127th Annual Henry George Dinner Speech
1. To make health care affordable we broke this monopolistic market. We now spend over $100 billion to give everyone who needs it high-quality health care for free.
2. We could break the monopolistic market in residential land and give everyone who needs it free land for one-tenth of the cost, or about $12 billion. After all, standard economics says to regulate monopolies to the point where price equals marginal cost, which in the case of land is zero.
Instead, we currently spend over $60 billion in subsidies and tax breaks that simply make housing more expensive.
3. The standard prescription by The Experts to reduce housing costs is to increase supply. I call it The Supply Side Distraction. This approach requires a construction boom of astronomical proportions, building an extra 500,000 homes over a decade, requiring an extra 300,000 people (the workforce of Canberra) to stop their current jobs and go into housing construction for a decade. And at best all that gets you is a 10% reduction in housing costs.
4. We could instead immediately reduce housing costs for renters by 37-50% by providing discounted access to land through public land rent schemes, or by facilitating the broad adoption of community land trusts. In Canberra 1,000 households currently save $9 million per year in housing costs in their Land Rent Scheme.
5. Reducing home prices by 25% will wipe off $1.7 trillion in wealth from over 7 million home-owning households, making policies that achieve this political suicide.
Simply confiscating the 2.7 million rented homes and giving them to their current tenants for free would be a similar transfer of wealth, but only affecting 1.5 million investors.
The second option must be more politically realistic than reducing prices by 25%.
Recording
18 minute interview followed by the speech
Welcome
Thank you for that lovely introduction, Catherine. It is a privilege to be here.
I also want to thank you both for involving me in the amazing research and discussions happening at Prosper. If it wasn’t for the big ideas coming out of this group, I would never have been introduced to the huge range of policy options out there. I recommend Karl’s Renegade Economist podcast on 3CR radio to help expand your thinking — from Hong Kong cage homes to privatisation, to energy rorts, and more.
I want to also try and expand our thinking today, starting with the first big lesson I took away from reading Henry George — which is that most of our major economic problems stem from the distribution of ownership of land and capital. I remember reading a passage where George made the argument that there could not be involuntary unemployment if every person had a plot of land to farm.
It is much the same with housing. If everyone owned their own home, could there be a housing affordability problem?
I want to do something tonight that I believe almost no one has done — talk about ways to make land and housing cheaper, perhaps even free. Despite what you hear in the housing affordability debate, The Experts do not actually want to talk about fundamental changes to land and housing systems that would achieve this.
To make my case, and to change the way we think and talk about housing, I first need to take a few detours.
A thought experiment
Imagine there is a market with monopoly characteristics that is an essential input into everyone’s modern life. The high prices charged by monopolist suppliers are making life extremely difficult for the neediest in society who often go without life’s basics to cover their costs.
One group of people,
The Experts, think the solution to the problem is to ‘market markets work’. They see complex market failures all around that are not only difficult to understand but extremely difficult to correct. But they want to try where they can to fix these failures, little by little.
Another group,
The Radicals, thinks the solution is to ‘break the market’. They say that fundamentally this industry will never overcome its monopoly problem and associated market failures and that a totally different approach is needed. They argue that instead of market provision everyone should get what they need for free. The government should simply provide it, and if needed raise over $100 billion in extra taxes per year to do it.
The Experts— the make markets work team— laugh at how implausible that is.
“That’s over 6% of GDP. How could it even be possible to give people such a gargantuan freebie? How would anyone vote for it? No, it is much better to try make markets work by tinkering around the edges.”
The Experts release report after report showing how their proposals might reduce costs by a few percent here, and a few percent there. That is, apparently, the best we can aim for.
Luckily, with the exception of the United States, the second group—
The Radicals who want to ‘break the market’— won the debate. Universal public health care has been established in just about every rich country; Australia and Canada’s Medicare systems, the French and British National Health Services, and many more. Just about every rich country decided that providing universal access to quality healthcare for free was a basic function of a modern wealthy country.
In healthcare, we solved the monopoly problem by breaking the market. We spend $100 billion of our tax money to do it. And now everyone is better for it.
Now, we can talk about land.
But first a special type of land to think about the problem in the abstract.
