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Economics References Committee
09/09/2014
Affordable housing

COLLYER, Mr David, Policy Director, Prosper Australia

SOOS, Mr Philip, Researcher, Prosper Australia

Committee met at 09:03

ACTING CHAIR ( Senator McLucas ): Good morning. I declare open this hearing of the Senate Economics References Committee's inquiry into affordable housing. The Senate referred this inquiry to the committee on 12 December 2013 for report by 26 June, which was then extended to 27 November 2014. The committee has received 225 submissions, which are available on the committee's website. I take this opportunity to thank all of those who made submissions to the inquiry and the witnesses who have taken time to appear before the committee today.

These are public proceedings, although the committee may determine or agree to a request to have evidence heard in camera. I ask photographers and camera operators to follow the instructions of the committee secretariat and ensure that senators' and witnesses' laptops and personal papers are not filmed. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as contempt. It is also contempt to give false or misleading evidence to a committee.

If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, the witness may request that the answer be given in camera. Such a request may of course also be made at any other time.

I welcome Mr David Collyer and Mr Philip Soos from Prosper Australia. Thank you for appearing before the committee today. Do either of you wish to make a brief opening statement?

Mr Collyer : Thank you very much. We would like to. First of all I would like to point out that we have given you a new chart pack. Our submission is now 7½ months old, so there are fresh charts for you to look at with another six months of data. We intend to go through them.

I will give you a bit of an introduction about who Prosper is. Prosper Australia is a non-government organisation. We are a team of researchers, economists, econometricians, land valuers and mathematicians. Our key focus is on tax reform and seeking to migrate Australia onto better tax bases. Philip Soos is a researcher with the land values research group and an associate of Prosper. The charts you see before you were created by him.

I will speak initially about a very key principle of the Australian compact that we have with each other which is about land. A key principle of our settler society—like Canada, New Zealand, USA and even Britain, which is the mother of these countries—is that land be available to all. The very poorest will struggle with that concept because of the price of land but we should accept as an underlying democratic principle that land be accessible to all. In our opinion we have failed in this regard.

There are two elements to property prices: the cost of construction and the cost of land. If you look at the last chart, you will see that construction costs have barely budged in the last 30 or 40 years—in fact, forever—and the key determinant of housing affordability is land prices. We believe there are four causes to the bubble, all of them are interrelated and all of them require resolution but not necessarily by us or by you. The first of those is debt. Our private debt, notably in mortgages, is staggering. The debt burden at about 150 per cent of GDP is enormous. I do not know how people can bear it. The appetite for speculation and the desire to look in the rear-vision mirror and project that onto the future and say, 'People have made good gains in the past, therefore, if I buy now I will also enjoy similar opportunity,' will be ruined in our opinion.

Planning constraints are an impediment, although the scale of the impediment they are is highly arguable. The fact that they exist means that they are in some ways an impediment. It may be simply that government is directing the growth of cities in certain directions and the economic costs might be quite low. It is very difficult to find an exact picture of how much influence planning constraints have on land prices. Finally and most importantly is our poor tax bases—that is, we direct human attention onto land speculation versus investing in the share market or other instruments. We actively direct attention to land and land ownership by the preferential tax advantages accruing to land.

We make in our submission a mere two recommendations. We could have made 30 or 70, but we chose to limit ourselves to two. The second one is a generic one calling for macroprudential regulation to restrain our current debt appetite. We believe that this will end very, very badly from Australia. The revert to mean is a revert to the long-term trend line of land prices. There is a great distance between current land prices and the long-term mean. Government seems incapable of influencing land prices or totally unwilling to be named as the person who burst bubble. Nobody wants to be responsible for being the catalyst for change. In our opinion, the market will provide a resolution. 'Mr Market' will intervene and it will be very untidy and a lot of people will lose a great deal of money and our country will suffer very, very badly. Simply a return to mean, a revert to mean, will cause tremendous economic damage. We call upon the Australian government to impose macroprudential regulations. It depends upon the detail. The detail in this is critical. The quality of those macroprudential regulations is everything. It is all very well to announce them and say that you have got some, but they need to be effective as well.

