in at the beginning of the lending boom, securing the best plots available, win the game.
In relative terms, the ordinary home owner doesn't advantage much, but what else can they do? Retire still renting? Or become a contestant and hope their house yields enough appreciation to support them when they retire.  (But not so much that their children can't get a foot onto the first rung of course, and leave home before the age of 40.)  Our lives are therefore spent working to pay off a mortgage - or two. (That is, unless you're an unlucky tenant who doesn’t have the funds to buy, in which case you play a game called The Rental Trap.) 
The question we ask however is: at what expense? – Or perhaps at whose expense?
As demonstrated by a recent <a href="https://hia.com.au/~/media/HIA%20Website/Files/Media%20Centre/Media%20Releases/2014/national/Residential%20Land%20Market%20Pressures%20Continue%20to%20Mount.ashx" target="_blank">HIA report</a> – land values continue to skyrocket – with the weighted median across all capitals during the final quarter of December 2013, rising to the:
“Highest level on record… a 22.3% increase on the final quarter of 2012.”
 <img src="/images/2014/05/12/cashmore%20may%2012%20one.png" alt="">
Or perhaps it can be better illustrated on a graph <a href="https://www.newgeography.com/content/004261-urban-containment-land-price-up-5-times-income-smaller" target="_blank">Wendell Cox</a> (author of the <a href="https://www.demographia.com/dhi.pdf" target="_blank">Annual Demographica Housing Affordability Survey</a>) constructed which cuts through the usual measures used to convince readers that “housing has never been more affordable”, with overwhelming focus on mortgage serviceability rates alone.
Instead, it demonstrates the speculative nature shaping the property cycle, which affects not only established house prices, but building activity as lot sizes reduce, whilst land price per square meter, outpaces income growth considerably.
  <img src="/images/2014/05/12/cashmore-may-12-two.jpg" alt="">
<a href="/expert-insights/investing/30877-property-cycle-who-really-benefits-catherine-cashmore" target="_blank">The smoke screen debates on affordability and scrapping negative gearing</a>, are just that, smoke screens.  Something that was subsequently confirmed upon release of the government's Commission of Audit, which ruled out any consideration of a change to housing policy – better to tax income instead – easier for the top 10% to avoid it, whilst low to middle income earners suffer the shortfall.
Importantly, the Commission of Audit’s terms of reference was to concentrate on direct government expenditure - such as grants and transfer payments rather than tax expenditure - rebates, exemptions and so forth (such as negative gearing, capital gains).
We all have to shoulder the burden, tighten belts, work harder – pensioners included!
‘All’ that is, except those imposing the rules – whose entitlements are immune from any fiscal responsibility.  
Yes – the members of our federal government - the issuers of our monetary supply, offset through taxing those who do have to earn dollars before they can spend it – whilst our government earns nothing – but is rather elected, and charged, to manage the budget in the best interests of its working population to promote economic growth – for which education, health, back to work initiatives and so forth, are vital pillars.
There is no evidence and no economic wisdom that indicates running a surplus under current conditions is good for the economy, especially if that surplus is to be achieved through the measures suggested. 
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The Henry Tax review set out a framework that would move us to good model of economic management - a well managed deficit in order to achieve this is better than a running for a surplus at any cost - harming productivity in the process - as well as exacerbating private debt - which is high by any measure.
Something, <a href="https://www.youtube.com/watch?v=D0iFiUfDqSw" target="_blank">Steve Keen</a> does an excellent job of demonstrating in a recent lecture given in Sydney, in which he shows the inevitable consequence to GDP should our government attempt to presently do so.
Economic orthodoxy, which stubbornly insists austerity measures to pay down government debt, should take precedence whilst imposing onerous taxes on its working population, are lessons that should have been learnt following the Great Depression in the 1930s.
There is nothing new about this – indeed, Australia’s oldest PhD at 93  - Dr Elisabeth Kirkby - has just written a 100,000 word thesis on it. And whilst valuable lessons reaped from the grains of history are ignored, the patterns that led to our greatest economic disasters are repeated.
What all demonstrate is, when the government tightens its belt, for no other reason than a vain attempt to spruik a surplus, it has the unwonted effect of withdrawing money from the economy – leaving the private sector (the working class population) to pick up the slack.
Therefore “repairing the [government] budget” with the claim it’s putting Australia “on the right track” – is not putting the fate of Australians on the right track.
It is the government’s responsibility to manage the monetary system for the needs of its population (whether surplus or deficit) - spending enough money into the economy to keep employment and productivity boosted, which by design, reduces pressure on the welfare state.  
Yet it chooses instead to penalise productivity and ignore tax expenditures such as the capital gains exemption on owner occupied housing or scaling back negative gearing.
In this respect, it is economically irresponsible to have a growing deficit offset by tax receipts that reward speculation and by consequence, widen the wealth gap between rich and poor.  Ironically, the very gap the tax and transfer system is supposed to narrow.
In other words, we are not burdening our children with debt – we are burdening them poor economic management.
As austerity measures bite and the retirement age increases, the majority of Australian’s will be working longer and harder – and whilst the government pays down its reputed debt burden – private debt levels will continue to increase as families borrow to afford the basic necessities they need, most likely leveraged against their own homes.
Notwithstanding, most of our debt, is bank created debt – arguably, a far greater concern than government debt.
For those that need a reminder – as demonstrated in the latest <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/4102.0main+features202014" target="_blank">ABS social trends report</a> – total household debt was $1.8 trillion as at the end of 2013 - higher than it has been at any other time over the past 25 years.
<img src="/images/2014/05/12/cashmore-may-12-three.jpg" alt=""> 
Real Household Debt Per Person, Source: ABS
Low interest rates aside - $1.8 trillion is a hefty figure.
To put it in some kind of context – a trillion, is a thousand billion. 
The sun is set to burn out in approximately 5 billion years. A trillion is so large; it’s almost meaningless in real terms.
Total government debt is around $542 billion (as at March 2014 - <a href="https://www.rba.gov.au/" target="_blank">RBA</a>) – that’s about 35% of GDP.
In contrast, our household debt to GDP ratio is estimated to be around 97% (as at December 2013 - <a href="https://www.rba.gov.au/" style="line-height: 1.3em;">RBA</a>) - assisted by low interest rates and an array of financial products to ‘woo’ new borrowers into the property market (such as shared equity schemes, interest only loans, redraw facilities, offset accounts and so forth). 
Notwithstanding – the increase in bank created debt is a far greater issue than \government debt.
Therefore instead of our current leaders asking Australian’s what they can do to assist government debt. We should be asking the government what it will do to assist private debt. Particularly as we move forward over the next 12 months or so, and the lending cycle turns.
Capitalism?
Of course, this problem is not unique to Australia.  Thomas Piketty’s book <a href="https://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/067443000X">Capital in the 21st Century</a> has just come out to great acclaim, choc full of statistics to demonstrate how income earners – the vast body of productive workers, who prop up the local economy through the taxes they pay and products they produce - are the losers, compared to those who hold stores of unproductive wealth. 
The book focuses on the ‘1%-ers’– advanced through gifts of inheritance – those who hold the vast majority of assets; controllers of the stock and bond markets - collecting their economic rent by way of hording property, and effectively, buying protection through lobbying seats of power.
It’s an age old game and in a world where gaining political leadership is only possible with vast sums of advertising dollars, lobbying is crystallised into the system.
We’re currently seeing this with the <a href="https://www.3cr.org.au/economists/podcast/renegade-economists-07052014" target="_blank">ICAC investigation</a> as it uncovers a web of alleged political corruption, with illegal donations from property developers and other sources, funnelled into a Liberal Party <a href="https://www.smh.com.au/nsw/icac-to-be-suspended-as-mike-gallacher-investigated-for-serious-electoral-funding-irregularities-20140506-zr59n#ixzz30xGqICRV">slush fund</a>.
Meanwhile, Clive Palmer has been accused of “<a href="https://www.theaustralian.com.au/national-affairs/palmer-spending-like-a-drunken-sailor-on-poll/story-fn59niix-1226871364428" target="_blank">spending money like a drunken sailor</a>” to secure a third seat in Senate for his PUP party.
Palmer reportedly entered the leadership battle due to “poor policy decisions” by the Gillard government – the carbon tax in particular being highlighted, which promised to negatively impact his core business.
However, his other policy evaluations leave much to be desired.
For example, Palmer’s <a href="https://palmerunited.com/national-policy/" target="_blank">housing affordability</a> plan, is to make home loans tax deductable for the first $10,000 – a move which will unquestionably push land prices higher, as future buyers factor the savings into their budget and adjust price expectations accordingly.
But then, considering Mr Palmer’s significant land holdings, which are said to <a href="https://en.wikipedia.org/wiki/Clive_Palmer" target="_blank">include</a>;
<ul>
<li>“A six bedroom, 11 bathroom, 22 car garage property in Queensland - along with;</li>
<li>An array of golf courses. As well as;</li>
<li>“Family and associates” owning a total of “11 homes in the Sovereign Islands” on the banks of the Southport Broadwater - as well as;</li>
<li>“Other known properties at Broadbeach Waters on the Gold Coast, Fig Tree Pocket in Brisbane, Jandowae on the Darling Downs, Queensland, and Port Douglas” and notwithstanding;</li>
<li>“An undisclosed number of properties held in trust for their daughter.”</li>
</ul>
I suspect lowering land values, may not be top of mind.