This land is where two roadways cross— an intersection. Imagine living a century ago in 1918 and seeing massive social failures at road intersections; fatal accidents and congestion, the rich with their fancy motor-carriages roaring zooming dangerously past the poor with their horses and hand-drawn carts. Being a common-sense person, you see this situation and propose a non-market system of turn-taking using a system of electronic lights run and paid for by a government agency. It makes total sense.
But if you tried to propose this system today, you would be labelled as mad by
The Experts— the ‘make markets work’ crowd. Their solution would be to price access to the intersection. You know it would be! After all, their favoured modern solution to traffic congestion is real-time road pricing. “We shouldn’t break the market” they would say. “Make the market work” they would say. “A publicly run rationing system is completely implausible nonsense” they would say.
Yet back in the real world we do in fact spend hundreds of millions of tax dollars each year on the radical, crazy, implausible, leftie, nonsense scheme that breaks markets rather than makes them.
Turn-taking. Remember that. It is innate. I have never seen a parent at the playground teach their child to bribe other children for a turn on the swings. Even
The Experts force their own children to take turns, even though their theories say it is nonsense to do so, and even though they would never impose such a system on the rest of us.
We can now finish this detour and talk about the land we need for housing. But once again I want to us to think abstractly, and not about the world as it currently is presented to us by
The Experts.
Land for housing in the abstract
Imagine you are an explorer who has discovered a small island society.
You observe that the island comprises 4 families. Three of them appear to own their own homes and control all the land on the island. One family does not— The Murrays. So, The Smiths house The Murrays, who have nowhere else to go, for an exorbitant fee. No matter what The Murrays do, how hard they work, what they earn, their landlord is able to extract most of the economic gains they make. After all, these other families hold the land monopoly.
Do you, the explorer, the inquisitive adventurer, the anthropologist, think to yourself:
a) why can’t this society just cooperate and give The Murrays a plot of land for their own home rather than extorting them for a huge chunk of their income.
Or do you think:
b) look at The Murrays enjoying the spoils of the property market at work!
Because I can tell you when The Experts and the economics profession sees this society—a million times magnified across modern Australia—they think b) look at the magic of the property market at work. They have nothing to offer The Murrays. In fact, the current policy advice from mainstream economic Experts is for our island society to do nothing, or even perhaps subsidise The Smiths, the landlord, for renting space to The Murrays!
That is exactly what our discounts on developer charges are, for example. It doesn’t seem like a solution to me.
Or perhaps we should give The Murrays more money to specifically spent on housing? Would that go straight into the pocket of The Smiths perhaps? We have those schemes too. We call them First Home Owners Grants.
Or, what if we were actually serious. Maybe we could limit the rent paid to 25% of The Murray’s income? We have such schemes as well in the form of public housing, and the National Rental Affordability Scheme. But even then, 25% of gross income is a long way from the 0% that the other Families on the island pay for housing.
This story shows why homeownership makes sense. Homeownership provides secure ‘non-market-priced’ access to housing in perpetuity. In fact, it is free. Once purchased, homeowners no longer need to participate in the monopoly land market. They have their own non-market supply of housing.
Housing policy fraud: An Australian story
When we return to the real world we seem to forget what it is that we want when we talk about affordable housing. The term affordable housing itself is used as a way to avoid confronting the reality that making land and housing cheaper is the only effective operational objective
I have had conversations with politicians at all levels about affordable housing policy before. I usually ask them “How much lower would you like prices to be? 20%, 30%, 50%?” They usually say “No, no, I don’t want prices to fall, just not grow as fast as they have been!”
Seriously!
I remember talking for almost two hours on the phone to John Alexander, Liberal member for Bennelong, and he was very concerned about making housing affordable and probably one of the more thoughtful and genuine politicians to try and tackle the issue.
But he did not want prices to fall. He had in mind a complicated financial scheme that would funnel foreign buying into new property. Specifically, his goal was for prices to rise at only 5% per year instead of the recent 10%! It was never clear exactly who would benefit, or how this was meant to make housing cheaper.
I asked him whether he understood what that actually meant? I said “Do you know what the median price will be in ten years if it grows at 5%? They will be 60% higher. If wages grow at 2% that would make housing 33% more expensive under your plan than they are now.”
But he felt like there was no other option.
I asked him “What happens if prices fall by 20% in the meantime due to market cycles?” This situation was apparently undesirable. Prices must rise. The market must be rescued.