The other key recommendation we make and the one that I believe really matters is for the federal government to impose a federal land tax, fully rebatable to the states, because the states are not using their taxation bases correctly. We have a federal system imposed by the Constitution, and I do not see any prospect of that being changed. There are people who say, 'I want to centralise government' or 'I want to decentralise government.' We are pretty well fixed in terms of the division between state and federal government by the Constitution. I do not see it as a bad thing. Some do; I don't. But I would like to see our federal system work a lot better. At the moment there are very, very large sums of money passed from the federal government to the state governments—and the state governments do not have to use their tax bases correctly, so they do not. Nobody is obliging them to. If we had a federal land tax totally rebatable to the states for any taxation they may have on the same parcel of land, we, the people, could oblige the states to use their taxing powers correctly. In my opinion it would be very valuable thing.

All three levels of government in Australia spend about 24 per cent of GDP. However, they cost us about 30 per cent of GDP. We are wasting between five and six per cent of GDP each and every year because of our poor tax bases. I link this to our runaway land prices, because we refuse to tax residential land prices in particular. People say, 'I don't like paying taxes on my home.' People are afraid of land taxation. They fear it because they can see it. Governments have preferred to use indirect taxation, such as the GST or payroll tax. Employees think that employers pay payroll tax, whereas in fact in practice the burden of payroll tax falls upon an employee. It is considered by employers as being part of wage costs. Therefore, the burden falls upon the employee, but they think the employer pays it. So everybody is happy. The employer pays a cheque and they know it is coming out of employees' wages. Similarly, stamp duty is a very grave impost. People think the incidence falls upon the buyer. The buyer signs a cheque and they think the incidence falls upon them, whereas in fact it falls upon the vendor. So everybody is happy—everybody thinks somebody else is paying the tax. It is about time government straightened themselves out and said that we need to use not necessarily invisible taxes but the best tax bases we can find. The most honest tax is the tax with the least cost to the community. We are burning between five and six per cent of GDP each and every year because of our poor tax bases. It is a waste of money. If we want our country to flourish, here is a very obvious and painless way of advancing Australia.

ACTING CHAIR: Mr Soos, do you want to make some comments as well?

Mr Soos : I do. The primary cause of unaffordability Australia is due to one thing and one thing only, and that is our housing bubble. Most commentators—perhaps 99 per cent of them—are deadset against the idea that our housing bubble exists. This is mostly born out of a failure to define what a bubble is.

Many commentators, economists, analysts and researchers have said that Australia bears no real similarity to other countries that have experienced housing cycles in recent years—the United States, Latvia, Ireland, Spain and so on. Even the luminaries of the economics profession, such as Robert Shiller and Joseph Stiglitz do not accurately define what a bubble is in the housing market. It is typically only vaguely defined as 'irrational exuberance' or 'chasing capital gains'.

So, although many analysts or economists cannot define what a bubble is, this does not prevent them from denying that a bubble exists, which is a rather ludicrous perspective. Thankfully, a past economist, Hyman Minsky, a heterodox economist, did define well what a bubble is. He defined it as the point where the cash flows of an asset which is purchased with debt can no longer cover the interest, the principal and the expenses of the asset. He mostly applied that to financial securities. It can just as easily be applied to real estate, whether commercial or residential.

There are three elements to this. One, you have to have strong rises in real prices. Two, the debt used to purchase such assets has to rise as well. Three, there have to be cash-flow losses—that is, the cash flows can no longer cover the interest, principal and expenses.

I refer you to the graph on page 1. Using the work of the ABS and a housing economist, I have developed a long-term index from 1880 through to 2014. If a picture tells a thousand words, this is it. We can see that from 1996 onwards there has been a massive boom in real housing prices across Australia, particularly in this city, where prices have tripled over the last 15 years. This fulfils Hyman Minsky's first criteria of a bubble—a strong rise in real prices.

On the next page the graph shows the household debt relative to the size of the economy or GDP. We can see that before 1990 it was about 20 per cent. Since then it has undergone an exponential boom, peaking at a massive 95 per cent in 2010—the same year that housing prices also peaked. Now, the vast majority of household debt is mortgage debt; but a fraction is personal debt such as small loans, car loans, credit cards and so on. The vast majority of that boom has been in mortgage debt used to purchase housing. This fulfils Hyman Minsky's second definition, which is a rise in the debt used to purchase assets.

