Australia's most expensive house

The previous record for Australia's most expensive single dwelling (don't think it falls into the house category, nor even the mansion category) was a measly $45million.  Just this week that record has been smashed by a respectable figure of $57.5million for a Perth waterfront mega/super/ulltra-mansion.


(What was he askin'? $70million - tell him he's dreaming!)


It shouldn't be a surprise that the sale was from one mining baron to another.  In Brisbane mining companies have a reputation for sending lots of cash in a hurry.


What shocked me was the claim from the real estate agent the he had sold Australia's most expensive house back in 1980 - for just $2,150,000.


Times have indeed changed.

Tax me, please

People hate taxes. But they are necessary, and some are better than others.

Henry George’s arguments in his 1879 book Progress and Poverty are that all benefits from progress accumulate to land owners. He proposed a single tax on land because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses.

I agree. A land tax is by far the least bad tax. Milton Friedman even agreed – “In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

There are many reasons to prefer land taxes.

Is road congestion the best allocation mechanism?

Congestion is a darling topic of politics and the media, and a topic of many conversations around the barbeque. But what is it? Is it a bad thing? Do we want more of it or less of it?

I define congestion as a condition of a network (of roads or other conduits) whereby the existence of extra users slows the rate of progress of all other vehicles. Given this definition, there can be a little congestion, where progress of road users is slowed a little, or plenty of congestion, where progress is greatly slowed.

Real Estate Review

My colleague is looking for a real estate agent to manage her house after downsizing to an apartment, choosing to keep the house as an investment.

She is facing a conundrum I have faced before. How does one go about comparing the performance of property managers before committing to a management contract?

Can the market for property management services be competitive without reasonable access to information?

Are Chinese buyers affecting house prices?

Respected economist Alan Wood notes here why he believes small increases in foreign investment in the Australian real estate market will not have a tangible impact on home prices.

While it is nice to have a little calm to a situation that is sure to encourage exaggerated media spin, I’m not sure whether Wood’s claim holds - that because Chinese investors are a small percentage of buyers there will be little to no impact on prices. If we make one assumption, that Chinese buyers are willing to pay more than local and other foreign buyers, then his claim completely breaks down.

The following stories might help explain why.

Some empirical support for land economics

There has been a paper recently published by Andrew Leigh, Economics Professor at ANU, which empirically estimates the impact of stamp duties on the housing market. I found out about this paper through Chris Joye’s blog at Business Spectator, although I regularly read the Core Economics blog, where it was also linked with some added thoughts from Andrew. I mention this only because I have now been involved with discussions about the paper at these sites.

I need to quickly summarise Leigh’s findings before moving on to the important theoretical and political implications.

His main finding is that if stamp duties are raised, house prices will fall by more than in the increase in the tax. Did you get that? If you increase stamp duty, the total price of housing (price plus stamp duty) will fall. Sellers suffer, buyers benefit. It’s a classic land tax - there is no deadweight loss, as shown in the figure below.




How can such a thing occur? For any other product, assuming a competitive market, if you add costs to production, prices will have to go up (even if quantity sold goes down), or margins will go down (temporarily at least).

Land, however, has some characteristics that make it quite different from other goods

1. There is a fixed supply (vertical supply curve), and
2. It is costless to produce (the producer surplus starts at a price of zero)

Some would argue that land available to be developed is not in fixed supply, and that town planning regulations can change that supply. I agree. But these are regulations, they are not market players, and that does not make the supply of land price elastic (although I would suggest the supply curve for serviced residential lots above the intersection with demand is quite elastic as land parcels are brought to market). I think both sides would agree that from a theoretical standpoint, the supply curve is vertical below the intersection with the demand curve.

It is the second point that is far more important to understanding the land market. Land itself is costless to produce. That means that the level of demand determines the price of land at any point in time. Not supply, demand. So when you increase a tax on land the total land and tax price stays constant, but the underlying value of the land declines (as shown by the reduced producer surplus in the figure above).

I have been quite baffled by the success of Christopher Joye’s argument that the supply of housing is a major factor in determining prices. He maintains two contradictory positions. The first is that we have a land price boom, not a house price boom. The second is that we should elastify the supply of housing to avoid further unnecessary price increases. Hang on chap. We don’t have a problem supplying housing. Our problem is that we all decided to pay ridiculously high prices for land.

There are two more characteristics to the land market that make analysis difficult. There is competitive behaviour in the market for buying land, both development sites and serviced land parcels, but not a competitive market for the sale of land.

Once a serviced land parcel is developed, there is no price competitiveness exhibited when selling to the final consumer market. The problem with land is that if prices fall, they can gather momentum as people sell to avoid further falls. Also, if developers seek to undercut the market price, it reduces the value of all their other land holdings. There is no incentive to release below market prices.

I also believe Leigh’s findings shed some light on my argument that changes to town planning rules, including increases in height limits and allowable building area, does nothing to affect home prices. Any site with increased development potential will fetch a higher price, and the resulting dwellings will be released at the market price.

