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Monday Message Board

August 4th, 2003

If I can overcome the jet lag that’s causing me to scramble names in my posts, and generally to operate in something of a fog, I’ll be back to normal blogging this week. To start the week off in the traditional fashion, it’s time for Monday Message Board, where you can post your comments on any topic (civilised discussion and no coarse language, please).

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  1. Observa
    August 4th, 2003 at 13:13 | #1

    I would be interested in opinions as to whether Religions should hold immutable ethical positions as prescribed by some ancient text or stone tablet, or re-invent/re-interpret their past ethos. The Christian faith’s grappling with homosexuality, seems to present as many problems as the Islamic faith’s treatment of adulterous women. Perhaps it should be left to the individual to cherry pick an appropriate faith, that suits their particular predilictions.

  2. Geoff Honnor
    August 4th, 2003 at 14:08 | #2

    I think all religions do re-invent themselves. The fundamental debate seems to be about whose interpretation/take on re-invention, should ultimately hold sway.

  3. gordon
    August 4th, 2003 at 14:29 | #3

    On a completely different issue, I have been reading the recent proposal by the Wentworth Group, “Blueprint for a National Water Plan” (31/7/03, downloadable from the WWF website). It is eerily appropriate that the document should come out so soon after so much recent comment on Prof. Quiggin’s suggestions on “Fixing the Murray”. The Wentworth proposal seems to me preferable to Prof. Quiggin’s in that it does not appear to create such an enormous potential Budget liability as would a Govt. commitment to buy environmental water. I seem to percieve a vague resemblance, too, to the late H.C.Coombs’ proposal for a Trust to own Australia’s National Estate (“Return of Scarcity”), a proposal I always liked but which seems to have attracted precisely no support at the time. The Wentworth Group report doesn’t reference the Coombs book, but ideas may be allowed a life of their own, I suppose.

  4. Brian Bahnisch
    August 4th, 2003 at 14:29 | #4

    In modern liberal democracies, there is, of course, a huge choice. I recall Phillip Adams interviewing a Catholic nun (I’ve forgotten her name) who had been active for many years in the US against capital punishment. She said that, in her view, people believed what ever suited them and then invested it with the authority of the Almighty. Not sure what the Pope would think of that!

    Sounds dangerous to me. I’m trying to give up all tendencies to universalising and all thoughts of secular utopias (= “progress”).

  5. August 4th, 2003 at 14:36 | #5

    Surely the issue du jour, if not du decade, is the spectacular increase in housing prices.
    This is an ideal topic for a political economist of Pr Q’s calibre, which I feel he has neglected.

    One issue which he should address: the effect of taxe costs on property prices.
    Economic theory suggests that tax costs are not passed on in competitive markets. They merely redistribute the “earnings” ie producer surplus, amongst the various factor input-ers.
    Final property price is set by:
    Demand: the effective borrowing power of buyers
    Supply: the available stock of land in demanded areas
    The evidence on the Eastern seaboard of Aust. indicates that low interest rates/highish urban migration have increased demand, whilst urban zoning and infrastructure patterns have curtailed the supply.

    This analyisis implies that the current hoo-haa over stamp duty, which is a progressive tax on wealth, is largely bogus and politically motivated (Fed. Libs v State Labs). If economic theory is correct, the housing boom is being driven by market fundamentals, not taxation incidentals.

    The housing boom has huge political implications discussed by this blogger.
    I would argue that ~90% of the Coalition’s lead over the ALP can be tracked to improvements in housing prices.
    Howard’s basic ecomomic policy has been:
    contractionary fiscal (CT debt repatriation)
    expansionary monetary (RBA low interest)

    Howard deserves some credit for this, although not alot. Keating’s microeconomic reforms have enabled low interest rates and high foreign borrowings, together with the higher productivity performance that underlies the earnings side of the equation.

    The fiscal contraction/monetary expansion policy was tried by Clinton in the US and underlayed their spectacular boom in equity prices.
    In Australia it has had a similar effect on property prices, with Eastern seaboard metropolitan house prices doubling over the past seven years – equivalent to a $100-$200 pay rise per week, week-in/week-out, for almost a decade.

    The ecomomic prosperity this has generated has trumped issues of social equity and cultural identity and is obviously becoming a central part of culture, witness the explosion of domestic property TV shows.

    Even the purportedly “bio-cultural” issue of immigration issue can be reduced to property prices: formerly battlers now nouveaux rich home owners in West sydney wish to regulate
    “undesirable migrant” intake to prevent a “there goes the neighbourhood” effect on surging home equity.

    The big question is: how much of it this property boom is based on foreign loan financed asset-price inflation and how much reflects the increased earnings potential of improved accomodation services.

    To his credit Pr Q has addressed the issue of foreign debt and asset price inflation here.

