The problem of a disproportionate rise in land prices
The fact that house prices are rising faster than incomes and have tended to do so since the 1980s must sooner or later be addressed even by government.
It is of course but an extrapolation from the law of rent stated in Social Problems (p.217) by the American economist and social philosopher Henry George. As population grows the power of association (reflected in land values) tends to overshadow what the individual can produce (wages).
Of course, the results of this in the short-run will be that housing deposits must become relatively smaller and mortgages relatively longer and more packed with interest. But there are exceptions. Some already hold large amounts of economic rent. Their incomes will keep pace with rising land values. They will continue to buy and become richer.
The problem of the disproportionate rise of land values to incomes has a very interesting side to it for the middle class, those who may own a couple of investment properties but who rely on a wage. They will need ‘negative gearing’ more than ever. For the money they actually lose in the short-term on property investment will become larger and larger.
That is, what they gather in rents will increasingly fail to pay the mortgage formed out of land price and bank interest.
It is interesting too that the middle class turned to the Labor Government in the 1980s for ‘negative gearing’ – exactly at the time when ‘your house is earning more than you do’ began to be true. (By the way, ‘negative gearing’ is proof that rents cannot be raised at the whim of landlords!)
Thus, while property investors will even more desperately hold onto ‘negative gearing’ the rapidly growing and irresolvable deficit must make government less willing to provide the middle class with the billions of dollars of subsidies they now get.
There is no tendency more potentially socially destructive than the rise of land values relative to rises in income.
Genuine homebuyers (without ‘negative gearing’) will be further marginalised in the property market. It is all an example of the beautiful working of natural law in the presence of the institution of private property.
While ever there is this institution ‘all the horses and all the king’s men’ will not be able to put back the pieces. . That is, public confidence in the promises and schemes of government will erode further. This will give society just one more jolt towards that anarchy that we call ‘the struggle for existence’
Two things will exacerbate the situation. The first is the casualisation of employment. That further diminishes the power of ordinary people to pay rent or to even get a mortgage let alone successfully pay it off. The second is the thoroughly obnoxious and destructive policy called ‘user-pays principle’.
This increasingly applied to our basic common land and common services to repair the deficit will act in their own way to further reduce the purchasing power of wages and endanger small business.
The prospect of such developments is as Henry George forecast: social inequality will increase to the stage where those whose livelihood comes solely from work will finally become absolutely poorer. Their purchasing power will decline. It is already happening.
Richard Giles is attached to the Association for Good Government, which is an ERA associate member.