- Europe’s malfunctioning tax system
- The riches in the rent of land
- Plus, a very personal and special request from Callum…
Today’s Profit Watch casts an eye over the global real estate market. The sorry tale of it all continues.
Did you see the news?
Bloomberg reports that Amsterdam’s property market is so hot that the local politicians are proposing banning newly built homes from being rented.
This to try and stop the investor demand pouring into housing.
It’s been a fun game for them so far. Amsterdam house prices rose 8% over the year to a record and rents are up 40% over the last 12.
A little further south and Spanish bureaucrats are up to similar tricks.
An emergency decree has gone out to limit rent increases to the inflation rate for new apartment contracts. Rents jumped 60% in Madrid and Barcelona between 2014–2017.
That’s not all…
Berlin rents are up over 100% in the last five years. The city is now considering a five-year rent freeze completely.
Proposals like this show these countries, like Australia, have a dysfunctional tax system.
This is important…
Of course none of these measures will work to create more affordable housing.
Either landlords will start accepting ‘black’ market payments to cover the real rent rate (as opposed to the ‘legal’ rate), or they’ll cut down on services, maintenance and new building.
The governments will eventually be forced to go into debt (or increase taxes) to cover the housing shortfall or subsidise low income earners.
Both slowly choke the economy.
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There’s no doubt that the European Central Bank is fuelling this as well. Interest rates have not moved for the entire tenure of Mario Draghi.
Is there any positive part? Yes — for us here in Australia trying to judge our systematic risk in the market.
Here’s one good thing we can take from this mess: the fact that rents are increasing in the first place.
That suggests a vibrant economy, at least. A major property led crash like we saw in 2008 is highly unlikely while this is happening.
It also means the collateral value that underpins the bank loans against these properties is high too.
But rising rents and house prices do of course crimp the spending power of European consumers.
If the useless bureaucrats that run the place would like to revive their economy, they could structure the tax system so as it rewards productive behaviour instead of property speculation.
That means capturing the rising land values in the first place before they distort the real economy.
Here’s an example from our own backyard…
10 times the value in a stroke of a pen
There’s a property developer in today’s Australia’s Financial Review who has recently acquired a horse stud on the edge of Melbourne. He paid $3.5 million for the 100 acres.
It was acquired through his property development business. So it seems reasonable for us to assume plans are for using it for housing at some point.
Currently this land is zoned for farming, but a likely chance is for it — much better than a horse punt, I’m sure — to become zoned for residential housing some time in the future.
Then it will be worth $30 million.
That’s without lifting a finger to put young buyers in a three-bedder or grandma in a self-contained unit.
Why do we care? Good luck to him.
Well, each society can choose to raise revenue in how it works.
One idea is to tax land values — socially generated and by nature a ‘surplus’ value — that can be used to lower housing costs and fund infrastructure in the local area, or whatever the community so desires.
The classical economists called this value ‘economic rent’ and argued for the tax burden to be placed here.
Hey, you don’t have to believe me. When former PM Malcolm Turnbull came in to power, he proposed the same policy. He called it ‘value capture’.
Oops! someone got in his ear because it never went anywhere.
The other way is to privatise these rents, as we do mostly here in Australia, and tax income on labour and profits.
That’s why you get worry over low wage growth — sound familiar? — which is just another way of saying a high cost of living.
Every Aussie has their natural rights violated
And no wonder when Joe and Jane Public have 30–40% of their income taken by the politicians before they’ve even fondled it.
Then there’s the 10% tax on anything you buy. The banks or landlords take around 20–30% of the rest. Even after all this, the state governments run deficits to fund their revenue shortfalls.
The public are so used to it they can’t remember or see their natural rights to the fruits of their labour are being trampled on every step of the way.
Are any of us surprised that the general public starts to feel a little squeezed? And wonder why they find themselves in what they’re told is something like a ‘per capita’ recession.
Even worse, these high property prices require huge debts to acquire, and heighten the systematic risk within the banking system.
Buying land and holding it doesn’t produce anymore wealth in the world than lying on the beach or whistling Dixie. That means it generates no income to pay off the debt so acquired.
Then the politicians start coming in with their useless man made laws — like a minimum wage, freezing rents, subsidised housing, shared equity schemes — to address the problems they created in the first place.
All of these are required only because the powers that be ignore the natural law of the economic world. It’s this: the more wealth captured in economic rents, the less left over for wages and profits.
Natural laws can’t be changed or negotiated with. You jump out a window, you’ll do down. It’s the natural law of gravity.
Alas, Europeans will find this out the hard way.
PS: I have a very personal request of you today. I’m going to a funeral tomorrow. Another cancer victim. At least he was over 60.
I have another friend battling the disease but still with us. We’re doing everything we can to raise money for his treatment.
This story is astonishingly hard. My friend is under 40. If you can spare anything, please go to this page to donate whatever you can.