While Leigh’s paper is just one simple analysis of stamp duty rates and house prices, the theoretically sound finding should put to rest some of the illogical arguments of the supply side warriors, and the property development lobby in general.

In Japan you can glimpse the future

When I first visited Japan in 2004 I saw the future - trains, gadgets, vending machines - but most importantly, I saw some amazing toilets. Even now, when I have a conversation with people returning from Japan they always comment about toilets. If you’ve visited Japan you would know why – they range from traditional squatters, to high tech digital robots. The most best of them all will greet you, automatically lift the lid, warm your seat, wash and dry your backside, play your favourite music, and flush automatically.

Back in 2004 I saw one particular style that was simple and profoundly efficient, where the cistern was filled via a basin so that you could wash your hands with clean water, and then use that same water to flush the toilet.

At the time I saw a market for such a design in Australia. I visited Japanese kitchen and bathroom stores to see the price range for these types of toilets, and investigated possible shipping costs. Alas, I became distracted and never followed through with this idea.

Now it seems that popular toilet maker Caroma is making these very toilets in Australia and the US. Only 25 years after their invention in Japan.

For anyone who likes the idea but is not interested in buying a new toilet, you can get a step by step guide to retrofitting your own throne to have this functionality here.

As an economist I wonder why it took the market so long to adopt this simple innovation in our water starved nation.  Was everyone simply as bad as I am at following through their ideas?  Was there a stigma in Australia about washing your hands with 'toilet water'?  Now that it is available here in Australia, will it even catch on?

A Redwater diverter for every new home?

Markets and opportunity. Peas and carrots.
Hand in hand go such things, and one would expect that in our new water conscious world, any device that can reduce water use in the home will go hand in hand with the phrase 'in demand'.

Here’s one device that has the benefit of being automatic and energy free.

It diverts the cold water sitting in the pipe between the hot water system and the hot tap to a storage (toilet, rain tank etc), then diverts the water back to the tap as it warms.
For all those whingers who need hot showers in Queensland it is probably a good water saving idea (yes, that's me).

I have, however, seen a nifty alternative. In Budapest I remember staying in an apartment that had a gas water heater bolted to the bathroom wall just one metre from the shower. Not only was the water in the pipe already warm from being inside, but there was hardly any water in the one metre of pipe anyway.

I’m not sure you can actually put gas water heaters indoors in Queensland, but one similar solution would be to have your water heater outside the shower wall.

Of course, if all that is a bit much and you still want to save water, you can just buy a diverter valve.

Population caps: Social catastrophe or sound planning?

My favourite lobby group, the Property Council of Australia (PCA), have attacked South East Queensland Mayors for starting debate about limiting population growth in the region through town planning restrictions.  The PCA's argument is that restricting development in a region has disastrous social and economic impacts. They wield the crossed supply and demand swords to argue that house prices will sky-rocket in areas with restrictive planning regimes.

Not surprisingly, their arguments are flawed.  Here's why:

Don't let bridge designers near our buses!

It has come to my attention that buses in Brisbane are, by international standards, slow.  There’s really no other way to put it.  And I think I have found a way to improve the speed of bus services at the smallest of costs.

Remove bus stops.

My economic philosophy of town planning

At the most broad level, the rationale for regulating land use is to minimise negative externalities to neighbouring owners of immobile property assets. This is why even ancient civilisations had strict rules attached to land.

Modern planning continues this tradition. There are few, if any, countries in the world that fail to regulate land uses (maybe the Vatican?) due to town planning’s success in addressing this fundamental externality problem. By regulating land use you can exclude development that will produce impacts such as noise, pollution, traffic, over-shadowing, and other externalities on other land owners. Protecting land rights, and subsequently land values, is essential to a functioning market economy.

This most basic principle is probably forgotten by many 21st century planners. It is one of my reasons for objecting to the proposed South Brisbane / West End plan. Allowing 30 storey developments creates severe externalities in terms of traffic, overshadowing, and use of public space such as parks. Another reason is based on the following second principle.

Town planning and organic growth – can we reconcile the two?

After a rather challenging discussion with a close friend last week about the necessity of town planning and the degree to which planning constraints impact property markets, I have decided to embark on what might become a detailed rant on the matter. This may the first of many posts on the topic.

The trigger for this planning discussion was a conversation about the proposed increase in height restrictions on former industrial land in the South Brisbane / West End area of Brisbane (see map below). Currently this area is a mix of light and heavy industrial uses, office and warehouse space, and new apartment developments. The area is earmarked as a new growth precinct, in the same vein as Newstead's transition from industrial to a mix of medium density urban uses.

The reason for the ensuing debate is that I oppose the 30 storey height restrictions being proposed in the neighbourhood plan, even though I support densification as a planning strategy. Instead, what I propose is a plan to allow for flexible organic growth.

Lobbyists: If they are always wrong, why are they so influential?

The Property Council of Australia (PCA) is one of those lobby groups with a blatant disregard of the facts and a history of political influence – the kind we love to hate.

Just yesterday the PCA made a submission to the Queensland government outlining how planning laws that promote densification are likely to increase greenhouse gas emissions compared to planning for more urban sprawl. This is not a joke.