I think we should be clear if we are going to talk about affordable housing. I think we could even avoid using that phrase and just say “cheaper housing”. We don’t talk about grocery affordability or petrol affordability. We say cheaper food and cheaper petrol.
Regardless, what I mean by affordable housing is that I want the price of secure housing to be lower. At the limit, we could make housing free, just like it is for the three families holding the land monopoly on my fictitious island society, and like it is for over 2.7 million households across Australia who own their home without a mortgage, and like hospital care is to every one of us.
That is our benchmark—free, secure, housing, just like homeowners have. That is what we should aim for. As a rule of thumb, we have one third of households own their home mortgage-free. One third own with a mortgage, and one third rent. Really, the housing affordability problem is one that only affects renters and new, recent, buyers. The 2.7 million renting households pay about $50 billion per year on rent to the 1.5 million landlords. The 3.3 million home-buyers with a mortgage pay around $60 billion in interest each year on the $1.1 trillion in owner-occupier homes loans. Only around that 300,000 of them bought their first home in the past 3 years, paying around $10 billion a year in interest.
Let me repeat that. To give everyone free access to housing, not free perpetual property rights, we could pay the $50 billion rent and $60 billion in mortgage interest from tax revenues, and it would cost much the same as our public healthcare system. This would be a situation of 100% free land and housing for everyone in their current home.
This is about the same as the profits of the banks, and the fees on superannuation, and the tax breaks on capital gains combined. If you think tackling these other economic challenges is possible, then making both land and housing free for everyone is totally achievable.
Instead, we often get distracted and talk about housing affordability as something completely unaffordable. For example, referencing benchmarks of rent-to-income ratios, of around 30%. Why taking a few hundred thousand household from paying 35% of their gross income on housing, to 30%, makes much difference to anything is beyond me. I couldn’t think of a worse benchmark for affordable housing.
We also need to stop thinking about making housing affordable in terms of the market price of housing, whether in the form of purchasing in perpetuity —what we typically mean when we say the house price— or renting for a fixed term.
As I have alluded to, we don’t have to supply housing only through market-pricing. We can have multiple cheap ways of accessing secure housing. We didn’t make healthcare free by making minor tweaks to the market price of drugs. We did it by pooling our resources through taxation and giving it away.
Yet none of what I have been talking about seems to be anywhere near Australia’s housing policy agenda, which is dominated by The Experts who can’t think beyond markets for economy policy – only for parenting.
That noise you hear is busywork
Right now, the housing policy environment is best described as busywork— good intentions, plenty of noise and activity, achieving nothing. Making plans to make plans, to have an inquiry, to make recommendations, for a plan, to create a taskforce, and around the merry-go-round we go.
If an alien economist landed here and looked at our housing policies, would they think the rules designed to make housing cheaper and more secure, or more expensive and less secure.
Some academics, who have been trying to operate objectively amongst the fog of academic self-delusion have had enough. In 2015 Nicole Gurran and Peter Phibbs published an article entitled — Are Governments Really Interested in Fixing the Housing Problem? Policy Capture and Busy Work in Australia— which basically answered their title question in the negative.
Here are some of the plans to make plans:
• Menzies Research Centre: Prime Ministerial Taskforce on Home Ownership 2003
• The Productivity Commission’s First Home Ownership Report in 2004
• A Good House is Hard to Find Report from the Senate Select Committee on Housing Affordability in Australia in 2008
• Western Australia’s Affordable Housing Strategy 2010-2020
• NHSC: State of Supply Reports (2008, 2010, 2011, 2012, 2013 onwards)
• Senate Inquiry into Affordable Housing, 2014-2015.
• Parliamentary Inquiry into Home Ownership 2015
I could go on.
The madness of it all is that after the thousands or work-hours on these reports, there is no political interest in making housing cheaper, and the housing policy we currently have can be summarised as ‘do nothing’ and let the land monopolists flex their economic muscle.
All these reports have in common an economic framework that sees The Murrays on our fictitious island society and admires the market at work. The mainstream economists who dominate these inquiries, reports, and policy busywork, have nothing to offer the question of affordable housing as they have no deep understanding of land markets. The profession’s pet theories expressly assume away all the important monopoly characteristics of land markets leaving them on able to, at best, waffle aimlessly, stringing together loaded jargon like competition, elasticity, regulation, equilibrium, all the while saying nothing.