Now I refer you to page 3. This graph shows, year on year, the net rental income—that is, the rental income after the deduction of expenses and interest. The losses would be even greater if principal were included, but the ATO does not keep records of this because principal is not a legal deduction.

We can see here that from 2001 onwards there has been a steep fall in the rental income of properties across Australia. That is because, even though expenses have remained at about 50 per cent of rental income over the years, a huge explosion in mortgage debt has caused these large falls in net rental income. This fulfils the third definition of the bubble, which shows that investors have not been able to pay down principal, interest and expenses out of their cash flows.

So, the only way that a property investor can remain in the market to achieve a profit is through capital gain, but this game can only keep on going so far, as long as they are able to service the ever-mounting debts used to purchase housing to begin with. Eventually that hits a peak and then falls.

Having defined the bubble, there are several other metrics which can show the move in housing and land prices across the decades. On page 4 we have the price-to-earnings ratio for residential property. This is similar to the P/E ratio that is commonly used in stock market analysis. In times of a bubble—for instance, the dot-com bubble, which we are all familiar with—P/E ratios steeply increase. We can see from 1996 onwards there has been a marked increase in both the gross and net P/E ratios for housing.

Senator McLUCAS: Can you explain the P/E ratio to me, please.

Mr Soos : It is basically the price of an asset divided by its earnings—so how many dollars of an asset there are per dollar of earnings. Typically the gross P/E ratio has been around 20 over the last few decades, but then it went into a steep increase from 1996 onwards as prices boomed but rents—that is, earnings for property—remained rather flat. It peaked in 2007 and has since declined marginally.

The next page over has the price-to-income ratio for dwellings. This shows how many years of household income it takes to purchase the median dwelling. During the mid-1990s, before the bubble, the ratio was about four. Since then, in the capital cities it peaked at over eight in around 2004, mainly driven by the big boom in Sydney housing prices. This index goes up to only 2011. Given the strong increases in prices over the last year and half, especially in Sydney and Melbourne, , the price-to-income ratio would have likely risen back up to eight or even nine.

The next page, page 6, shows you the total aggregate land prices relative to the size of the economy or GDP. We can certainly see that there has been a strong upwards trend in the index since about the 1970s. That has been driven, in part, by what we saw on page 2—the big increase in household debts which has been used to purchase if not speculate on real estate. As housing prices have gone up, so have the land values. It is not the dwellings that increase in price; they depreciate over time. It is what sits under the dwellings—the land—that continually appreciates. That is the component that is being speculated upon.

Page 7 shows much the same thing. It shows the value of the housing stock relative to GDP. Again, since around 1996 onwards, there has been almost a doubling in the value of the housing stock relative to GDP. That is primarily driven by residential land prices, not the dwellings.

The page over shows the Kavanagh-Putland index, named after two associates at Prosper Australia and the Land Values Research Group. It is basically the total value of sales in the year divided by GDP. During periods of irrational exuberance or speculative fervour, the ratio increases as speculators flip property, increasing the value of total sales while GDP tends to moderately grow. So a sharp increase in the index indicates the presence of a bubble. As you may recall, in the late 1980s there was a substantial commercial and real estate bubble. We certainly saw a spike there. The unique thing about this index is that sales move before prices and so we can see what the trend in the market will be before prices move. This peaked in 2004, during the speculative phase, and has since moderated back to mid-1990s levels.

Next is the housing debt to cash flow ratio. It is simply a measure of leverage: how many dollars in debt per dollar in net earnings from rent. As we can see, during the mid-1990s there was about $5 to $7 of debt per dollar of net earnings. That boomed to about $30 just before the global financial crisis hit in 2008 but has since moderated slightly to about $20. This indicates that Australian households are quite leveraged, given the amount of debt they have taken on.

Mr Collyer : Highly leveraged.

