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The Forum > Article Comments > The property market’s role in changing addresses > Comments

The property market’s role in changing addresses : Comments

By Philip Kimmet, published 6/7/2007

A 'correction' to inner residential values would discourage sea and tree change to some extent.

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"Winding back negative-gearing, more aggressive capital gains taxation, and a range of similar disincentives would take the heat out of “high land value” housing, while arguably having a marginal effect on down-market housing in the burbs."

Negative gearing would work well if it applied to new houses only; that would add to housing stock. Capital gains taxation also is fundamentally wrong when applied to genuine gains in manufactured goods.

If you want to take the heat out of "high land value" housing there is one tried and true method which always works - if the State governments have the honesty and courage to apply it - land tax.

http://www.taxreform.com.au
Posted by Lev, Friday, 6 July 2007 9:52:01 AM
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The housing market is only the way it is because interest rates are too low leading to inflation in housing prices. Hiking interest rates a couple of percent would sort it out quicksmart. The government will do everything it can to avoid that happening but it does not matter - Mother Nature is now starting to intervene and, with oil supplies diminishing and petrol prices rising, this pseudo-interest rate rise is now starting to be imposed. Once it gets going you will see seachange and treechange communities becoming non-viable through high transport and food costs and their inhabitants will end up as refugees back on the fringes of the very cities they tried to escape from.

Australians are about to be reminded that debt and wealth are not the same thing. Pity our young families on the outskirts of our cities with large mortgages, high costs (from young children), lower than average incomes and long distances to travel to work. They will be hardest hit. Maybe they can rent out a room to a refugee sea/treechanger to try to get by!
Posted by michael_in_adelaide, Friday, 6 July 2007 10:10:03 AM
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Another obvious solution to excessive housing prices in the central city areas would be to improve infrastructure in outlying areas thus encouraging the movement of employers to less costly business and housing locations. As a former employer I found it worked well with my employees (and helped me with employee retention) to have the business within a reasonable commute to their homes.

A major problem with this approach is the local and state governments lack of planning and infrastructure initiatives. To encourage businesses to move to the outlying areas requires the infrastructure to be in place; major highways, rail and bus service, water and sewer services, 3 phase electrical service, and of course quality telephone and very high speed Internet capacity.

This can not be achieved with the NSW state and local governments $200,000 tax on each new building block approved which is followed with a wink and a nod but no guarantees that the required services will ever be constructed
Posted by Bruce, Friday, 6 July 2007 10:29:29 AM
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Bruce says that outer suburban infrastructure cannot be improved "with the NSW state and local governments $200,000 tax on each new building block approved which is followed with a wink and a nod but no guarantees that the required services will ever be constructed".

True. The solution is to admit that infrastructure increases land values, and finance it accordingly -- by taxing increases in land values. Then the government doesn't get its money unless it actually delivers the infrastructure.

This mechanism not only protects property owners against arbitrary taxation, but gives governments a fiscal incentive to build infrastructure that increases land values for the benefit of property owners. So the government builds infrastructure that would not otherwise be built, and property owners get windfalls that they would not otherwise get. As long as the tax does not take away ALL of the increase in land values, it leaves property owners better off.

For more detail, see e.g. Prosper Australia Working Paper No.7, at http://grputland.com/working/paper07.htm .
Posted by grputland, Friday, 6 July 2007 4:07:39 PM
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Does anyone deny that house prices are market driven, reflecting a balance of supply and demand factors? Supply side factors like land releases, approval process conditions and bottlenecks, and government charges. Demand factors like the birthrate, house occupancy, immigration rate, temporary resident influx.

Oh yes, I'm sure the availability of capital has an effect. But answer me this: If interest rates went down to 1% and half the population died, would house prices increase or decrease?

I think that there needs to be an advancement of the thought processes applied to house prices. The blind men and the elephant approach is great in pantomimes, especially when all the small children start shouting out the bleeding obvious, but to see it on a forum like this is tedious.
Posted by Fester, Friday, 6 July 2007 11:05:19 PM
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Nice riddle, Fester! But too much for a small brain like mine, I’m afraid. I’ll keep it simple.
‘House’ prices are not only a house, but land as well. House building is a truly competitive market, so your supply and demand conditions frame the market.
Land is different. No-one makes it. We simply claim what is there already, and because it is fixed in supply, market conditions don’t apply or work. Scarcity forces the price ever upwards. Population increases exacerbate the scarcity, so your scenario of halving the population should have the opposite effect, and cause land prices to fall. But the landowners won’t sell unless forced to by their circumstances, so land price will stay artificially high until enough landowners are close to financial ruin. 1% interest rates would stave that off for a long time, I suspect, so the land would just stay vacant – out of use, and an economic loss to the community. Of course, a land tax, as advocated by some on this thread, would encourage them to sell earlier and thus put the land back into productive use.
Posted by foleo, Saturday, 7 July 2007 1:37:02 AM
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Very amusing, Foleo. That's a great number of vacant properties to pay rates on and maintain. But there are real examples to learn from, rural population declines, for example. There are also real examples of stable populations.What is happening now is a result of a big increase in demand, primarily but not solely from increased permanent and temporary immigration. Supply side factors have not been sufficiently upgraded, so the result is not surprising.