In short, we have a policy fraud built on an intellectual fraud, intentional or not.
We have policy analysts, think tanks, academics, and commentators, who battle the power of pharmaceutical and healthcare monopolists by taking away their pricing power with non-market systems, while at the same time ignoring the pricing power of land monopolists and even boosting it with even more gifts, grants and subsidies! These people probably sit in adjacent cubicles, taking radically different approaches to the same economic problem. I’m looking at you Grattan Institute.
We know that land is a monopoly for two reasons. First, it comprises the right, but no obligation, to be put to use. Second, there is no free entry— you cannot compete in land markets using inputs that are not also outputs of that same market.
Henry George knew it when he observed:
“What is it, then, that prevents labor from employing itself on this land? Simply, that it has been monopolized and is held at speculative prices, based not upon present value, but upon the added value that will come with the future growth of population.”
This is exactly what modern real options theory says — don’t build housing unless it beats waiting to build something better in the future, and don’t sell unless you are sure the future options are inferior to cashing out.
A fundamental irony, however, is that once you accept that land is a monopoly, standard economics says you can regulate the price down to the marginal cost. Since the marginal cost of land is zero, an efficiently regulated market would set the land price to zero.
Fraud: Supply is the problem, but don’t build homes
The greatest housing policy fraud is what I will call The Supply-side Distraction. A
recent presentation by Grattan Institute’s Brendan Coates was called: “Supply sceptics beware: without more housing, it won’t be affordable.”
Sounds ominous. But here is the conclusion: “Building an extra 50,000 homes a year for a decade could see house prices 10-20% lower.”
Really? That’s less exciting than John Alexander’s preferred outcome of prices rising 5% per year instead of 10% per year! Now, I know Brendan really cares about this topic, and he is probably one of the smartest housing analysts out there. But like almost all others, he ignores the land monopoly, and that’s a fatal mistake in the economic analysis of housing. He knows my views, so what I’m going to say won’t surprise him.
A frank approach would see that in the three months to June 2015 Sydney home prices increased 9%. This is the scale of the ambition– reverse a few months price growth with an insanely large decade-long construction program.
And the economic cost of that low ambition? That would be a 25% increase on the already high number of homes being built of over 200,000 per year, enough to accommodate half a million people.
We are currently building a new Newcastle-worth of homes a year, and we would need to add to that a new Ballarat, Toowoomba, or Darwin’s worth, every year, for 10 years, to reduce prices by just the amount they grew in the second quarter of 2015 in Sydney, or the past 10 months in Hobart. Some suburbs of Sydney have seen prices fall by more than that in the past year from tightening of credit. It is a colossal investment task for a minute reduction in housing costs.
Currently, a record 9.5% of the labour force is in construction, which was just 7.5% prior to the financial crisis. To meet this supply ambition over ten years, to reverse a few month’s price growth, would take an extra 2.5% of the workforce to stop what they are doing, stop producing what they are producing, and shift into housing construction. That’s an extra 330,000 people, or about the labour force of the Gold Coast, and even higher than the labour force of Canberra.
The real resources required for this 10% price effect make me wonder how serious followers of this view can be. Even worse, The Supply-side Distraction does not involve actually building any new homes at all but hoping that minor tweaks to planning rules will stimulate the greatest construction boom in the history of the nation where property developers left, right, and centre, will be building thousands of new homes even though it reduces their profits by doing so because it reduces prices!
That’s the truly bizarre part of the story. Not only do the economics show that supply’s effect on price is tiny, making it a strange target for an affordable housing policy, but the way that supply-siders plan to get there is, essentially, to hope the market works like it does in their clearly flawed model!
I have many times asked that if you really believe this story, why not create a public agency tasked with building and selling 50,000 new homes a year, regardless of their own profitability. No. That’s getting too close to being an effective way trimming 10% off the price of housing. We wouldn’t want that!
The cost of the fraud: Doing the wrong things
The Experts’ affordable housing policies are costing us dearly and often making housing even more expensive.
State and the federal governments have spent around $1 billion a year on these programs, plus hundreds of millions in stamp duty discounts for first-time buyers.