Mr Soos : The last chart Mr Collyer has covered previously. What these charts show, using very long term statistics going back to the late 19th century onwards—

Senator Dastyari interjecting

Mr Collyer : Yes.

Mr Soos : What it shows is that the reason Australia has unaffordable housing and prices are so high is that we have a bubble. Even though 99 per cent of economists, analysts and researchers will reject such an assertion, I believe this is the primary reason why property is unaffordable.

CHAIR: Thank you. I apologise because my flight got delayed by about 20 minutes, so I was not here for the start of your evidence. I will invite questions from senators.

Senator McLUCAS: Thank you very much for your submissions. I think the take-home for me is that the underpinning of your argument is that the cost of the land is the problem, and you make two recommendations. The first recommendation talks about reforming land value tax and suggests that the Commonwealth should take over that task. Why is it not working now?

Mr Collyer : Not to take it over but to bolster. At the moment we have a state land tax. All states have it except for the Northern Territory, which is the only state or territory that does not have a state or territorial land tax. There are so many exemptions to the state land taxes that it is a joke. The revenues from it are very poor. The states favour instead stamp duties as a property taxation so as to leave unimpeded the long-term holders of land. It is a structural problem we have. I recommend a federal land tax to oblige the states—not to enrich the federal government but to oblige the states—to reform their own taxation to remove the manifold exemptions they have on state land tax so that they behave themselves and start earning their own money. At the moment they are foolishly reliant upon the federal government for grants.

Senator EDWARDS: They are addicted to it.

Mr Collyer : They are addicted to it. They have two addictions: one is the federal government taking responsibility for the collection of taxation and the other is stamp duty, which is like heroin. Every time the land prices go up or volumes go up, they get a heroin hit—a jolt in the arm. They have all this money to spend, which is a windfall gain to the state governments, and it is very, very bad for the economy. They trap people in and out of housing and we would like the federal government to help the states to use the federal system. We have misused the federal system for a long, long time so that people cannot actually understand where the revenues are coming from, who is doing the spending and who is responsible. Let's turn that idea on its head and help the states reform themselves. I do not want to make the federal government rich; I want the states to reform themselves, with federal agency.

Senator EDWARDS: So we are more responsible than the other guys?

Mr Collyer : If they will not behave themselves, you can be responsible for them. Is that a useful way of looking at it?

Senator EDWARDS: Thank you. I agree; let's vote on it now!

Senator LUDLAM: Thanks very much for your evidence. Before I get started on the substantive stuff, just take us back to your final slide on page 10, where you have netted out the real house prices from construction costs. I am not quite sure how that works, because pre-1987 that graph would seem to be telling us that in some years land was actually a negative cost. You can see that huge wedge opening up in the late 1980s, but what was prevailing before that?

Mr Soos : I do not understand your question.

Senator LUDLAM: You have shown us on the final slide, on page 10, the real house prices, with this huge wedge opening up where construction costs stay relatively flat and it is the value of land being bid up by investors—I guess that is your submission—

Mr Soos : Yes.

Senator LUDLAM: that causes that spike in real house prices. But before 1987 it looks as though land is not worth anything. Can you see the point that I am making?

Mr Collyer : That is not quite right. This is an index, not an absolute level, so it is indexed at 100 in 1973, I think. Is that where your index starts?

Mr Soos : Yes, it starts at 100, and that is an average between 1972 and 1975.

Mr Collyer : So it is an index of value and the inflation side has not shifted since that time. The construction costs are almost dead flat.

Senator LUDLAM: I am with you: it is an index. What is happening in the late eighties-early nineties? What are the policy changes that start opening up that wedge?

Mr Soos : During the late 1980s there was a massive commercial bubble which also fed into the residential property market, and that substantially increased real housing prices, even though construction costs remained fairly flat. That is why that wedge began to open up. Then, during the early nineties recession, prices fell slightly and then, from about 1996 onwards, we have had that big boom in housing prices, which has opened up a huge wedge between construction costs and prices.

Senator LUDLAM: When are we seeing the introduction of capital gains tax exemptions and negative gearing? I do not know if it is principally your argument that that is one of the levers that has helped open that up as well.

Mr Soos : Both of them definitely contribute to leverage.