The wealth tax solutions Piketty proposes to stop the gap widening fail not only by the confused definition of what one would consider wealth (a Rembrandt painting, or luxury yacht for example?), but also that of capital.
In modern terminology, capital is used for anything that yields a profit – which under our current system includes land. However, in classical terms, capital is a factor of production - a depreciating asset and one, which can be reproduced.
In a society built on the foundation of free markets, factors of production flourish under competition. If one widget costs too much, an entrepreneur will find an innovative way to produce the same widget at a cheaper price. 
It’s called capitalism.
Land however is not a factor of production. It can’t be moved or reproduced and it’s limited in supply. Therefore the revenue stream generated from the unimproved portion alone is due to its locational advantage, and little else.
The free market activities in a capitalist society, cause land values to increase – and considering this is through no act of individual exertion on the vendor’s side, but rather the collective efforts of the community, it makes sense that most consider owning a well located plot of land, better than both money in the bank and the wages they have to earn.
This is why increasing charges on the revenue stream ensuing from the locational value of land, and recycling it back into the community - (which is where it came from, and where it belongs) – by way of a tax shift offproductivity (wages) and onto our valuable and limited natural resources - was termed the ‘least bad tax’ by the capitalists <a href="https://www.macrobusiness.com.au/2013/11/land-tax-must-kill-negative-gearing-stamp-duty/" target="_blank">Milton Friedman and Winston Churchill</a> – to name but a few. 
Rising land values harm capitalism, they increase the rent for small business owners, always benefitting the landlord but never benefitting the wage earner. Furthermore, rising land values force young people out of the market, whilst making those in the market wealthy – and widening the gap between rich and poor.
When land prices inflate, jobs are lost as more revenue is taken away from productivity and soaked into the ground.  
It’s not called capitalism; it’s called capitalising - taking advantage of community created revenue - the total of which is pocketed by the land owner.
This is why land prices are so high and vested interests of policy makers <a href="https://catherinecashmore.com.au/wp/?p=503" target="_blank">always act</a> to push them higher.
The great man Buckminster Fuller – architect, systems theorist, author, designer, inventor, and futurist – once said:
“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” (H/T author of soon to be published book Land by <a href="https://medium.com/p/18066c10ac50" target="_blank">Martin Adams</a>)
We live in a democracy, therefore any change to the status quo needs to come from the ground up – we will never get it from the top down.
The Henry tax review set out recommendations for transitioning our economy based on the ideas penned above. 
 How we get there is worthy of debate – however thankfully, due to the internet and a new age of enlightened priced out folk, we can start that debate in 2016/17 by using our own preference and economic wisdom to vote a government which acts to widen the rich/poor divide out.  By which time there may be better options to vote in.   
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Economic nonsense and the consequences for future generations

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I’ve been asked to write an answer to the question, “Which is better – an apartment or house?”
It’s one of the most common queries buyers ask - especially in light of what seems to be an inexhaustible high-density apartment boom, taking place in Sydney and Melbourne in particular.
In New South Wales alone, the latest data from the ABS shows apartment approvals near a record high, numbering 25,517 units in the year to February 2014 - a 69% share of total figures. Country wide, approvals of both units and apartments now sits at its highest level in <a href="https://www.macrobusiness.com.au/2014/04/australias-supply-side-squeeze-continues/" target="_blank">history</a>.
In Sydney in particular, the news is deemed ‘positive’ – assumed to put downward pressure on both rents and prices. But contrary to popular belief, additional supply of property does not always equate to lower prices.
For decades, the city’s supply has been hampered by stringent planning requirements, allowing big developers with a greater financial capacity to hold the upper hand. Consequently, a larger proportion of developers currently active in CBDs gain their funding offshore (which, according to some analysts, is expected to reach near 100% in Melbourne by 2016). 
<img src="/images/2014/04/28/cashmore-april-28.jpg" alt=""> 
In NSW, the shortage of stock required to cater to the needs of a market, which currently consists of over 50% investors in central areas, has resulted in a spike in prices, which has diverged considerably from other states.
Sydney is booming, and the real estate agents are busy making hay. However, it’s hard to term these dwellings as affordable – or for that matter, desirable.  They are not built for home buyers - they’re temporary pit-stops for renters who need to stay centrally located.
Groups such as Charter Keck Cramer estimate up to 90% of the apartments released in Melbourne’s central regions since 2009 have been sold to investors – albeit, it doesn’t make them good investments.
Complexities of construction
In order to maximise yield, they typically have a floor size of around 60-70 square metres (for a two bedroom dwelling) – compromising natural light and storage space along the way.
Furthermore, the challenge of keeping apartment prices low is complicated by zoning regulations, rendering some neighbourhoods immune from dense development, whilst others have been given the green light.  
This further limits the tight concentration of land where construction can occur and from a micro perspective, escalates already inflated land values for the sites deemed suitable.
The developers are not altogether to blame. Getting planning and building approval for an apartment block is a costly venture, requiring 100% debt cover and often resulting in a period of years from concept to ‘lock up’ (a six year period not being unusual).
The complexities include levies for funding of communal facilities (such as underground parking, street lighting and so forth), which understandably contributes significantly to the cost of the product and often a lengthy period to resolve protests from existing residents, who understandably fear the social and economic impact causing a downward valuation on their own wealth fund for retirement.
To obtain the necessary funding, larger percentages are marketed to overseas buyers using vastly inflated commissions.
High owner corporation fees to fund the required security features, lighting in corridors, lifts, lifestyle amenities (such as a gym or roof top garden for example) equate to at least a few thousand a year.
Some developments offer rental guarantees, promising a return not possible once it’s expired. And should the developer encounter financial difficulties during this period, there is no government legalisation backing up any promise of payment.
Good investments?
To give some idea - the floor plan below was taken from a building just north of Melbourne’s CBD, which was purchased off the plan in 2012 for $580,000, and sold some 18 months later for $476,000.
 <img src="/images/2014/04/28/cashmore%20april%2028%20two.png" alt="">
A sample floor plan for a two bedroom off the plan apartment.
Another in the block was promised a rental return some $50 a week higher than it achieved on the open market, examples such as this leave most local investors hoping tax concessions will help compensate their losses.  
Having worked in a rental apartment previously, I can anecdotally confirm turnover in this type of development is high - with renters generally preferring lowrise to highrise - and despite common belief that renters are poverty stricken ‘wanna be’ home owners, the demographic that live in apartments (typically young, childless, working couples) have aspirations that often exceed what’s currently on offer.  Therefore, whether we’re increasing supply for the ‘needs’ of the rental sector in central localities on a micro level is questionable.  
Melbourne’s Southbank has vacancy rates often topping 8%, which also falls in line with data obtained from Prosper Australia’s recent speculative vacancy report, which analyses water usage to assess residential vacancies across the metropolitan region over a 12 month period – the methodology of which is explained in detail <a href="https://www.prosper.org.au/2013/11/01/speculative-vacancies-in-melbourne-2013-report/" target="_blank">here.</a>
The research shows 7.9% of accommodation in the suburb uses no water at all, and over 22% less than 50 litres per day (a statistic which may be influenced to a limited extent, by some being serviced apartments).  Needless to say, periods of vacancy which put downward pressure on yields, is not what most investors have in mind when acquiring a property – yet an increasing number are doing so in their SMSFs and are acutely reliant on cash-flow.
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Buying close to the city a better option?
All of the above, works on the assumption that most people like to live close to the city and whilst this may apply to residents in their early years, who delight in the hub and bub of an inner city lifestyle - including student renters who need to locate close to nearby university campuses - there isn’t much evidence that the rest of us are prepared to give up space to live in the type of accommodation constructed.
Indeed, the idea that demographically we’re becoming a nation of downsizers is somewhat mythological, but it doesn’t stop the flow of regular articles suggesting we’re all becoming a nation of happy strata dwellers. Once again, it’s often another excuse by property commentators (including buyer advocates specialising in apartment sales –often not openly obvious when you cruise their websites) to promote this option over others. 
Whilst we’re likely to see a trend toward apartment living due to lack of feasible alternatives, it’s been shown the elderly overwhelmingly downsize to medium density accommodation, thereby avoiding highrise developments altogether. Younger generations in their 20s and 30s have a greater propensity towards high density living, with the proportion increasing; however, figures still only peak around 14% at the age of 27 and the trend across all age groups is marginal, with only one in 20 choosing this form of accommodation nationwide (as of the 2011 census).
Obviously, most local home buyers prefer houses to apartments – and for the highrise price tag of a two bedroom flat, there’s far more bang for buck in established accommodation that doesn’t come with the additional risk of a view being built-out, queues to exit the car park, and 150 immediate neighbours traversing through various stages of their housing ‘career’.
