The nation is set to break land price inflation records in three of the next five years, based on past land price growth averages. It is time to act on past tax inquiries.
Australia’s runaway land prices are akin to a national economic emergency. An
increase of $4 trillion in just the next five years is highly likely, based on past growth rates.
Land price inflation of $600 billion this year is likely to equate to 30 times the size of total banking profits. But will anybody blow the warning siren?
Political intervention in the land and housing market has only seen first home buyer mortgages increase. If buyers have access to more cash, they bid prices upwards. Stamp duty discounts are a related cousin – both providing more demand-side stimulus.
Rather than confront the land price spiral, successive State and federal governments of all stripes have tried to get buyers ‘into the game.’ Too much time and public money has been spent on access to buyer deposits, government gazetted saving incentives, first home buyer grants and stamp duty exemptions.
Policymakers concerned by Australia’s low productivity and wage growth rates must recognise that with every increase in mortgage or rental payments, there is less to spend into the local economy. Small business resilience and employment then suffer.
RBA rate cuts have spurred runaway land prices, with the central bank much more willing to cut interest rates to support a weakening economy, rather than increase them when land prices add to overheads.
Remember back to the Global Financial Crisis when we thought surely the world wouldn’t risk another property bubble? The aggressive stimulus package which began in late 2008 included six interest rate cuts in 7 months. This slashed interest holding costs for property owners by 142%.
Despite land prices increasing by $683.5 billion in 2016-17 – the most on record – the bank did not increase rates, suggesting an underlying fragility in the economy. November 2010 was the last time interest rates were increased.
Then the correction. In 2018-19 land prices fell by 31% more than the worst of the GFC (2012). So the RBA cut twice, followed by another 4 occasions during the 2020 pandemic, shrinking interest-based holding rates by another 93.3%.
The RBA’s unwillingness to use a rate hike to halt runaway land prices points to a catch-22: high land prices and associated mortgage costs are a drag on the economy, but using monetary policy to stop land price inflation increases business loan costs and is a drag on the economy.
Runaway Land Prices
As the above graph demonstrates, one could claim the 2000s really were called the ‘noughties’ as land prices flew along at 12.6% p.a. The 1999 halving of the Capital Gains Tax gave the green light for a place to call home to become an investment vehicle, forever changing the culture of keeping a roof over our head.
As wage stagnation kicked in alongside the 4 year GFC moderation, land values increased by a more moderate 4.9% over the 2010-20 decade. The combined 20-year growth average of 8.7% is more than 6 times greater than today’s 1.4% wage growth.
Following the ALP’s recent federal electoral defeat, housing policy has gone from a high public interest issue to one relegated back to the bottom drawer. Land price growth of 8.7%, therefore, may not be far off the mark. Such increases are expected to break previous records in 3 of the 5 coming years. This would see land prices rising to more than $10.2 trillion – a 65% increase in the next 5 years.
Such increases – over just three years, would be equivalent to the entire ASX valuation – worth more than all of the most valuable companies in the nation.
This rate of growth is unprecedented. When it comes in the trillions, the limp money thrown at rent and mortgages is likely to slow our economy for decades.
The implications will be felt in many and varied ways. Natural disasters will continue to reveal the inflexibility high land prices and their associated debts place on communities. Our banks will become even bigger, requiring further support. And of course we will be praying for soundproof walls as our kids live longer at home.
The potential for Japanese-like 120 year mortgages appears more likely without concerted action. The federal government could clip some low hanging fruit by mandating that mortgages cannot exceed 30 years duration.
The past decades of rezoning and land supply boosts across NSW and Victoria have shown that trickle-down supply-side policy is not enough on its own. Nor is the blunt use of interest rates preferable to more targeted approaches. Governments must act on the advice given by the multitude of tax inquiries.
Every inquiry has called for a tax shift: to move towards higher taxes on land, and lower taxes on workers and the businesses who employ them. With capital gains in housing (read: land) set to continue their meteoric rise, moving our tax base away from productive activities and towards passive incomes is crucial.
The NSW government has stepped up to lead extensive stakeholder engagement to design such a transition forward. But few other state governments have made the most of the pandemic, particularly those with weak oppositions.
The commodification of land and housing is accelerating. ‘Proptech’ means real estate in our towns and cities, or our farmland, can now be purchased from a smartphone on the other side of the world, or by a team of buyers’ advocates armed with algorithms. We’re also seeing the corrupting influence of land deals on political insiders privy to new infrastructure plans. The way housing is treated by mobile capital demands that our elected representatives get serious about sculpting our tax system to protect communities from rapid change.