Tax expenditures from the Capital Gains Tax exemption for owner-occupiers are nearly $50 billion per year and tax discounts that apply to property investors are around $3 billion per year.
We are rezoning land for free rather than charging for it, costing another $11 billion per year, chasing a non-solution of hoping land developers will voluntarily build so many houses that prices fall.
All up, we already spend $65 billion per year on policies that don’t make homes cheaper.
It would be madness if we spent all our health funding on energy crystals and psychics, and nothing on medicines and treatments that had passed scientific scrutiny. And yet, in the housing sector, that is what we have. A fraud of epic proportions if ever I saw one.
Politics of property
The politics of property is why it is so easy to perpetuate this fraud, even for those who genuinely care about cheap, secure housing. The simple fact is this—making housing cheaper is a multi-trillion-dollar transfer of wealth. In March 2018 the total value of residential dwellings in Australia was… and this is truly astonishing…. $6.9 trillion (or $680,000 per dwelling on average). It is hard to fathom such big numbers, but that is about four years of GDP, four times more than the market capitalisation the whole Australia equity market, and six times the value of the world’s highest valued company, Apple.
Now imagine that we want to make the market price of housing cheaper. Say 25% cheaper. This would take Sydney prices back to where they were in September 2014. If we did that nationally we would wipe out $1.7 trillion of value from the balance sheets of over 7 million property-owning households.
It would be one of the biggest wealth transfers in history— from a huge majority to a tiny minority, just 3 to 4 % per year, who are first-home buyers. Reducing prices would be political suicide. And politicians know it.
I often wonder if we have politicians or political parties sophisticated enough to make big changes that will reduce home prices. I worry, for example, about the Labor party’s promise to both reduce the CGT discount and require quarantining of negative gearing losses. We know that when the Resources Super-Profits Tax on mining was proposed the government of the day faced extreme pressure for vested interests and caved immediately. What plan does Labor have to combat the vested interests in property development when they too launch a $20 million propaganda blitz against the policy? How serious are they? Do they have their own advertising agencies lined up? Do they have a sophisticated media and communications team ready to saturate the airwaves to such a degree that the vested interest counterpunch has no breathing room?
In my view, it would be more politically expedient to simply redistribute rental housing from landlords to tenants. It would amount to the same $1.7 trillion wealth transfer. But instead of from 7 million homeowners to potential future homebuyers, it would be from the 1.5 million landlords to the 2.7 million tenants, creating twice as many winners as losers.
If you think reducing home prices 25% is even remotely politically feasible, then acquiring all homes from landlords and given them to tenants is almost a done deal, politically speaking. I’m deadly serious. We could do this, shift any debts onto the central bank balance sheets, and wipe our hands, having solved the affordable housing problem for another generation.
Our goal should be free land
By I have a more modest goal than that—free land, for life, for all.
In our monopoly housing market, one third of households already get free land. One third own a home but have a mortgage, with the most recent of these buyers paying about 28% of their income on repayments on average. Another third pays about 21% of their income on rent on average— providing an income of over $50 billion per year to the nation’s 1.5 million landlords.
A free land option could be made available for those who don’t already own a home, targeting the 2.7 million renters, and some of the recent buyers.
Let note something Henry George wrote for some inspiration here. When discussing the situation of outside options and their effects on wages he said:
“Suppose there should arise from the English Channel or the German Ocean a No-man’s land on which common labor to an unlimited amount should be able to make ten shillings a day and which should remain unappropriated and of free access, like the commons which once comprised so large a part of English soil. What would be the effect upon wages in England?”
He would at once tell you that common wages throughout England must soon increase to ten shillings a day.”
What George is imagining here is a new option where workers get free land access, and because of this, their wage increases ‘remain unappropriated’. If everyone has the option to get free land, can there be unaffordable land and therefore housing?
The lesson is that we need, to some degree, to break the land monopoly with alternative land access options. What George had in mind was socialising the land and renting it rather than having perpetual obligation-free ownership. This way, the monopoly benefits of land ownership were shared widely through this common ownership.
But there are other ways to create access to housing that avoids the monopoly land market. My best proposal is this — a traffic light system of taking turns using land for housing, for free. Give us our earth rights. Our birthrights.
Henry George lived at a time when governments were just a few percent of the economy, so he might have regarded the supply of free land by a public entity as impossible, hence he instead imagined what would happen with the discovery of a new bountiful island that gave workers free access to land.