At 44%, the typical Aussie home still has three bedrooms and the stats show only one or two residents occupy the majority, with a big increase in the number of four-bedroom homes, which now make up almost a third of our total housing stock. 
The single person household is no longer the fastest rising demographic. In the five-year period to 2011, lone person households had dropped from 24.4% to 24.3%, while group households (shared accommodation) jumped from 3.9% to 4.1%.  Whether the trend continues will become apparent in time.
In the rental demographic, this is likely due to reasons of affordability – renting a one bedroom inner-suburban apartment can often be more costly than an older three or four bedroom detached dwelling a few suburbs out. Therefore, it makes sense to share and this trend is mirrored in international markets – such as the UK and Canada, which produce similar data in their own census breakdowns.
Most of the first home buyers who cross my path also follow the above pattern.  Rarely do they opt for a one bedroom apartment – unless they’re restricted to a particular suburb. Most opt to move outwards and purchase something larger and if given the option, would rather rent until they’re able to afford a suitable property for their five- to seven-year time needs. 
Affordability constraints driving buyers away from city areas
Extra supply for the buy to let market should not be diminished, and it’s not my intention to do so.  However, there’s a broader need to establish quality accommodation for a larger proportion of home buyers who will accept townhouse living if locating inner city, but reject high density developments. And contrary to popular belief, it is possible to accommodate an equal number of residents in medium density dwellings without building to the skies.
Movements such as <a href="https://www.policyexchange.org.uk/images/publications/create%20streets.pdf" target="_blank">Create Streets</a> in the UK are at the forefront of pushing low rise initiatives, and Robert Dalziel – the London-based architect for Rational House, who visited nine cities around the world, including Mexico City, Shanghai and Berlin, has comprehensively examined how high-density can be made agreeable for a broad demographic of home buyers.  More information can be found in his book –commissioned and published the Royal Institute of British Architects: entitled <a href="https://www.propertyobserver.com.au/https://www.amazon.com/House-In-The-City-Architecture/dp/1859464521" target="_blank">A House in the City — Home Truths in Urban Architecture.</a>
Therefore, the major part of Victoria’s growth (mirrored in other states) has been evidenced in fringe localities such as Wyndham, Melton and Whittlesea. And one thing we’re not short of in Melbourne (and for that matter most other states,) is land.  Albeit, as I’ve written previously - regulatory constraints in outer suburban localities have increased land prices disproportionally, making the entry point for such developments effectively double what it should be. 
To demonstrate, following correspondence with Wendell Cox, author of the <a href="https://www.demographia.com/" target="_blank">Annual Demongraphica Housing Affordability Report</a> in reaction to a recent piece I <a href="https://catherinecashmore.com.au/wp/?p=494" target="_blank">wrote</a> outlining differences in international markets, Cox constructed a nice little chart which cuts through the usual measures used to convince readers that ‘housing has never been more affordable’, with an overwhelming focus on mortgage serviceability rates alone.
Instead, it demonstrates the speculative nature shaping the property cycle, which affects not only established house prices, but building activity as lot sizes reduce, whilst land prices per square metre, outpace income growth considerably.  (Something, which only a broad based land tax coupled with changes to supply policy will solve.)
<img src="/images/2014/04/28/cashmore-april-28-two.jpg" alt=""> 
Source: Demographia
Cox points out that ‘urban containment’ – contrary to the political rhetoric – does not result in cheaper prices.  However, to date, every reform put in place to release more land and build an abundance of accommodation, has resulted in higher prices per square metre both here and similarly in the UK and USA.
What to do?
Back to the question at hand – quite evidently, purchasing a new off the plan flat in either Sydney or Melbourne is not going to grant a windfall in economic rent (capital gains).  
You’ll often read commentators dictating that apartments perform better in their median data than house prices – and whilst it may be the case over the short term, it has not been proven over the long-term. In fact, over a long time frame, median detached house prices have outperformed unit prices and there are sound fundamental reasons why this may continue.
Broadly speaking, as a “set and forget”, providing you’re careful with the pre-purchase due diligence (strata reports - ensuring its not a stratum or company share title, which can cause issues in terms of financing and attracting future demand - fees, size, price, zoning, position, facilities, and so forth) apartments generally attract a higher yield, are low maintenance, and when issues with the building do occur, they are typically handled by the owners’ corporation and/or property manager.
Purchasing land offers more options – (subject to feasibility) - allowing extension, subdivision, back garden granny flats and so forth - our largest demographic of buyer are families and therefore land is still the golden nugget for most accommodation seekers.
No matter what kind of buyer you are – at some point you’re going to want to sell the home and move on, therefore acquiring an option that maximises consistent demand is critical in any equation.
Albeit, with the apartment choice being either an aged block in need of maintenance or new and subject to over supply. Or in terms of a house – budget restrictions only allowing a compact block in a fringe development in which landowners have control over how they ‘drip feed’ supply onto the market, I quite often advise purchasers to consider an alternative option. 
And, for that piece of advice, you’ll have to contact me direct.
You can contact Catherine via <a href="mailto:cc.cashmore@gmail.com" target="_blank">email </a>or <a href="https://twitter.com/ccashmore_buyer" target="_blank">Twitter</a>.
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Which is a better investment – an apartment or a house?

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Last week, Joe Hockey stood up in front of Parliament and on behalf of the Abbot administration, announced: ''The age of entitlement is over. It has to be replaced, not with the age of austerity, but with an age of opportunity!'' 
The former multi-millionaire banking and finance lawyer, husband to an investment banker, and owner of several premium land holdings (including a 200-hectare cattle farm in Malanda and mansions in Sydney), whose own ‘entitlements’ and that of his colleagues remain largely untouched, went on to address:
<ul>
<li>The single mother set to lose more than $,3000 per year;</li>
<li>The newly unemployed university graduate and retrenched worker, who must live with no income for six months (poverty) before claiming Newstart (forgone benefits of more than $7,000) – yet still have to service their rent or mortgage;</li>
<li>The low wage family with kids, who will lose $6,000 a year once all changes are factored in;</li>
<li>The hospitals and schools  who lose their projected funding (on the rationale that they are state responsibilities, forcing an increase to GST – a regressive tax);</li>
<li>The bottom one-fifth of earners who will lose around 5% of their disposable income, compared to the top one-fifth, who will lose only 0.3% (modelling undertaken by <a href="https://www.smh.com.au/federal-politics/political-news/reshaping-welfare-are-we-entering-an-age-of-inequality-20140516-38fc9" target="_blank">NATSEM</a> who point out the burden of this budget, overwhelmingly falls upon people in the most precarious position);</li>
</ul>
.. justified by telling Australian public, that they are not “to be alarmed”, because it’s all “in the national interest”.
“The National Interest”
The “national interest” is an interesting term to use for a budget that has set about plucking the feathers of the poor - the low and middle-income earners, the numerous small businesses, the main productive sectors of our economy - whist avoiding any direct action to the assessed <a href="https://www.prosper.org.au/2014/05/15/budgeting-for-capital-gains/" target="_blank">$484 billion total increase</a> over 12 months in unearned capital gains (more correctly termed “economic rent”) stored in land holdings, according to the ABS.
Or laying a finger on the licensed resource monopolies, the mineral wealth of which increased by $56 billion in 2012-13 alone.
Does this sound fair to you?
The country we want
“It’s about the sort of country that we want to be, in the years and decades ahead. It's about the value we impart,” continued Hockey, who has requested that all complaints be directed to the former government – adopting the age-old habit of passing the buck. Yet, warnings were given well in advance of this “budget emergency” and the sensible and equitable reforms needed were laid out in the Henry tax review – which they ignored.
The “sort of country we want to live in the years and decades ahead”, is an apt question to ask – albeit, it should be directed at our children.
After all, it’s our children who are set to inherit this land and it’s their future the government is shaping. More importantly, it’s not one the Liberal administration should be dictating on our behalf, following the usual stream of failed ‘promises’ we are familiar with on all sides of politics.
No doubt, job security and housing affordability would come top of the list – both are interdependent and serve our most basic needs.  
Without land, or the ability to use it, rent it, or buy it, we’re unable to do, or produce anything.  We are by definition “poor”.
The accumulation of all our ‘stuff’ is due to the natural resources land bestows.
It is therefore no coincidence that in both religious and ancient mythology, the first job of man was to tend the land. 
Our relationship with land is truly unique.
The quality of its location and care of its produce is foundational to ourmost basic human and consumer needs.
Destroy the land, or prevent ready and affordable access to it, and you destroy a population. 
The consequence is as black and white as that - “pay the rent or leave.”  
And it is no surprise, that this budget ignored the role of land in its economic modelling – they have been ignoring it for years. 
It’s not included in the Consumer Price Index for example - the tool the RBA use to measure inflation and reflect the cost of living, despite land prices and the size of the loans needed to service them having an uncanny consistency of exceeding wage growth through the course of each cycle – at least for that of the average <a href="https://www.news.com.au/finance/money/mortgages-rise-faster-than-wages/story-e6frfmci-1226921791556" target="_blank">household</a> and income earner.