    It all looks familiar to the late eighties when the same bout of foreign borrowing led to a bubble, only in Aust everyone is now a “housing entrepreneur”. Is this an example of “the greater fool” theory?

    If, and when, the housing bubble busts, the party in power will suffer. I suspect that Howard will call an election before that happens, and retire in time to let Costello deal with the property bubble legacy.

  6. Homer Paxton
    August 4th, 2003 at 14:39 | #6

    Christianity ( which is not religious) has no problems dealing with homosexuality. It is very black and white. It is unacceptable conduct as is adultery, fornication, gossip, anger, murder etal.
    There are no shades of grey involved.
    The problem at present is that there are people who wish to adopt wordly values rather than God’s values. In almost every case they deny the scriptures and Indeed Jesus.

  7. James Farrell
    August 4th, 2003 at 16:08 | #7

    Jack beat me to it. John may not be aware to what extent The Housing Crisis has dominated the agenda in the media for the last week. I would love to know what he, or anyone for that matter, thinks about stamp duty.

    On the 7.30 Report on Thursday four experts achieved instant and total consensus that ‘something needs to be done’, and in particular that stamp duty is too high and unfair. These experts included a Federal Treasurer and a state opposition leader, who both just wanted an opportunity to taunt Labor state governments, a real estate institute chappie, whose interest is vested, and a geographer academic who had perhaps forgotten whatever economic principles he knew.

    I was disappointed the reporter couldn’t find someone to defend stamp duty as fair and enlightened. There is surely a case to be made, but one would need to establish empirically that it is the seller who pays most of the tax.

    Does anyone know of a reputable recent study on the incidence of stamp duty, especially for free-standing houses?

  8. Chris Joye
    August 4th, 2003 at 18:19 | #8

    Here’s an op-ed of mine on the subject, which may be published shortly…

    On June 6 this year, I delivered a 380 page report to Prime Minister John Howard that advocated a variety of demand and supply-side approaches to radically reducing the costs of home ownership in Australia. The insights offered in this submission, which was co-authored with colleagues from Harvard, New York University and Cambridge, are responsible for precipitating the Productivity Commission Inquiry and shaping its terms of reference. So what exactly were our key supply-side learnings, taking as given that the media has focussed on other innovations such as equity finance?

    First, a great deal of confusion tends to reign in the emotive affordability debate. Above all, combatants make the mistake of attempting to judge the costs of home ownership in relation to the income levels of prospective acquirors. While there is no question that poverty leads to significant suffering, this does not justify tying housing policies to the distribution of income. If government wants to assist the economically disenfranchised, it should do so via targeted antipoverty proposals. If it is especially eager to ensure that poor people are able to afford appropriate shelter, then housing vouchers that are linked to income may make sense. Good public policy does not, however, obfuscate issues that cause high house prices with those that contribute to depressed incomes. As such, we concentrate our efforts on schemes that improve the affordability of housing by relaxing regulatory restrictions that have the potential to cause price rises. We do not recommend responding to a housing Îcrisisâ by providing low-income occupiers with taxpayer-funded subsidies. To reiterate, the two problems are distinct.

    Second, our analysis indicates that there is an ever-growing divergence between the price of Australian properties and their underlying costs of construction. Importantly, this does not appear to be a manifestation of natural constraints on the supply of land, but rather a product of government restrictions that artificially inflate the price of housing. Viewed differently, these limits on dwelling dispersion and the release of greenfield and brownfield sites act as a burdensome tax on new building, which in turn leads to a mismatch between the accommodation needs of Australian households and the stock of available properties. In this context, we recommend expanding the affordability debate to encompass local and State government reform, in favour of confining ourselves to that perennial panacea—public housing.

    Specifically, we believe that several innovative steps can be taken to improve the elasticity of supply without resorting to subsidies, and which would result in a striking reduction in the costs of home ownership right across the country. The overall objective here is to accelerate the approval and land release process so as to promote
    private sector investment in the production of affordable housing. In particular, we propose a system in which local authorities are set (binding) targets vis-ˆ-vis the number of new approvals they issue during any given period. The size of these quotas would be determined according to a variety of factors, including environmental considerations, the density of existing dwellings, developer demand and cross-municipality prices. Hence, regions characterised by a combination of high prices and low dispersion would be set comparatively high targets, all else being equal. The scheme could be enforced by tying the councilâs funding to their ability to increase supply in line with the mandated goals.

    This brings me to a more general point, which is that many local and State Governments have failed to come to the affordable housing party. To a certain extent, this is an upshot of their aversion to instituting changes that are perceived to be disruptive to incumbent residents (popularly encapsulated in the ÎNIMBYismâ movement). While we believe that our strategy goes a long way to addressing these concerns, it may not garner adequate political support. In the event that it does fail, councils still have an arsenal of other alternatives on hand. As a minimum, they should strive to adopt clearer and more objective review standards, and expeditiously render land use decisions in an attempt to enhance the universe of ownership opportunities available to current and prospective home owners. The States, on the other hand, need to make a much greater commitment to providing the vital physical infrastructure (or at least its funding) that is a precursor to the zoned land being useful for housing purposes.