In the 21st century economies of the modern world, we certainly can provide free housing. After all, the government spends more on healthcare than homebuyers spend on loan interest, and renters spend on rent.
When something is really important, we never rely on markets to provide it. We bail out farmers in drought. We provide public education and healthcare. We run the courts, the military and the police. We run the road system.
What would a turn-taking traffic light system of free access to land for housing look like?
The Unspoken Housing Alternatives report
(
Report link)
Luckily, we have an experiment running since 2008 now in Canberra where over 1,000 residents are currently saving more than $9 million per year in housing costs and will be 37% better off than renting the same home over a decade.
Here residents who do not already own property are given access to land in new subdivisions, not quite for free, but for a discounted access price of 2% of the market value each year, with a cap on the assessed market value growth of the local wage index.
For a $275,000 block of land, the average in the scheme, rather than pay to borrow the money needed to purchase at 5%, you simply pay to rent the land at 2%, a $9,000 per year saving. This is massive! Remember that what we are doing right now is hoping that we can build enough homes over the decade to reduce rents and prices by 10%, or about $2,000. It has been proven that we can do nearly five times better tomorrow if we want.
Over 2,000 people have taken up the scheme since it began, and over half of them have since left because they saved so much money they decided to buy their land or another house in the private market.
If a scheme of this scale had been implemented nationally it would have created about 125,000 homes, housing over 325,000 people, with half going on to buy their own home in the private markets. Those remaining would be saving over half a billion in housing costs per year.
But this amazingly successful land rent scheme only gives residents access to land for the equivalent of a little under half price. That 2% could just as easily be 1%, or 0%. If we worried about making land free, we could have a rising block system – if the market value of the land is less than $200,000, you pay 0%. But you pay 3% for the value above that.
If we adopt these systems nationally or in other states this rate is important to get right early, because changing it will arouse concerns about fairness (the report covers some of the sensitivities to changes made in the ACT scheme).
The amazing thing is that the budgetary effect of the ACT scheme is to break even. This is actually a free scheme to give people cheap housing! This is because the discount on costs to residents are offset by capital gains being held by the government. As long as the capital gains on average make up the difference between the land rent percentage and the government cost of borrowing, they have no net financial cost. If such a scheme was to be made zero percent, the cost would only be the difference between the capital growth rate and the borrowing rate, or around 2% of the land price.
You might be thinking that this is a problem— the residents miss out on capital gains while the government gets them. But of course, renters never get capital gains anyway! On net this scheme is an economic trade-off —give residents low-cost homeownership as long as they give up their capital gains. It’s another housing option, more secure and cheaper than renting, and this exactly what we need if we care about making housing cheaper without the multi-trillion-dollar political risks that come with depressing market prices.
But
there is more. Not only do we have the ACT example, but globally there are examples of community land trusts (CLT) which accomplish the same trade-off of cheaper homeownership without the financial speculation. I will comment only briefly about such schemes, but I see no reason why we cannot have multiple alternative low-cost homeownership options available.
A CLT takes subsidised land and passes these lower costs onto residents through regulated pricing, again breaking the monopoly market. For example, rather than rezone a property developer, giving them new property rights for free rather than selling them, we could have planning rules that allow more density only for CLTs which must offer land to residents at prices that are at least 50% of the prevailing market price, just like the LRS. The economic mechanism here is a bit subtler, but in essence, the price control of resales ensure that capital gains can never be realised. One scheme that started with a subsidy from Bernie Sanders in Burlington, Vermont, has regulated prices around 40% below the nearby prevailing market. The modelling I did for this report showed that similar schemes based on Australia conditions could reduce housing costs by 50% compared to renting and be much more secure.
Like the land rent scheme, CLTs are a vehicle to make land free as well, if that’s what we want.
How much does free land cost?
Free homes in the form of paying rent and interest would cost over $100 billion. But free land access with social ownership is much cheaper.
A more than 50% discount on land has been achieved in the ACT at no economic cost to the government. It is break-even when residents pay 2% of the land value, so the net annual cost to the government for offering free land would be to forgo this 2% of the market value as revenue.
That’s our benchmark. 2% of the market value and we can give everyone who doesn’t own property free land for life.