And it’s easy to lay the blame of inequality or the reduction of it, on income distribution alone. Either that or confuse it with other items of ‘wealth’ – as is the case in Thomas Piketty’s book <a href="https://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/067443000X" target="_blank">Capital in the 21st Century</a> (a subject I explored in part last <a href="https://catherinecashmore.com.au/wp/?p=506" target="_blank">week</a>).
These are items that are easy to hide in tax havens. You can’t do that with land.
But importantly, the politicians who delivered the budget, and the other “20%-ers”, will only feel a modest loss to their disposable income from the newly imposed ‘debt levy’. They will claw far more back in the increased value of their land holdings – particularly as we progress through the next phase of our cycle.
The Cause of Wealth inequality
This is the cause of wealth inequality – a lopsided economy, built on a $5.1 trillion housing market (over $4.1 trillion of which is land.)
<img src="/images/2014/05/19/cashmore-may-19-one.jpg" alt=""> 
<a href="https://www.macrobusiness.com.au/2014/03/deflating-australias-land-bubble/" target="_blank">Source</a>: MacroBusiness
It’s a subject overwhelmingly ignored, and yet shapes every other area of housing policy – due in part to the vested interests of <a href="https://www.smh.com.au/comment/even-i-am-shocked-by-icac-revelations-20140516-zreh2" target="_blank">wealthy property tycoons</a> who lobby our politicians to maintain the status quo. As well as politicians who don’t want to see their investments affected in anyway.
The corruption of economics, however, is not unique to Australia. It began soon after Henry George, in 1879, took the world by storm, when he successfully communicated the root and leading indicator of the massive boom/bust cycles (although he was not the first to do so) – that being land.
His farsighted solution, whilst understanding the importance of private ownership, clearly demonstrated that recessions/depressions on a large scale, could be avoided (not by banking reform alone). But if the natural revenue from the economic rent was recycled, to provide and fund community facilities – along with the other government services we require.
This is because it removes excessive and unwanted speculation from the market, assists home buyers, utilises land effectively, improves productivity with lower land prices and can assist in increasing wages, which would help the workers – not the land hoarders.
He influenced the likes of;
David Lloyd George in England, Leo Tolstoy, Billy Hughes in Australia, Rolland O'Regan in New Zealand, Chaim Weizmann in Israel, Francisco Madero in Mexico, and many others including, Winston Churchill, Milton Friedman and Albert Einstein (to name but a very few). He quite simply took the political world by storm. 
The people it didn’t impress however, were the large landowners and financiers, the political lobbyists, who set about a on a well-constructed and amply funded mission to change the course of economic education to one that moved away from the classical models which recognised the role of land and were advocating George’s policies.
“The Corruption of Economics”
Mason Gaffney and Fred Harrison chart the full story in their book <a href="https://www.propertyobserver.com.au/https://www.amazon.com/The-Corruption-Economics-Georgist-Paradigm/dp/0856832448" target="_blank">The Corruption of Economics.</a>
They show how the three elements of production—land (and the resources it bestows), labour, and capital (that of the ‘industrial’ kind) were gradually reduced to two. Labour and capital – land being “lumped in” with the latter.
Capital was now no longer ‘man made’ the result of hard work and genuine innovation. 
Instead, it included the stuff of nature – the very elements we need to live – allowing the increasing gains from any natural appreciation of land value (the expected result of every collective improvement we make to society) to be pocketed, rather than shared through a proportional system of land rent on the unimproved value alone.
It simply implied that the home-owner pay directly for the facilities they use – the amenities that give their land its value – which in the main, removes the need for other taxes which are easy to avoid – like income tax for example. 
That sounds fair doesn’t it?
All taxation is at the expense of Rent
As the classical economists David Ricardo and Adam Smith proved, all taxation is at the expense of Rrent.
<img src="/images/2014/05/19/cashmore-may-19-two.jpg" alt="">
<a href="https://www.macrobusiness.com.au/2014/03/deflating-australias-land-bubble/">Source</a>: MacroBusiness
In other words, any tax withholdings or exemptions given to land holders, result in an increase of “economic rent” available to be capitalised (at the current interest rate) into the price. 
This raises the cost of land – yet does little to address the needs of our children, who must take on an every greater proportion of private debt to join in.
Consequences
The consequence results in what the current budget suggests. Collecting taxes to offset the items we require from other areas, wages and productivity, the burden of which falls overwhelmingly on the poor  yet advantages those at the top.
Is this fair?
Well this is what the current (and previous) administrations have been enforcing and advocating for years. 
Promoted widely by our nice ‘balanced’ property commentators who teach how to get rich on capital gains (as if it’s hard), without stressing the consequence and burden to society and the economy as a whole.
Think about that when you’re browsing the property investment isle in your local bookshop.
Think about it.
Who benefits?
The progress of genuine innovation
Thankfully with the birth of genuine innovation – the internet - we finally have the beginnings of a global revolt against mainstream economic <a href="https://www.theguardian.com/education/2014/may/04/economics-students-overhaul-subject-teaching" title="More from the Guardian on Teaching">teachings</a> which cannot identify boom/bust cycles and crashes, because they refuse to see land.
Not to mention their completely false understanding of money creation and debt and its role in banking - highlighted consistently by Steve Keen who is about to head the first “progressive” department of economic teaching at <a href="https://www.debtdeflation.com/blogs/2014/05/08/for-a-pluralist-education-come-to-kingston/" target="_blank">Kingston University in London</a>. Our loss.
Importantly, economic students are starting to recognise their degrees are hardly worth the paper they’re written on (something else to ponder when you read the many “market updates” from our mainstream economists).
Change
Changing the system is not easy when we have built a society dependent on housing wealth to fund retirement.
It requires a slow transition (such as that set out in the Henry Tax review) to gradually phase out tax subsidies such as negative gearing – offset by the supply reforms Leith Van Onselen, <a href="https://www.performanceurbanplanning.org/" target="_blank">Hugh Pavletich</a>, Senator <a href="https://www.macrobusiness.com.au/2014/04/bob-day-slams-australias-housing-policy-failure/" target="_blank">Bob Day</a> and many others have been advocating for years.
But if you want a “fair go” country, one that avoids volatile boom/bust cycles and instead of promoting wealth inequality provides economic prosperity along with the best we can leave to our children, then change we must.
And it starts with us. 
Feature picture courtesy of Twitter.
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The real consequences of the budget

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By now it should be overwhelmingly clear - the government has no interest in housing affordability and they will not take any measure to lower land values. If the budget didn’t paint the picture, no doubt the forthcoming Senate inquiry into housing will.
‘The age of entitlement’ is not over – it has been protected at the expense of ‘the age of opportunity’.
The current administration has surgically set about reducing living standards of the poor, making cuts to heath, education, and employing harsh means testing measures which will fall most heavily on the old, young, unemployed  and a broad sector of low to middle income families with dependant children.  
They have done this to studiously protect the interests of the wealthy, refusing to lay a finger on the licensed resource monopolies, the mineral wealth of which increased more than $55 billion in 2012-13 alone.
Clawing back just a fraction of the tax exemptions granted on capital gains, or placing a levy per ton of exported minerals, would not only have gone a long way to covering the budget short fall, but would also have lifted the burden from the poorest onto the richest.  But in a political system where major parties sell themselves to the highest bidder (which as current ICAC investigations suggest happen to be property developers and large land holders), their failure to do so should come as no surprise.
It walks hand-in-hand with the diabolical decision by “Australia's premier real estate industry education and training provider”, AREC, to employ an <a href="https://www.urban.com.au/news/31505-jordan-belfort-s-upcoming-arec-attendance-a-huge-backward-step&amp;sa=U&amp;ei=sH6CU7iMNdjc8AXPgIHABA&amp;ved=0CAYQFjAA&amp;client=internal-uds-cse&amp;usg=AFQjCNEujHT_TkxAuEIAWxBbqjReSTcqfA" target="_blank">ex convict</a> who defrauded clients out of more than $200 million to educate real estate agents at the biggest industry training event of the year.  Despite <a href="/news/31622-wolf-of-wall-street-s-gold-coast-arec-attendance-continues-to-provoke-debate" target="_blank">protests from various participants</a>, the event has <a href="https://www.rebonline.com.au/breaking-news/7652-arec-expected-to-sell-out" target="_blank">sold out</a> and clearly not prickled the conscience of the other speakers who are happy to stand alongside ‘The Wolf of Wall Street’, Jordan Belfort.
The above measures, along with Tony Abbott’s desire to be knighted the ‘infrastructure Prime Minister’ will drive investment into housing – albeit, of the speculative kind.
Infrastructure intensifies the use and demand for residential land as the population grows and no doubt, we need more of it. However, it also has the effect of rising land values, which taken alone, should be a ‘good’ thing for our country (or at least it would be, <a href="/expert-insights/investing/30877-property-cycle-who-really-benefits-catherine-cashmore">if those gains truly benefitted the community</a>).
Instead those gains will be pocketed, leaving the government to scrape future funding from elsewhere.
Land cannot be reproduced because it cannot be moved; it’s fixed in supply, dependent on the employment sectors and community facilities that surround it.