Senator LUDLAM: Coming back to your land tax idea, this is an idea that has been washing around for—

Mr Collyer : A hundred and thirty years.

Senator EDWARDS: Since Federation.

Senator LUDLAM: Yes, probably since before Federation. So let's take it on. The archetypal counterargument, I guess, is somebody who is not using land to generate any kind of rent—so the archetype is the pensioner who is sitting on a $1 million block and not actually raising any income. Are you going to price her out of her home?

Mr Collyer : Not necessarily. We, collectively, could remove the burden from her either by deferring it or by increasing pensions if that proved to be an issue. You cannot do these things in isolation. The idea is not to impose a new tax on everybody and not change other taxes. The purpose of a land tax is to give you the opportunity to remove other taxes that we know are very bad for us. We are not trying to increase the government tax take; we are trying to rebalance or reposition taxation.

The example you cite we call the teary widow argument. Where people are in genuine need, the purpose is not to oblige them to live in poverty, but you also need to be equally aware that many of these elderly people are being kept in inappropriate housing by their own children subtly saying, 'Mum, you stay in the house; never mind that it's falling down,' so they can enjoy a capital gain later when Mum dies. It is always presented very simply, in the way that you do, but there are other factors in there. Mum would be much happier and much better off if she moved around the corner into a single-level unit with a small garden. Even though she loves her old garden and she planted those plants 40 years ago, she can still maintain her neighbourhood connections if we did not have a stamp duty. She is trapped by stamp duty as much as she is by the pension.

Senator LUDLAM: Recognising that it is probably a pretty serious task, have you modelled at what rate you would need to cut the land tax to to be able to start drawing down on things like stamp duties?

Mr Collyer : You could replace stamp duty by roughly doubling the council rate, if that makes sense, as a metric. It is about that sort of rate—a little above double council rates.

Senator LUDLAM: So the model is that the feds would apply something about twice as high as rates and then transfer that directly back to the states.

Mr Collyer : No, the same again as rates. The Henry review modelled on a one-per-cent land tax. Even they evade the question of what rate it should be at—

Senator LUDLAM: But it is a start.

Mr Collyer : That is a matter for government to decide, not for us to promote. But we are talking about bases rather than rates. If we use the Henry model of a one-per-cent tax rate, that is going to raise $50 billion a year in fresh money which we could use to remove other taxes.

Senator LUDLAM: As much as the GST deal was meant to be a model for states drawing down inefficient taxes and having GST revenue it never quite worked. But is that essentially the model? If the state withdraws gambling taxes—and I could pick a few of my least favourite ones—and stamp duties, you would transfer the Commonwealth land tax to them.

Mr Collyer : No, that is not quite what I am proposing although very parallel to it. If we have a universal one-per-cent federal land tax and the states elect not to tax, for example, the in globo landholdings on the outskirts of Melbourne, or elect not to tax principal place of residence—if they elect not to tax those the federal government can keep the money.

But if they do tax that it is fully rebatable, so that the states actually get to collect the income stream—meanwhile blaming the federal government for being a bunch of monsters, which I am sure your shoulders are broad enough to carry.

CHAIR: You have suddenly lost us—

Mr Collyer : You did not keep up with that?

Senator EDWARDS: Hello!

Senator LUDLAM: It sounds like the status quo. How would you introduce such a thing? Does it need to be introduced as part of a huge , comprehensive, sweeping reform or can you bring it in incrementally?

Mr Collyer : No, it is very simple. There is a federal cadastre—sorry, a federal land registry. It exists already and it simply piggybacks on local government and state government land registers. The administrative costs are almost nil because you are using existing registries and existing known calculation methods. There is nothing—

Senator LUDLAM: For valuation of the land?

Mr Collyer : Yes. The valuations are done by local government—

Senator McLUCAS: On the unimproved value?

Mr Collyer : Yes, on the unimproved value of the land. And please do not tax buildings because that discourages construction!

Senator LUDLAM: Thank you for pointing out the contestability of the term 'bubble' because the graphs make it look like there is, but a lot of people say that there is not. What happens to bubbles and what is going to happen to ours?