    In wrapping up, let me cast our primary conclusion into stark relief: there is an affordability problem, but it has nothing to do with the distribution of income or a dearth of exploitable land. Rather, it seems to be the result of oppressive government regulations (often imposed with the enthusiastic support of proximate communities) that severely constrict the stock of low-cost properties. Combined with ever-growing demand, these constraints on supply propagate price rises. And so, despite the fact that many Australians are increasingly concerned about the costs of home ownership, much more intellectual capital needs to be invested in fostering durable supply-side policies. The good news is that we can do so without spending a cent of public money. Metaphorically, this is akin to blasting away the large swathes of sand that currently obstruct the wheels of our market mechanism. In the UK and the US there has been emerging recognition of the merits of this method. For example, the Mayor of New York City, Michael Bloomberg, comments: ãOur affordable housing strategy has two principal elements. The first is innovative financing, and the second is changes that will cut building and land acquisition costs in order to facilitate private housing construction.ä His counterpart in London, Ken Livingstone, recently tendered a vision for his city along similar lines.

  9. August 5th, 2003 at 00:42 | #9

    Christianity ( which is not religious)

    As someone once said, Homer, please explain?

  10. August 5th, 2003 at 01:07 | #10

    I stupidly neglected the main factor that kindled the price boom in negatively geared Residential Property Properties (RIP) – the cut in capital gains tax from 48% to 24%.
    This is in direct violation of the central tenet of the political economy of taxation: equal treatment of asset categories. Non-tradeable assets and human capital do not attract the lower rate of tax.
    Inevitably this caused an overdemand in RIP, leading to irrational overinvestment and a bubble.
    This was supposed to lure hi-tech businesses into Australia, instead it has led to a typical property boom.
    To take a numerical example of the effect of differential reductions in Capital Gains Tax:
    – Property Price at year 0: $100
    – Real Capital Gain: 4% pa
    – Tax Cut: from 50% at year 0 to 25% in year 1.
    Assume neutral gearing (interest/maintenance costs = rental revenue).
    The price of the property would have been worth $104 at the end of year one. Attracting a 50% tax cut, the RIP would have realised a $2 capital gain after tax.
    The CGT is cut from 50% to 25% at FY1.
    This automaticly raises the after-tax profit, realised by selling the property, from $2 to $3.
    This is a 50% increase in profitability.
    Assume that the interest rate is stable and resources are fluidly shifted to equalise profitability of assets at the margin.
    This will, ceteris paribus, lead to a 50% increase in the price of the asset class that enjoy the reduction in tax rates.
    In fact, this is what has happened to RIP, tax cuts have fuelled price bubbles.
    Annete Sampson covers the issue:

    the residential property market is trading on a price-earnings multiple of about 23 -close to its highest level ever. …the P/E is calculated by taking average prices over average rents. As with shares, the P/E shows that it will take a property, at current rental levels, about 23 years to recoup the purchase price.
    History…shows that the P/E for residential property has been 12 to 15 per cent [sic] over the longer term.
    In income terms, the implied average gross yield, before taking expenses into account, is about 4.5 per cent.

    The doubling in P/E ratios indicates that RIP prices have overshot the rational level that would have been justified by the cut in CGT.

    By contrast, the P/E ratios of the ASX 200 is probably historicly below par. Thus we have too much money invested in ,a href=”http://www.abc.net.au/pm/s740831.htm”>home rennovation, not enough in firm innovation.

    We have a property bubble alright, financed by unprecedented low interest rates, a futile First Home Owners grant and irrational capital gains tax cuts.
    Whether the bubble will burst with a bang or a whimper is anyone’s guess.

  11. Homer Paxton
    August 5th, 2003 at 13:30 | #11

    A religious person believes they have to do something, usually good works, to get to heaven.

    This is not the case in Christianity as everyone is sinful and therefore desrves punishment. Jesus took this puishment on the cross for anyone who believes.

    When you think clearly about it good works is silly. If I lie to my wife then what do I have to do to overcome this? Help an old lady across the street or give money to a charity etal?
    This also implies a God who tolerates sin because no amount of good acts can make up for one sinful act.

  12. Observa
    August 6th, 2003 at 01:44 | #12

    Hmm! So the Monday Message board can be gathered together. It would appear that a lot of people have re-invented a new faith in the housing market, which may turn out to be a case of worshipping a false God, when the music stops. Will it be a case then of ‘Lord, why hast thou forsaken me’.

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