All of the above raises cost of accommodation yet does little to address the needs of future generations, who, if they’re not lucky enough to inherit the goods, must take on an ever greater proportion of private debt to join in.
This widens the wealth gap between the land owning rich and income poor as the government leans back and lectures welfare recipients that “the world doesn’t owe them a living”.
The government has it within their power to move toward an economy that rewards productivity, reduces unwanted speculation, increases wages, encourages timely construction and the effective utilisation of land, promotes decentralisation into regional areas, keeps the cost of shelter affordable for young buyers, lowers rents for tenants, and levels the playing field between non-owners and owners.
Yet they won’t because their agenda is to protect their own private interests and that of the wealthy, above that of the community.
This means land will only developed for profit, timed to capture the upward wave of a cycle, rather than developed to meet the immediate needs of the home buyer and does little to deter <a href="https://www.urban.com.au/expert-insights/building/20394-monday-28-flicker-residential-developers-and-land-banking-edward-quinn-story&amp;sa=U&amp;ei=kn2CU7_aMor98QX8yICIBA&amp;ved=0CAYQFjAA&amp;client=internal-uds-cse&amp;usg=AFQjCNH3g-I-6Cmubgqt74O4GOPl1loOzg">the wasteful process of land banking</a>.
The government, however, is not interested in genuine reform. Instead, they favour laws that give certain classes of people artificial advantages over others whilst having the conceited arrogance to advise it’s all in the ‘national interest’.
What does this mean for the property investor?  Well for the time being, the system will fall in their favour.  Interest rates will remain low, they will not rise, and the government will not intervene.
Over the long-term however, we will not escape the consequences of the government’s actions. Wage growth only increased 2.6% in the past year, a rate below the consumer price index and the weakest since records began. We are in effect going backwards, not forwards – and the economy will suffer as a result.
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The government's protection of the wealthy is bad news for the average property investor

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Five years on since the US recession ‘officially’ ended in June 2009, urban land prices are rising, the pattern of history is repeating, and this time the players on the chessboard have changed.
But our governments are turning a blind eye. 
They have yet to acknowledge why the crisis happened, or put policies in place to prevent it happening again.
Expensive welfare systems, elaborate tax and transfer policies, and the financial ‘cures’ following the previous land induced crash in the early 1990s did nothing to prevent the swiftest and sharpest synchronised global downturn in human history.
Taxpayers were punished, bankers got a “get out of jail free” card, and the largest real estate investment trusts spent $50 billion purchasing 386,000 foreclosed homes, to rent out to previous owners who believed and acted on the lie “there is no bubble”.
The IMF and policy makers are now twisting themselves in economic knots trying to pin down a ‘cure’ for the dangers of excessive house price inflation they readily admit lead to most banking crises, with Australia featuring in the top five of each of their highlighted risk assessments;
“Our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises,” an <a href="https://blog-imfdirect.imf.org/2014/06/11/era-of-benign-neglect-of-house-price-booms-is-over/" target="_blank">IMF blog post warned</a> last month.
The IMF claims the ‘neglect of house price booms is over’ but as the OECD ‘Post Mortem’ of the 2008 crises reveals, these economists can’t see. 
They ignore the role that rent (unearned income), debt and the financial sector play in shaping the economy. 
They have a colourful history of recurrent boom bust land cycles, all replete with rampant speculation and easy credit, spanning in excess of 300 years from which to study … and yet:
 “The macroeconomic models available at the time of the crisis typically ignored the banking system…”  (OECD Forecasts During And After The Financial Crisis: A Post Mortem – February 2014).
In other words, based on the aesthetic qualities of their equations, the 2006/7 bubble couldn’t exist. A story we hear repeated every year as prices continue to defy gravity and economist try and explain it away with ‘sound fundamentals’.
Neo-liberal policy made matters worst. 
Less government interference, protecting labour, redistributing wealth through taxing the rich, deregulation of capital markets, lowering trade barriers, and reducing state influence though privatization and fiscal austerity were termed by American scholar Robert Waterman McChesney as “capitalism with the gloves off”.
It promised to lead to efficient markets and lower unemployment.
But at the onset of the GFC, unemployment in developed nations rose above any previous recession of the past three decades, whilst wages, as a share of GDP plummeted to their lowest point since the Second World War.
<img src="/images/2014/07/14/cashmore%20july%2014%20one.png" alt="">
“This should be a wake-up call,”concluded the UN in their annual <a href="https://unctad.org/en/PublicationChapters/tdr2012ch6_en.pdf" target="_blank">Trade and Development report that revealed the findings</a>:
 “There must be something fundamentally wrong with an economic theory, that justifies the rise of inequality mainly in terms of the need to tackle persistent unemployment.”
In the UK, Bank of England has imposed a 4.5 times loan to income cap on 85% of mortgages, along with various ‘stress tests’ to please the regulators.
But the Council of Mortgage lenders show only 19% of recent London mortgages are at or above this ratio, whilst the national figure is a mere 9%.
By volume, London accounts for around a quarter of loans nationally, (Q1) so the 85% cap will do little to nothing, except perhaps eliminate home ownership for low-income groups.
But stemming inflation or deterring speculative activity is not, and never will be, <a href="https://www.theguardian.com/business/2014/jun/26/bank-of-england-limit-large-loans-housebuyers-mortgage-lenders" target="_blank">Central Bank policy</a>:
"These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank's central view."
In the U.S.A just five megabanks and their holding companies control a derivatives market worth hundreds of trillions of dollars, in Australia the ‘Big Four’ command 80% of the market and 88% of residential mortgages.
“These are the men who have the most economic power in the world’’ wrote British philosopher, mathematician and historian, Bertrand Russell, one of the 20th century’s leading logicians; “and they derive it from land, minerals, and credit, in combination.”
Russell understood only too well, that all productive gains, every improvement in society and the economy, would be capitalised into rising land values, enriching those who owned the assets but more so, those who created the credit and traded on the debt. 
Milton Friedman meanwhile tutored that societies are structured on greed. 
But greed means taking something from another, grasping for a larger slice of the pie (see <a href="https://en.wikipedia.org/wiki/Pareto_efficiency" target="_blank">pareto efficiency</a>).
Greed is not a natural feature of a well-functioning community; rather it’s a feature of a dysfunctional economy that allows a country’s wealth to gravitate into an elite nucleus of financially strong hands.
It remains that the economy is fuelled by what is termed the ‘FIRE’ sector – finance, insurance, and real estate.
The FIRE Economy is dependent on rising asset prices – on you and me buying houses - so it can extract economic rent.
The three sectors work together – they’re intrinsically linked.  
The banking sector pumps a colossal amount of credit into the system by way of a home loan. Real estate businesses sell the products – some trading as REITs - insurance companies underwrite the owners debt, property, and income, and as the interest payments compound – doubling and doubling again – the debt is recycled into more lending, more borrowing, higher house prices - making those who trade on the debt in an obscure concentrated market of derivatives, increasingly wealthy.
<img src="/images/2014/07/14/cashmore%20july%2014%20two.png" alt="">
Source: <a href="https://www.worldeconomicsassociation.org/books" target="_blank">Bubble Economics</a>: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos
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The government, many members of which come directly from the industry itself, receive substantial payments from the FIRE sector.
For example, between 1998 and 2008 the banking industry spent <a href="https://newint.org/features/2011/01/01/10-worst-corporate-lobbyists/#sthash.nyyaPmr4.dpuf" target="_blank">$3.4 billion</a> lobbying the US government.
In Australia, the ICAC investigations into Illegal donations from developers and <a href="https://www.theage.com.au/comment/even-i-am-shocked-by-icac-revelations-20140516-zreh2" target="_blank">“wealthy property tycoons”</a> reveal tens of thousands of dollars have been used to influence decisions by local, state and federal governments.
It should therefore be of no surprise that ‘affordable housing policy’ always seems to work in reverse. 
Generous subsidies are handed over to investors – all of which are capitalised into land prices.
Restraints on supply are imposed, ‘rich neighbourhoods’ are protected from over development, land on the fringes is no longer dirt cheap, acreages are banked, <a href="https://www.prosper.org.au/2014/06/18/no-land-for-you-melbourne/" target="_blank">exempt from State Land Tax</a> until subdivision at the owner’s pleasure.
To survive, the FIRE sector must effectively sell the illusion that the economy can grow on rooftops, that we can all take part in an orgy of economic rent.
“Only the little people pay taxes” (i.e. work for a living) - we can all become wealthy through property investment, dining out and trading on leveraged gains, perhaps donating a little to charity, or taking part in some publicity-generating event to raise funds for homelessness along the way – as our politicians are fond of doing.
Of course, first home buyers suffering alarm at rapidly escalating costs are necessary oxygen for the system.
So their judgement is manipulated as housing affordability is now reclassified as mortgage serviceability – how far the pay cheque can stretch each month rather than highlighting the upfront cost, while young buyers are encouraged to enter the market as speculators, living off their parents, until they gain a ‘foothold’ from leveraging the equity.
Banks assist with an array of financial products – offset accounts, honeymoon rates, shared equity schemes – mortgages treated like credit card payments, where all that’s required is the interest and should the market collapse with money still outstanding, they’ll collect the house too.