Not all of the nearly 2.7 million renting households would enter the scheme — it would apply to Australian citizens, those who do not own any residential property — excluding rent-vestors unless they first sell — and would probably be unsuitable for very mobile households.
Let’s say our target is 2 million homes. At an average market value of land of around $300,000, a 2% subsidy to make land free amounts to just $12 billion per year! The is roughly the value we give away for free through rezoning decisions that could instead be sold. It is about a fifth of the current housing subsidies we have that make housing more expensive.
Free land is dirt-cheap housing policy.
Getting land into the scheme
If we are to start a parallel land access system, we need to convert land into the scheme without having to outbid existing buyers in private land markets. The ACT has an advantage in that it already has a government entity supplying all new residential land. Qualifying buyers are simply provided the option purchase using the land rent scheme rather than pay up-front. The scheme is not tied to specific lots, but to specific buyers.
In other states without these agencies, it can be a bit trickier, though there are still some government developers around, like Landcom in NSW.
To get the 2 million homes into the scheme over 10 years is just 200,000 per year. For context, we built 170,000 new homes per year over the past ten years.
What are the ways to get land into the scheme on a national scale without sending new families to the housing auctions to outbid each other?
To get the first quarter of a million homes we can have a new land agency compulsorily acquire undeveloped subdivisions from private developers. We know from Prosper’s research in their Englobo reports that there are easily a quarter of a million plots of land ready to be developed. Like the public developer in the ACT, the agency can develop the infrastructure then supply the land to free for residents to build their homes.
We could get nearly another quarter of a million in dense areas using the land agency to acquire whole new buildings from developers who might be struggling to get presales, or simply acquire sites or use publicly-owned land to build apartment buildings with the right mix of dwellings for the scheme.
Homeowners could convert their own land into the scheme, being paid the assessed land value, and forgoing future capital gains, as long as there are controls that restrict the purchases being made prior to the date of the start of the scheme so as to not attract a flood of new buyers who overpay with the intention to convert to free land scheme if prices start falling.
Negotiated agreements between landlords and tenants could covert land into the scheme if landlords want to cash-out without the sale costs, subject to valuations and approval from the agency.
There are many more ways, like acquiring deceased estates, negotiating to acquire homes from mortgagees in possession, and more.
Political elements
Though it may decrease market prices by providing a new option for renters and homebuyers, I think this type of approach is politically more palatable because the objective is not to remove $1.7 trillion in asset values from the powerful voter base of homeowners and investors. Like having a public health care system doesn’t directly target the price of private health insurance, the existence of this option certainly does help reduce the price in the private market.
Such schemes can be marketed like as having no retrospective changes. You keep your land value under the current private system, but we will simply build a new system in parallel.
The free land scheme also can’t be challenged by those who think we need to build more housing to make it cheaper. What could be better than building more housing and giving people access to it for free for their whole lives?!
Where to now?
Let me conclude then with how I think we should talk about housing affordability. Our benchmark should be free land for everyone. We never talk about affordability for homeowners because they have free land. They have already escaped the monopoly land market.
- First, we should aim high— not this meagre 25% of household incomes on rental being classed as affordable.
- We should call out policy fraud where we see it — counterproductive policies, and others that do not get anywhere near making land free. We should simply not give them let them control the debate by agreeing with them when they say how difficult or expensive it would be to make housing affordable. It’s not a wicked problem. Stuff that.
- We should especially ignore anyone whose analysis ignores the land monopoly and talks about market solutions. That is, most of The Experts.
- We should show that many of the most effective systems we have are non-market, in public health care, on our roads, our education system, our military, our courts and more.
- We should emphasise how cheap it is to make land, and even possibly houses, free for all — it would cost far less than the ineffective housing policies we already have that making housing more expensive! It would cost less than we pay to money-managers each year to extort our super, and less than the banks make in profits.
- We should never justify policies to make housing cheaper by their government budgetary impact. This is admitting defeat before you even start. None of the current ineffective policies were sold that way. Expensive policy is a good thing because politicians get to say they are investing $25 billion on housing! Think about the jobs!
The political problem is what Henry George identified when he remarked:
“Everywhere, in all times, among all peoples, the possession of land is the base of aristocracy, the foundation of fortunes, the source of power.”
Thank you for listening. I look forward to your questions.