They cite a 2007 Australian Conservation Foundation study to give their position merit, but what the study actually says is that environmental benefits from increased density are wiped away by the wealth and consumption effect. Essentially, the data shows living in smaller dwellings closer to conveniences reduces households’ greenhouse gas emissions, but generally, these households are wealthier, and thus have higher greenhouse gas emissions overall. No surprises really.

Unbelievable

Only this week I wrote about cyclist resentment in Australia, with a detailed look into the arguments of the emotional cyclist v motorist debate that happens down under (but not in continental Europe I might add).

In today's local rag there is a snippet of news in the business section that epitomises the anti-cycling attitude of the typical Australian. For the life of me I can't find it online, so I will reproduce it here verbatim. 

You have to imagine this accompanied by a cartoon of a smiling Neil Summerson running over a cyclist, with bike parts, helmet and limbs flying out from under a precious collectable antique Mercedes.  It's true I swear - look on p40 of The Curious Snail. 

In the fast lane
Bank of Queensland chairman Neil Summerosn had a traumatic encounter of the cycling variety prior to fronting the media and analysts at the bank's record results presentation yesterday morning.
Summerson, a keen car buff with several automobiles in his garage, suffered the indignity of having a cyclist pass his car as he headed into the city for the press conference, estimating the speed of the cyclist at well over 40km/h.
The BoQ chairman pulled up at a stop sign only to see the cyclist whiz through the sign, prompting Summerson to call out, "Don't you obey road rules?" The two-finger salute followed and Summerson then pulled up alongside the bike rider, smiled, and put his foot full down on the accelerator of his Mercedes E500 V8, leaving our rider behind in a cloud of dust. Sticking to the speed limit of course.

My questions:
1. Why is having a cyclist pass you a 'traumatic event'?
2. Why is Summerson's hooning behaviour promoted as an acceptable response for motorists unhappy with other road users?
3. Is this how Summerson behaves every time he witnesses a road rule being breached?

Honestly, I couldn't believe what I was reading.

Coming up next - medicated air!

I couldn't think of a snappier title, but I wonder when we, as a society, decided that everything needs medicating.

Last year I wrote about Queensland's move to fluoridate the water supply, and how there are probably better drugs to put in water that fluoride.

It appears this is just the beginning.  It is now mandatory to add folic acid to bread flour in Australia.  You probably haven't even heard of this before.  Niether had I until I read this article, which argues why this heavy handed regulation is stepping way over the mark. 

100th post: Bicycle registration?

I wanted to write a beautiful piece reflecting on two years of blogging for this event – my 100th blog post. But instead, I’ll get down to some nitty gritty analysis of contemporary issues with an economic and environmental twist.

Today’s topic is cycling.

After a charity ride from Brisbane to the Gold Coast last weekend, the local rag has ignited the dry tinder of cyclist resentment present in the Australian motoring psyche (remember the Rex Hunt incident?). I want to deconstruct the emotional Cyclist V Motorist debate to see which positions hold merit, and what type of government intervention could provide benefits for all involved.

Whether the weather increases volatility of markets

I recently read, and thoroughly enjoyed, the book Rigged. In one scene a young trader is asked what factor contributes most to changes in the price of oil - to which he responds, the weather. For example, a cold winter in North America or Europe signals an increased demand for oil and sends the price up. 

So my question is this. Given how weather dependent our agricultural industry, our energy industry, and other essential primaries industries can be, how much less volatile would financial markets be if we had predictable or constant weather?

UPDATE - Turning points

Recently I posted about the spike in population growth experienced in Australia over 2008, and how we cannot simply extrapolate the trend, or we will miss important turning points. I predicted that the rate of population growth will fall from this level over the next few years as a result of

1) reduced migration, and
2) a decline in birth rates due to the ‘bringing forward’ of births encouraged by the baby bonus.

I didn’t have to wait long for some supporting evidence. The ABS today released overseas arrivals and departures data showing a significant increase in departures, and decline in arrivals, since April 2009.  It looks like migration is on its way back down.  When the June 2009 release of the population statistics is published on 3rd December we might just see the turning point in population growth I forecast back in September. 

Rebound effect in action

The image below is from an email sent by the Queensland Government Climate Smart program.  What an odd prize for a program designed to reduce energy consumption!

The value of food security?

Food security, energy security, job security - all political terms that conjure up emotion, deliver electoral support, all the while remaining devoid of meaning.

I have been asked impossible questions in my job. But one comment recently sticks in my mind. It goes:

..there must be some data that they could have used to address the “value” of having future food security.

What value might that be? Do you want a dollar figure that represents the present value of all future value streams from having food security? And do you imply that food security means that Australia remains a net exporter of food?

Wikipedia provides a fairly detailed, but useless, entry on food security. It does not mention national self-sufficiency at all, but merely one’s access to nutrition, and the link with poverty. No surprises there.

I’m all for national pride, but arbitrarily deciding that a country must be self-sufficient in one particular good is a poor philosophical position. If we replaced food security with toilet paper security, or car security, or hat security, we would immediately reveal the absurdity of the argument.