The result is land is now used for greed rather than need, pushing city boundaries outwards, requiring an excessive use of durable capital, which eventually leads to a shortage of loanable funds. 
You will never be told the system can fail.
Instead you will hear that house prices can maintain a ‘high plateau’ – stagnate for a while until we all ‘catch up.’
However, the increase in the annual rate of growth is now part of the income that buyers pay for and lenders rely upon.
This is how real estate is sold – investors gravitate to areas that advertise ‘good capital gains’, calculating the land’s value based on both the rent a tenant will pay plus the projected annual increase (land rent).
Buyers live in fear of land values collapsing, yet, while prices trend higher, expectations over shoot the mark by no small degree.  Landowners treat their unearned increment as income, raising consumption, lowering saving, putting to upward pressure on inflation, which eventually results in interest rates rising.
Never, throughout the course of history, has such a process been economically sustainable.
At some point the productive capacity of the economy can no longer support the boom – and as Australia’s history of land induced financial crises reveal, the end is not always as kind as experienced in 2008. <a href="https://www.worldeconomicsassociation.org/books"> </a>
“House prices don’t always go up” warned the Governor of the RBA, Glenn Stevens at a recent speech in Hobart, just as he did in <a href="https://www.abc.net.au/worldtoday/content/2014/s3958842.htm" target="_blank">March</a>, - a message he has <a href="https://www.mywealth.commbank.com.au/property/house-prices-rises-cyclical--rba-s-stevens-news20131029" target="_blank">repeatedly</a> <a href="https://www.smh.com.au/business/the-economy/glenn-stevens-says-aussie-dollar-needs-to-fall-further-20131213-2zapf" target="_blank">reiterated</a> since appearing on Seven Network’s <a href="https://www.abc.net.au/worldtoday/content/2010/s2858942.htm" target="_blank">Sunrise</a> in 2010.
But Australian investors aren’t listening to Glenn – they’re reading the media headlines, covering the latest findings in the BRW Rich 200, which shows property to be the ‘single biggest source of wealth’, and entrepreneurs “piling into property faster than ever”.
Banks remain disturbingly under-capitalised. 
“I’ve had land that has doubled in value in the past 12 months,” <a href="https://www.brw.com.au/p/investing/brw_rich_fatter_profits_for_property_tBzXYYtLFJ8zKUsFclS3eJ" target="_blank">said Harry Triguboff</a>.
But while Triguboff paid a lot for his land, but he did not make his cheque payable to the local school, park, rail network, or the array of public and community services that yield his land a healthy source of locational revenue that grants such windfall gains.
His payment went direct to the previous owner of the land, who pocketed the profit, while the funding needed for maintaining the facilities and attracting workers to the city, come from an elaborate network of taxes, which fall primarily on income and productivity – ‘the little people’.
<img src="/images/2014/07/14/cashmore-july-14-three.gif" alt="">
Source: <a href="https://www.worldeconomicsassociation.org/books" target="_blank">Bubble Economics</a>: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos.
This is the kind of rent seeking most of us have some experience of, a process that effectively punishes and disheartens the priced out sectors of the community, whilst encouraging the hoarding of land as the road that leads to riches – thereby ignoring the social and ethical problems that result from the process. 
The effect is to turn us into a nation of speculators where moral judgement is subverted by the unearned yields one can receive.
Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.
No one is born into poverty or inequality – these things are not by-products of nature – in a modern society the extremes we experience that lead to protests and riots over cuts in expenditure to welfare (a requirement exacerbated by the process outlined above) are due to policy and political ignorance.
When the Henry tax review in 2008 concluded: “Economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”
It was onto something important.
Lifting taxes off labour and restructuring our tax and supply policies is a good start, but alone it won’t do.  Removing the power embedded in the banking industry to create credit based on their own vested interests is equally important, it would free up the creative capacity of the community and move instead toward a society and culture that is able to provide for all.
However it remains, that every effort in history to effect the changes suggested above have been fought by the establishment.  In this respect, change can never come from the top down. It requires a system that can return democracy to the people through a slow process of re-education, and it’s a system we need to advocate if social and economic justice is the goal.
But until such a time, it’s business as usual – and in this respect, the date for the next financial crisis has been set. 
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With rising land prices history is repeating and the date for the next financial crisis is set

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“Too many workers live too far away to fulfil our cities’ economic potential,” is the conclusion of a recently published study by the <a href="https://grattan.edu.au/" style="line-height: 1.3em;">Grattan institute</a>.
The report maps the dollar value of goods and services produced by workers within a particular area of Australia’s biggest cities.  Demonstrating a disproportionate 80% is created on just 0.2% of the nation’s land mass.
 <img src="/images/2014/07/28/cashmore%20july28%20one.png" alt="">
Source: Grattan Institute.
It mirrors findings highlighted in a recent speech by Luci Ellis, head of financial stability at the RBA, who collected the addresses of people’s workplaces from the 2011 Census, to construct a picture that is particularly striking if directly contrasted with where employees actually live.
<img src="/images/2014/07/28/cashmore-july28-two.gif" alt="">
“Inner areas have become even greater job magnets in recent years; some middle and outer areas added people, but not so many jobs, so their job-to-worker ratios actually declined,” wrote Ellis. 
Places with ratios well above 1 are employment centres. They pull in commuters across the city even from outside its borders. While the very pale fringe areas, attracting the largest population growth due to pressures of affordability, are the ‘commuter districts’, dormitory suburbs, where jobs and community infrastructure have failed to follow through.
The picture is one of increased social polarisation – fringe localities tend to face higher crime rates, elevated levels of unemployment, along with reports of <a href="https://theage.domain.com.au/health-fear-on-estates-20120314-1v3lw">depression and mental illness,</a>
Poor supply policy and delays zoning pockets within the urban boundaries for residential development, means a typical house and land package on a compact 450 square metre site, transacts for no less than $400,000.
Instead of a sensible system of bond financing, where residents pay back proportionally over a lengthy period of time, or a broad based land value tax to replace other taxes as advocated in the Henry Tax Review, funds for the provision of essential infrastructure are loaded onto the upfront cost of housing and promptly passed to the buyer. 
Yet councils can wait years for the finances to arrive.  The funds are only payable upon subdivision and with no control over the development or release of newly zoned land; buyers often pay for services they may never receive.
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The Grattan report is subtitled “Cities as Engines of Prosperity” and charts Australia’s evolution from a country that “made things”, into one that is now reliant on centrally clustered “knowledge-intensive and specialised services”.
<img src="/images/2014/07/28/cashmore%20july28%20three.png" alt="">
Together, the cities above, account for 15% of Australia’s economic activity but despite declining job-to-worker ratios in the outer suburbs, along with increases in the price-to-distance trade off for home buyers, only 8% of Australia’s employed population actually work in the central hubs of each major capital.
In Melbourne for example, over 50% of jobs in are located more than 13 kilometres from the inner core, with fewer that 20% of jobs in the CBD itself.
These are not high paying jobs however, which leads the authors to imply we need to move closer in and“minimise barriers to highly productive activity in CBDs and inner city areas”.
They suggest this would provide industries with a “wider range of potential workers to choose from”. 
 “Australia’s cities are the backbone of our economy, with CBDs and inner city areas critically important to the nation’s prosperity….The more highly skilled and specialised a job, the greater the need to find the best person to fill it.”
Knowledge based and specialised services cover a diverse area, including industries such as, finance, insurance, real estate, and business services, as well as cultural, media, communication, and education facilities for example.
They are gaining predominance across the globe, due to a technological boom that is powering us forward in an expansion not unlike the industrial revolution.
3-D printing is lowering the cost and logistics of production. Advances in the research of solar and renewable energy have paved the way for homeowners to store electricity overnight and possibly <a href="https://www.smh.com.au/environment/energy-smart/storing-solar-power-is-the-key-to-cutting-energy-bills-csiro-says-20140502-zr2zw" target="_blank">disconnect from the grid</a> completely.  
Companies such as Uber and Lyft have created innovative apps to provide cheaper transport options for consumers and ironically, changes in the way we interact and communicate have allowed people and jobs to disperse over a broader footprint and successfully collaborate across international borders.
However, this is not where Australia excels.
Moves to take advantage of the innovation revolution have been continually hampered by government intervention, winding back tariffs and scaling down their 2020 Renewable Energy Target, acting to protect the cartel of the Taxi industry’s ‘licensing’ monopoly, and cutting funding to organisations such as the CSIRO. 
No - the predominant sector that yields the most “knowledge intensive” gains in Australia comes from the FIRE industry (finance, insurance, and real estate)– which has its infrastructure webbed like a parasite on the back of the great Australian housing boom. 
<img src="/images/2014/07/28/cashmore-july28-five.gif" alt="">
At a global banking conference in 2013, the question was asked: "Why the hell are Australian Banks performing so well!?" It was in response to a chart showing a decade rise in market capitalisation on the global banking index, from 2% to 14%.