There are also complaints of a lag in infrastructure provision. This is also unsurprising as coping with an increasing population imposes substantial costs on the existing population. Such is the case in South East Queensland, where the population looks like wearing a huge infrastructure debt. Without the population growth, the debt at least would be non-existent.
Posted by Fester, Saturday, 7 July 2007 7:40:41 AM
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I see more tree changes not less, to a lessor degree sea changes are unlikely to suffer a drop soon.
From Hexham north almost to the border a home mostly just as good as those high priced ones in Sydney can be bought for less than$200.000.
Increasing pressure in big city's offer a cheap home and cash to spend after paying that loan out.
In some cases homes 30 km from the sea, last sold for $185.000 only 3 years ago have changed hands again at a loss of $19.000.
But while heat is unlikely to fire up these prices a great deal that $200.000 is going to return and tree changes that share the coastal dream are unlikely to suffer.
Posted by Belly, Saturday, 7 July 2007 6:33:12 PM
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"One definition of an economist is somebody who sees something happen in practice and wonders if it will work in theory." - Ronald Reagan

It is also typical of economists that they think they know what drives consumers and therefore see no need to consult with them.

Much of the investment property available to renters is provided by mums and dads on moderate to low incomes who want to improve themselves and provide for their futures. They are distrustful of other avenues for investment. From what one sees in the Press, they are right to be cautious of any investment they cannot see and control. They are also right to be concerned about investments that show poor returns through high management fees and trailing commissions. Then there is the risk of continual interference by government with superannuation being both a milch cow and a common target for tweaking.

Arguably, when investing in property these investors are taking a high risk with rental returns < 3% gross on investment, increasing overheads and the certainty of interest rate hikes post-election. In many cases it is the case that owners are subsidising the lifestyle of their tenants in the hope of future capital gain (from which must be deducted the costs of selling and capital gains tax). Any wonder that many economists argue that it is a better deal to rent than buy and put the residue into other forms of investment.

Frankly I fail to see any advantage in putting the rental industry under any more strain as recommended by the author, so a few more well-heeled DINKS can afford to buy into the inner city. Besides, one could also argue that it is the gentrification of formerly cheap rental inner city 'burbs by young professionals that has seen an escalation in prices. Of course if capital gains tax was extended to cover the principal place of residence this market could be reduced.

But I think the author is more concerned about older people realising the value of their properties and not the twenty-, thirty- or forty somethings. Intergenerational jealousy, maybe?
Posted by Cornflower, Wednesday, 11 July 2007 10:42:50 AM
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The author's and some of the posters' premise is that you can make housing more affordable by simply making it less attractive to purchasers through harsher capital gains taxes, winding back negative gearing, higher interest rates, and more land tax is pure economic folly.

All these things serve to reduce demand for housing, but as night follows day, they will also serve to reduce supply. If you drive away those prepared to pay for something, then the incentive for those prepared to supply it will also decline accoringly. That's the heart of why capitalism works, frustrating as it is for those of us unable to match the market price (me included).

No the only way in which we can increase housing affordability is the same as the way the common man came to acquire most of his modern day material wealth (at least in Western industrialised countries). Cheaper production.

Much could be done to make production of housing cheaper. Most of the high cost of housing stems from the very limited amount of land which exists in proximity to infrastructure. Land itself is not much of a limiting factor in Australia, contrary to one poster's commments. If, as others have said, more tax dollars/ or private incentives were directed toward building new infrastructure outside of our main cities, the supply of viable housing (by that I mean houses in proximity to jobs and services) on cheaper land could be greatly increased. This is cheaper housing production and would result in more affordable housing.

Everything else is just voodoo economics and wishful thinking.
Posted by Kalin1, Wednesday, 11 July 2007 12:21:54 PM
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Very true, Kalin1. Housing could be built very cheaply. Shipping containers are an excellent example of one means to this end, and often get mentioned. Relaxing subdivision/multidwelling restrictions in the town planning acts would rapidly bring down housing costs, especially if you get the shipping containers substantially fitted out in China or India.

But this raises two points:

(1) Why have governments failed to take action to avert the affordability crisis when solutions are so readily at hand?

(2) What is the average infrastructure cost to provide for each additional resident?

Water, sewage, electricity, gas, roads, schools, hospitals etc dont magically appear. They must be paid for. So if the true cost for each additional resident is not part of the housing cost , then the cost is subsidised by existing residents.

I would propose as a solution to housing affordability that migrants to Australia pay an infrastructure tax to offset the cost incurred on the community for providing for additional residents. I believe that this would be fairer than slugging new home builders and the existing population as currently happens.
Posted by Fester, Wednesday, 11 July 2007 5:21:48 PM
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Good luck Philip.

Watch the Property and realtor barons and their stooges circle their wagons the moment anyone tries to do anything with their modern sacred cow, negative gearing.

You will, if you can't already, see the enormous somewhat hidden leverage at the highest offices in our land that the Property industry and its boosters have. They will vilify and crucify you as to them, the end justifies the means and they don't give a stuff about their impact on the community, its all the bottom line.
Posted by Inner-Sydney based transsexual, indigent outcast progeny of merchant family, Thursday, 19 July 2007 3:09:27 PM
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I dont see the problem with people leaving an overcrowded market. It should be applauded.
It was the late fifties when they tried to set up Albury-Wodonga as an alternative to slumming the cities but the 'big business' developers fought it for profit motives.
If the infrastructure elsewhere can cope then that should reduce pressure in sydney.
I was in brisbane in early july and had someone complain about sydnyites moving there and could only laugh at how spoilt they have been for so long.
Oh and as for upping the interest rates, have you sought help from someone.
Posted by hoboturkey, Saturday, 28 July 2007 11:00:39 AM
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