Mr Soos : By definition, bubbles burst and they burst rather spectacularly, as we have seen overseas. One thing about our bubble is that it is, by a number of metrics, even larger than that of the United States. If and when that does burst it is going to cause quite some fallout.

Even the real estate bubble of the late 1980s, which was primarily commercial—though smaller residential—induced the early 90s recession. So we can only imagine what our current bubble will do.

Senator LUDLAM: But how do you get off that gently without pricing people out of their homes? Is it just to flatten it and wait for real wages to catch up? How do you get out? How do you unwind something like that?

Mr Soos : You cannot, and that is the thing.

Senator LUDLAM: I was afraid you would say that.

Mr Soos : It has to—

Mr Collyer : We cannot undo this in a dignified manner. It has got far beyond that. Imagine if we plateaued land prices and said, 'Okay, we will hold land prices where they are until wages catch up.' It would take far too many years.

For example: after the 1880 land price burst, real land prices did not recover in Melbourne until 1960—from 1888! That gives you an idea of how long you would have to wait. If you said, 'Okay, were going to maintain land prices and hope that the economy will grow around it,' you are looking at a multigenerational time frame. And meanwhile, if the government actually announced or set an agenda that said, 'We will keep land prices stable,' the traders would say, 'There is no point in me holding onto this piece of land for two decades. I am out.' And there is your crash.

Senator DASTYARI: Just following on from this, because I do not quite get my head around this. Again, I apologise: I ran in a bit late and so you may have covered this at the start. Just on a sheer migration front: we have—

Mr Collyer : Migration?

CHAIR: Migration front, right. We have a net migration of about 180,000 intake a year. According to the ABS's own stats that came out at the end of last year we are going to move to a population of about 46 million by 2058. There are some figures that say that our population will be about 35 million midway in the 2030s. All of this varies—and you guys would know this more than I do—because if you change one or two factors now, in the long run there are quite massive changes.

You talk about the bubble bursting. I understand the part of your graph which says, effectively, 'Look, this is all about land speculation, there is actually nothing—

Mr Collyer : They are overvalued.

Senator DASTYARI: Overvalued land speculation. The bit that I find hard is this. If I am living in Sydney, as long as there is the restriction that currently exists in terms of land release—and my bugbear is that everyone talks about land releases as if it should be about the western suburbs: you just put more houses further away from the city. The reality is that I expect that my daughters, who are now three and one, will be living in a place much smaller than the place I live in and close to the city, because at some point we have to go up, but that is a whole separate debate. I am not sure about this: the necessity of it bursting. Do not get me wrong; I think it is a problem, but I have always viewed it as a different problem, which is that the fact that there is not enough supply in the cities results in these exorbitant prices, but what makes that having to burst?

Mr Collyer : That is a very important point and there is a lot of confusion around this.

Mr Soos : First, I would contest that we have a major problem with supply or a housing shortage. Looking at the very long-term figures, in the postwar period we have produced one new dwelling for every two new people in Australia—that is, men, women and children. Since the price boom beginning in 1996, we have produced one new dwelling per 1.9 new people in Australia, and that is considerably below the average household formation of 2.7 people per household.

Senator DASTYARI: It is tied in, isn't it? Household formation changes by housing affordability, and that also changes the model, doesn't it?

Mr Collyer : Yes, it can, but we are observing household formation at 2.7 and house construction at 1.9.

Senator LUDLAM: Can you provide us with a source for that? That is an important metric. Where does that come from?

Mr Soos : It is from my own data derived from ABS statistics. I can provide a later.

Senator LUDLAM: Thank you.

Mr Soos : If we look at what was asserted during the booms in the United States, Ireland, Spain, Britain and so on, it was always claimed that prices were high due to a shortage of land or there was a house shortage, and so on, but in every case it was revealed to be false. Prices were based not upon any sort of shortage but speculation. Now we know that the United States and those other countries are now bulldozing entire neighbourhoods because there is so much supply. During the boom it is difficult to see that supply, especially when the vested interests—anywhere from the real estate institutes to the banks to the government—all get together in a chorus saying that there is a shortage. In Ireland and Spain they had strong immigration rates, approaching two to three per cent, as we have had in Australia in the last half a decade, but those markets still went down-under, because if immigration had an effect on prices you would see it in rents as well. Rents have remained mostly flat over the last decade or so.