The answer was obvious; the banking sector <a href="https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/" target="_blank">makes its money by creating debt</a> – mostly mortgage debt and our highly leveraged ‘too big to fail four’ are the world’s most heavily exposed to residential and commercial real estate, capturing 88% of the mortgage market alone.
To be clear, the FIRE Economy is not a value adding economy; it profits by extracting economic rent from the debt on rising land values, impeding areas of productive enterprise and trading the interest in a multi trillion-dollar derivatives market to advantage those sitting at the top of the financial pyramid.
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To survive, the FIRE sector must sell the illusion that the economy and its participants can achieve economic prosperity through speculation on rising property values.
This has been assisted by tax, housing, and monetary policy, resulting in Australian’s holding some of the highest levels of private debt in the developed world. 
Tax withholdings or exemptions given to land holders for example, result in an increase of unearned monetary gains (economic rent) available to be capitalised at the current interest rate into the upfront cost of land. 
This was aptly demonstrated in a recent release by <a href="https://www.prosper.org.au/2014/07/24/negative-gearing-is-costing-you-a-lot-more-than-you-think/">Moodys’ Analytics</a>, estimating how the tax policy of negative gearing, has acted to inflate Australian house prices by no small degree.
 <img src="/images/2014/07/28/cashmore-july28-seven.gif" alt="">
Supply policy has further assisted.
Inelastic responses to market conditions have allowed professional land-bankers to squat on sites at low cost and secure windfall gains when the sites are later rezoned for residential development.
Allowing the uplift of land values to capitalise year upon year into the cost of housing, may be gift-wrapped with corporate spin to suggest it somehow benefits the community, however, a cursory analysis reveals the exact opposite to be true.
It raises the cost of living for every single household, increasing welfare costs, and leaving less to invest in sustainable industries that contribute to the county’s real ‘value adding’ economy. 
As demonstrated by the British economist and historian Fred Harrison in his book The Great Tax Clawback Scam.
The pull of the centralised core, where property values and wages are highest, results in decades of progressive taxes on every worker in the state being clawed back by a few, as inner city land values benefit from higher wages, increased demand and improvements to social infrastructure and transport arterials to do precisely as the Grattan review suggests – and keep us locked and reliant on a small pocket of land for our economic gains.
It brings with it the theory of urban consolation – reduce sprawl and force residents into apartments, however doing so can have the adverse effect of increasing sprawl, as lesser industries ‘hop’ the middle ring, in search of cheaper options and their employees move out further still.
If we were living in ancient Rome where walking was the general mode of transport, you could understand the need to stay centrally located; however we are not. 
We’re in an age of mobility where global research is being poured into innovative modes of transportation such as solar roads and electric cars.
If a buyer is able to travel to the supermarket, park and any other amenity on the priority list within a 30 or 40-minute period, the distance from the CBD is not an imposing factor. The decider is the time it takes to drop the kids off to school in one direction and travel to work in the other. 
Since the 1970s, successive governments have poured millions into incentives to try and decentralise and boost regional localities.  However, all attempts have failed, because the funding mechanism is flawed.
Decentralisation requires affordable land for both business and buyer, which is not unduly inflated due to policies that promote speculation, as well as growth enhancing infrastructure and flexible supply policy that responds in a timely manner to homebuyer (not speculator) demand.
The Henry Tax review was not slow to <a href="https://taxreview.treasury.gov.au/content/finalreport.aspx?doc=html/publications/papers/final_report_part_1/chapter_12.htm">point this out</a>, when it suggested slowly phasing out a vast array of ‘bad taxes’ that impede productivity and reduce mobility (stamp duty, payroll, insurance, vehicle registration, and so forth, as well as phasing out those that ‘reward’ speculation) and instead, collecting more of the economic rent from the unimproved value of land.
Historically, the capture of economic rent (through land tax and to some extent ‘betterment’ taxes) financed some of the most remarkable infrastructure we have. Sydney Harbour Bridge being a case in point.
It was <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/radionational/programs/rearvision/tony-abbotts-big-plans-at-odds-with-infrastructure-history/5404212">acknowledged</a> at the time, that residents on the north shore would benefit significantly from an increase in their property values as a result of this essential piece of infrastructure.  Therefore, a framework was set in place to capture a proportion of the uplift – approximately one third – to assist with funding.
This was in no way detrimental to the property owners.
The increased advantage of economic activity coupled with the rise in prices resulting from the enterprise, more than compensated. A win-win if you like – and readily accepted by the public as ‘fair’.
A more familiar example can be used for owners of apartments. 
When buyers purchase a unit, they expect to pay a yearly corporation fee for maintenance and improvement of community services. In doing so, it reduces the up front cost consumers are willing to pay as they configure the fee into their budget, yet it is also an investment, as the benefits and any subsequent improvement attracts future purchasers. 
A broad based land value taxation as advocated in the Henry Tax review is essentially no different.
In markets that have similar policies – a change in the tax mix, with higher taxation on land in lieu of those on productivity in order to fund related infrastructure, coupled with good supply policy, enables a process of decentralisation and increased affordability to follow through.  Both reforms work hand in hand.  
The prosperous economy of Texas in the USA is a good example of this.
Since June 2009, about 48% of all jobs created in America have been in the state; it has booming population growth, high levels of disposable income, low house prices and has been termed 'The Texas Miracle'.
This is because with no income tax employees get to keep more of their earnings while higher property taxes used to fund community infrastructure stem speculative inflation, which along with good supply policy has created a truly decentralised city, with only <a href="https://www.youtube.com/watch?v=hQtDHY_tkns" target="_blank">7% of jobs located ‘downtown’</a>.
We do not have to mirror another country’s policies, but it does prove the ability to create a system that provides a fairer regime for the funding of infrastructure and stops runaway house price gains.
However, in an economy that is dominated by the financial sector, and reports such as the latest Grattan review celebrating Australia’s city-centric culture, efforts to decentralise and produce a fairer system for all Australian’s is, once again, likely to fail.
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We need to change our city-centric economic views

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I was contacted twice last week to comment on news stories that featured young Australians building their way to retirement, through debt, leverage and speculation, on the back of rising property prices.
Described as ‘an entrepreneur,’ another a ‘wonder kid,’ both stories told a similar tale.
A gift from mum and dad had helped with the deposit - living in the family home had enabled investment into areas that may not have suited their 'home' buying requirements.
Rising property prices had enabled equity to leverage into the second acquisition – it was not reinventing the wheel, rather a repeat of an all too familiar theme. One had managed to reach his sixth investment by the age of 26 (having started at only 19) - both were on their way to becoming property investment advisors – wanting to help others achieve real estate riches too.
“Young buyers are entering the property market as investors” prompted one reporter – which is no more obvious than saying “circles are round”.
Everyone who enters the property market is an investor, I responded. 
There would be few in the industry working on the buying side of the equation who had not been involved in what I often term ‘the capital gain game’ – where every option suggested is followed by the question “but which will get the best growth?”
Australia has a lopsided neoliberal economy founded on the back of a 5.1 trillion dollar housing market, over 4.1 trillion dollars of which is irreplaceable land.
We’re slaves to a system where the retirement wealth egg is the family home – our personal economic leverage for all lifestyle and business needs - something that is only achievable if policies are manufactured to ensure values remain high (and climbing), whilst debt levels remain ever affordable.
Click to open in new window:
<a href="/images/2014/06/23/cashmore-june-23-one.jpg" target="_blank"><img src="/images/2014/06/23/cashmore-june-23-one.jpg" alt=""></a>
Source: <a href="https://www.worldeconomicsassociation.org/books" target="_blank">Bubble Economics</a> by Paul D. Egan and Philip Soos
It used to be called ‘Monopoly’. Today its termed: ‘getting onto the property ladder’.
Retire as a renter or find a way to ‘work the system,’ playing a dangerous game of debt and leverage, and hoping when the wind finally blows, you’re not left holding the house of cards.
For those unable to afford current high prices, they will see no tax benefit - unless their income is low enough to require welfare assistance. 
Rather they will be at the mercy of rising rents with an uncanny tendency to outpace inflation, tight vacancy rates and few low budget options.
If, as above, they are the ‘lucky’ beneficiaries of family assistance to enable their step onto the first rung of the ladder, they’ll enter a tax system skewed toward ownership, the benefits of which are capitalised into the price, pushing values higher.
<img src="/images/2014/06/23/cashmore%20june%2023%20two.png" alt="">
Source: <a href="https://www.worldeconomicsassociation.org/books" target="_blank">Bubble Economics</a> by Paul D. Egan and Philip Soos
Under such a system, the final consequences are set in stone.
On a global scale, the land bubble induced financial crisis of 2008 left millions suffering fatal burns.
Tough austerity measures that followed destroyed the hopes and dreams of thousands of Europe’s youth.
For those just entering retirement, savings were wiped away, along with any chance of employment in later years.
Australia escaped relatively unscathed, but this isn’t because we’ve solved the boom/bust cycle.
Our policies differ little from the affected countries that promote ownership with similar inflationary measures.
First time buyers have no memory of a recession and understandably want their share of the pie.