Senator DASTYARI: You talk about supply and shortage. Obviously you understand this a lot better than I do. I go back to the Sydney example because I know it quite well. I can accept the argument that there is no broad shortage of supply. When you go to Sydney, there are all the land release areas. You can go 45 minutes from the city and there are new projects and new suburbs and you can buy off the plan, and the second they get enough they start the next phase and the next phase. A lot of the evidence we have had about the housing shortage—I would love to get your opinion on this—is that there is the shortage, but they are largely saying that, where we have a shortage, it is not necessarily in the total quantity; it is also in the type. There is a shortage of apartment dwellings or places close to the city or homes for the elderly—the variety. Is it your view that there is no shortage whatsoever and part of the reason is demonstrated in the rent prices? You have all those graphs. I think the rent price one is quite easy to understand. Rental prices are going up in Sydney, aren't they?

Mr Collyer : With inflation; only with wages. They have not accelerated away from wages. For example, if you look at the Pilbara through the iron ore boom, they did accelerate away and suddenly they were imposing enormous costs, but that is not true of Melbourne or Sydney. Rents have been fairly stable, linked to wages and inflation. If people cannot afford to rent, they will simply form combined households or will go back to live with mum and dad, so the marginal players are pushed out if rents go up too much, and rents have not changed.

Senator DASTYARI: You talked about the bubble. Senator Ludlam very rightly pointed out: what happens to bubbles? Bubbles burst. What do you see will trigger that?

Mr Collyer : It could be absolutely anything. The catalyst for the Irish turn was allegedly their reserve bank governor appearing on television in a cardigan and people's confidence in their reserve bank was shattered by that appearance. That was considered to be the catalyst of the Irish burst. The proximate cause we cannot know, but we can point to this. What happens—

Senator DASTYARI: We will tell the governor not to wear a cardigan!

Mr Collyer : Into Glenn Stevens' contract ought to be written the line—

Senator DASTYARI: The only person I know who was a cardigan is Stephen Conroy!

Mr Collyer : You can imagine that people just lost confidence in this rather wet little man who was their reserve bank governor. The point is that nobody really knows, but we are very close to it and have been close to it for a number of years. I have been warning people not to buy a house. I have been actively out there personally saying, 'For heaven sake, don't buy a house. You can't afford to it. You'll face a lifetime of debt if you do. The principal repayments will kill you, not the interest payments. You're better off to save a larger deposit.' I have been saying that to a lot of people. Anybody who wants to talk to me I will say that to because I think this era we are in is very painful. The catalyst essentially is a decrease in the rate of increase. If you look at page 1, it is an exponential curve. You come to a point where the aeroplane cannot fly up into the air any longer and it must turn, at which point 'Mr Market' intervenes and people stop buying and wait. The orderly vendors who would like to sell to move with larger families or smaller families are simply unable to sell their house and they start to discount. People get a whiff of that and say, 'Hello, we're looking at price discounts,' and they redouble their, 'We're not buying,' and prices start to cascade. They keep falling until they hit the long-term mean, which is what happened in Ireland and Spain.

Senator McLUCAS: Have you looked at the regions of Australia? We are talking nationally at the moment. Some of these things are happening in different ways around the country. You referred to the Pilbara before, and that is a bit different, so we will put that to one side. There are regions of Australia where there is recession, so to speak. Have you looked at any of those regions and thought, 'Is this the predictor of what might happen to the country, to the nation?'

Mr Soos : Our analysis is mostly focused nationally, on capital cities, particularly Melbourne and Sydney, but we have the examples of the Sunshine Coast and the Gold Coast, which boomed until about 2006 or 2007 and now prices have collapsed by about 30 to 40 per cent. That is a regional example of what it could occur across Australia.

Senator McLUCAS: I live in Cairns.

Mr Collyer : You cannot argue that Cairns is land constrained, can you?

Senator McLUCAS: No. Well, it is. It is constrained by the mountains.

Mr Collyer : Yes, but there is land to the north and to the south, isn't there?

Senator McLUCAS: South.

Mr Collyer : To the south. The idea that Australia is somehow land constrained absolutely astonishes me. We have this enormous, virtually empty continent. I know it is dry, but it is huge. The idea that we of all countries are land constrained beggars belief.

Senator EDWARDS: But there is a supply problem.

Mr Collyer : I started off by saying that there are four problems. I will go back to them: debt, the appetite to take on debt, the willingness to take on debt, which is related to speculative appetite—when people see what happened in the past and say, 'I'm going to hop on this boat because this trend will continue.' People have done very well. People have made fortunes in land—they honestly have—and I do not deny them that. I am not trying to say they are bad people, but the fact is that this trend cannot go on forever, because we end up impoverishing ourselves. The first home buyers are now down to about eight per cent of the marketplace. Only those who can get help from mum and dad or who have two outstanding incomes can even get an eye in on home ownership. So we have basically excluded an entire generation from home ownership. It is wrong. It is not what the Parliament of Australia or we want. We want land for everybody.

Unidentified speaker: But there is a supply problem.

Mr Collyer : We just tried to argue to you that there is not a supply problem and that the problem lies elsewhere. We believe it lies in taxation and in speculative appetite and in debt.

Senator LUDLAM: Can you help us fit this supply piece of the jigsaw puzzle back in, because we have heard strong evidence to date that restriction of land, whether it be on the margins or infill, on behalf of the state landholding agencies and private developers squeeze supply that pushes prices up. That is a natural economic impact, whether it is a state doing it or a private developer. Is that not happening or do we acknowledge that is a piece of the puzzle?

Mr Soos : I would like to refer to what happened in the United States in the lead-up to their bubble. You had economists, PhDs and business persons with decades of experience, from the Federal Reserve, Harvard University, Californian Building Industry Association and the National Association of Realtors, all saying exactly this during their housing boom, until 2008. Then it collapsed. It was shown that what they said was just outright false. The same thing happened in Ireland, Spain, Latvia, Lithuania and England. It is always said that restrictions on supply are causing the prices to rise. But it is quite false, because all you have to do is look at the trend in rents and also the rent to income ratio as well. If supply is being squeezed off, it would also squeeze off the supply of investment properties and that should be causing a sharp increase in rents, which we have not had. That is why you get such a divergence between the price to earnings or the price to rent ratio where prices are up here but rents are down here. Therefore, it cannot be explained by a supply shortage given that, over the last couple of decades, we have built one new dwelling for every 1.8 new Australians. That is a considerable supply; it is not a shortage.

When it comes to the total quantity of housing we do not have a shortage, but we do have a shortage of affordable property. That sounds like a contradiction, but that is because prices are not based upon fundamentals like rents, income, GDP and inflation. House prices are based upon debt speculation. The same thing with the dot- com bubble. What kind of shortage caused the dot-com bubble? It didn't. It was a bubble in prices where investors took upon huge marginal loans to speculate on stock prices. While earnings were down here, stock prices were up here. But that was not caused by any sort of shortage or government regulation. It was caused by irrational investors speculating on future capital price movements. What happened during the dot-com bubble is really no different to what is happening today.

Mr Collyer : It is confusing, isn't it? This is not at all clear. You have heard all sorts of conflicting evidence around what really matters and what are the drivers of our excess land prices. This is why we would like the federal government to impose a federal land tax. You deflect people's attention away from land as a speculative instrument and get them to focus upon what really matters—somewhere to live for everybody, somewhere to work and somewhere to farm. Those are the key things that we want Australians to be able to do. We have all been distracted off into this speculative bubble of 'Let's all buy a negative-geared property each and minimise our income taxes.' We are all mad; we are all nuts. It will be undone and Mr Market will undo it for us.

CHAIR: That was an incredibly interesting session. Thank you so much for making yourself available and coming here today. I thought it was really insightful to get a very different perspective. You have data, statistics and you make a very strong case. But also I think there is a lot of value in having a different perspective. You disagree completely with the Property Council?

Mr Collyer : Yes.