However our history is littered with recurrent patterns of <a href="https://www.worldeconomicsassociation.org/books" target="_blank">boom-bust credit and asset bubbles</a>, commonly triggered by high land prices. 
They all heralded financial instability and dreadful social consequences - a study of which should perhaps feature higher on the school curriculum.
We’ve just entered into another cycle and already prices have exceeded previous peaks. 
Housing cycles are long-term affairs, however unless we begin to studiously take measures to change our tax and supply policies, when the clock ticks round again – as it inevitably will – our house of cards will blow over like the rest.
Many applauded Malcolm Turnbull as he made the most of his share of publicity during the CEO sleep out last week, to raise money for the homeless. 
However, Turnbull is part and parcel of a budget and government that exacerbates housing affordability, and by consequence, the very problems he endured a cold night to help ‘solve’.
This is because the government has structured the tax burden to fall predominantly on wages and productivity – which advantages those at the top, who see their landholdings increase way in excess of any taxation or earned income through no individual effort of their own, rather the collective efforts of community investment (<a href="https://catherinecashmore.com.au/" target="_parent">items of which I’ve detailed previously</a>) – whilst the productive earners at the bottom of the pile, struggle to make ends meet.   
In other words, by hoarding housing, the rich pay less - the poor pay more.
Unless we restructure our tax and supply policies to address this and reduce land prices, encouraging instead individual investment into productivity rather than rising land values. Welfare measures to help the homeless are merely a Band-Aid to capture the increasing number falling foul of the system and never a cure.
Which brings me back to the one question both reporters failed to asked,
“Who are rising property prices good for?”
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Housing hoarders: Where the rich pay less and the poor pay more

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A few days ago, I was asked to comment on <a href="https://www.heraldsun.com.au/business/big-buyers-put-melbourne-on-global-wanted-list-of-prime-cities/story-fni0dcne-1226937873180" target="_blank">The Candy GPS Report</a> which identifies 12 future cities for real estate investment – one of which is Melbourne.
The 12 cities are as follows (from most expensive to the least):
 <img src="/images/2014/06/02/cashmore-june-2-one.jpg" alt="">
Just in case anyone is still deluded that we build the accommodation for people to live in. It correctly outlines how real estate is progressively becoming a mainstream asset class for investors.
Ultra high net worth individuals from Germany, the United States, Japan and other parts of Asia are now looking at secondary markets and second tier cities as an alternative to the somewhat bubbly established safe havens of London and New York.
It comes on the back of what is already a fraught subject in Australia; the impression that “foreigners” are purchasing our residential real estate – bidding up prices and forcing out first home buyers who simply can’t compete.
The parliamentary inquiry last week was devised to put this matter to rest, to prove it isn’t so. Although, for those in the industry who work directly with buyers and sellers, it merely confirmed what we already know.
Australia has a largely unaudited system of ‘non-resident’ investment in its real estate market.
Whilst the official figures seem to demonstrate the larger proportion of demand is increasing supply rather than inflating values.  With only eight staff to audit the thousands of applications the FIRB receives, it admits it relies on "honesty and stern speech", whilst those who work on the ground within the industry, rightly attest that there are <a href="https://www.macrobusiness.com.au/2014/05/firb-says-youre-not-racist-about-property-but/" target="_blank">loopholes</a> in the rules.
For example, corporations, friends, family members, relatives,  and solicitors are all able to purchase for those who do not quality - and from <a href="https://www.afr.com/p/business/property/the_year_of_the_chinese_developer_KtqoIDtcggT8KGAMXv8OgKhttp:/www.afr.com/p/business/property/the_year_of_the_chinese_developer_KtqoIDtcggT8KGAMXv8OgK" target="_blank">anecdotal evidence</a> alone, they seemingly do.
Importantly, it is not up to real estate agents to report their suspicions and inflame a debate which has bordered on racist against our Asian migrants.
The process must be correctly audited, and until it is, argument will continue. However, we should not let this mask the real issue surrounding our residential real estate market – that of government policy. 
As the RBA recently noted in their <a href="https://www.rba.gov.au/speeches/2014/sp-so-150514" target="_blank">“wouldn’t it be nice to have houses at affordable prices”</a> speech a few weeks ago, conditions are not only hard for first time buyers, with wages tracking below the rate of inflation whilst prices trend higher, many others are falling through the cracks altogether.
Previous reports have shown fewer younger and middle-aged people own their own home and across all age groups, fewer own outright. There has been an <a href="https://www.iut.nu/Literature/Australia/housing_supply_affordability_report_2012-13.pdf" target="_blank">increase</a> in both the number of people recorded as homeless as well as the number living in other marginal housing.
If Australians in 2011 had the housing consumption patterns they had in 2001, they would occupy an additional 284,000 dwellings. Instead, despite families having fewer children and an aging population, we’ve seen a reversal of the decade-long decline in household size, which outside of any cultural shift, clearly points towards pressures of affordability.
Now new buyers risk not only being locked out altogether, but also (as the RBA’s Lucy Ellis puts it) “where the jobs are and where the employed people live” – which remains around the central areas of our largest capital cities. As the speech demonstrates, we have not decentralised – in fact quite the reverse. 
 <img src="/images/2014/06/02/cashmore-june-2-two.jpg" alt="">
It comes down to the same old issue – housing policy.
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We build for an investor market in a lopsided economy that has pinned itself to rising land values to support every other area of investment.
This is great for those who were lucky enough get in at the beginning of the lending boom, many of which now have an ample welfare pot for retirement.
Not so great for first home buyers today who are struggling to afford, well… anything at all.
The many vested interests from politicians to industrial lobbyists, to keep land prices inflated, can be evidenced in every area of real estate policy. 
From our failure to correctly audit the investment market (foreign or otherwise), to other matters such as first home buyer grants, tax breaks for investors, turning a blind eye to spruiking, a failure to enforce strong lending rules, and a continual inability to supply affordable housing in the fringe localities on what should be dirt cheap land (close to its agricultural value), enabling new buyers to purchase at no more than three times annual income.
Instead we unduly inflate prices in the outer suburbs through a process of ‘false scarcity’ produced by urban boundaries, zoning regulations, onerous development taxes and infrastructure overlays, all of which encourage speculation in vacant land, which is becoming a far more lucrative venture than building for current low yields.
This further inflates land values in the inner and middle ring localities because, as anyone familiar with classical economics knows, it’s the fringe cost of land that sets the base price for the suburbs closer in.
The report by The Candy GPS mentioned above, which promotes the potential for Australian real estate investment, mirrors other assessments with similar conclusions. 
For example, in a study by investment bank <a href="https://www.credit-suisse.com/au/" target="_blank">Credit Suisse</a> earlier this year, it correctly asserted:
“The marginal buyer of Sydney and Melbourne real estate has changed, as have the drivers of property prices.”
It points out a potential $44 billion investment into Australian residential real estate over the next seven years, mainly due to our geographical advantage in the wider Asia-Pacific region.
To put this into context, by 2025 the Asian region will account for almost half of the world’s output and also be the world’s largest consumer.
In Julia Gillard's ‘Asian Century’ speech, she asserted:
“We are now seeing the most profound rebalancing of global wealth and power in the period since the United States emerged as a major power in the world.”  
The number of Asian students studying here is at record highs.Trade flows, research and business development, education, tourism, and increased levels of migration have given us the potential to capitalise on the inflow. And as the capitals of the two states with largest recorded arrivals of Indian and Chinese migrants, Melbourne and Sydney are set to advantage.
The trouble of course, comes down to management.  The influx will push prices higher and not benefit us over the long-term (especially the next generation of priced out buyers) unless we change policy.  
If we were really smart, we would look at our system of taxation to ensure this investment in land is not only sustainable – but also advantageous to the broader economy.
To do this, we should work on a long-term sustainable plan to remove an array of bad taxes, including stamp duty which impedes housing turnover and labour mobility for owners seeking alternative employment opportunities, trapping residents in housing. As well as phasing out other policies, which focus investor demand on established real estate rather than the construction of new supply – such as negative gearing for example.  Instead we should replace them all with a broad based tax on the unimproved revenue from the locational value of land alone – not the buildings on top. 
Currently, we assess rates on the combined value of both – which means for every improvement to the capital (the man made asset on top) we place a penalty on building activities which impedes the productive capacity locked in our land market.
An effective land value charge, as well as shifting ‘bad’ taxes from productivity, would result in a number of changes.
It would encourage effective utilisation of land in both inner and outer suburban districts, stimulate construction, take some of the speculative element out of the land market, reduce prices and thereby assisting with decentralisation. And with less with ‘economic rent’ locked in the soil, over the longer term would act to increase – not decrease wages.
Combine this with an overhaul of supply policy and the accumulated wealth being brought into the country could be channelled into productive activities, rather than rampant real estate speculation.
It's unlikely that this will occur however. History attests that governments have a habit of allowing wealth to trickle up, not down – usually due to a combination of ignorance, lobbying and vested interests. Albeit, if policy fails to change through both taxation and supply, at some point prices will get too high for productivity to sustain and as recent international examples attest, the future consequences of this will be significant. 
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Catherine Cashmore

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