New Economy Journal

The origins of unaffordable housing in the practices of private ownership of land and private banking

Volume 3, Issue 2022

July 5, 2022

By - Gavin Tang

Piece length: 2,335 words

Article Theme : Does Capitalism Have a Future?

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This article was originally written for the Fractal Economy Cooperative website.

Almost everyone has an awareness that housing has, in some places, become unaffordable for all (who are not already homeowners) except for those on a very high income bracket. We are faced with the situation that the average wage- or income-earner will not be able, even with a double income, to buy into the property market in certain towns and cities.  Such members of society are faced with a lifetime of paying high, and ever-increasing, rent. ‘Honest work’ will not enable one to buy property in many places (which means that the only ones capable of buying property are making money ‘dishonestly’). Homelessness is a pervasive and devastating social problem. The Homelessness NSW chief Katherine McKernan has described the current rental situation as a “humanitarian crisis”.[1]

In an article titled The Great Australian Nightmare in The Sydney Morning Herald June 19 2021, the writer stated “The price of the median Sydney house reached $1.986 million last month. Which represented a daily price rise of $1220 for every day of the year to that point [May 2021]. So if you were aged 21 to 35 and earning the national average income for people in your age group – $58,635 a year –the price of a Sydney house was rising every day by an amount equal to one week’s wages.” In short, investors – and theoretically, homeowners – were making seven times more money sitting on their arse than people going to work for a living. Or, to put it another way: for those who were working and earning the average income, and saving every dollar of their income, property prices were slipping out of their reach at a rate seven times their earning capacity.

There is no plausible end in sight to the escalation of this absurdity. There is also no real discussion about the systemic changes that are required to stop the speculative spiral in land prices. The ‘fixes’ offered very often create more problems than they solve. For example, the first homebuyer’s grant only increased property prices and therefore moved the goalpost even farther for those trying to get into the property market. Community and non-governmental attempts to make housing affordable make little or no dent on the process of land prices becoming higher and higher. Think about it.  If some project to make housing more affordable really worked, it would be replicated countless times by communities throughout society.

If anything has come out of the many fixes proffered by various sectors, it should be the awareness that piecemeal solutions will do nothing to address this problem. What is required is a major rethink of how land and rent becomes unaffordable, and then how we address these causes with systemic changes. What is required will be a paradigm shift.

There are two components within the mindset of capitalism that have enabled the housing crisis to develop as it has. One is the belief that banks are intermediaries between depositors (lenders to the bank) and borrowers; the other is the notion that land can be privately owned. Between these two misguided beliefs, we as a society have created a housing unaffordability crisis, as well as multiple social and soul/spiritual problems– problems such as the growing egotism, fear, despair and selfishness involved in land acquisition.

The false notion of supply and demand for land

Capitalism argues that land prices are determined by ‘market forces’, with supply and demand for land shaping the  price of land at any point. Furthermore, as the argument goes, interference in these market forces will only worsen the situation and create ‘imbalances’ and inefficiencies in the market structure.

Underlying the principle of supply and demand is the idea that as the price of a thing goes up, people will produce more of the item in order to capitalise on the extra profits to be made. A cursory examination of land will reveal that no one can manufacture more land – this effectively means that there is no ‘supply’ of land as such. It is essentially fixed in quantity. Furthermore, the market for land is not like, for example, the market for paintings by Rembrandt.  Paintings by Rembrandt are valued and also fixed in quantity, but normal persons can live without such paintings. However, everyone needs access (as opposed to ownership) to land in one way or another. The upshot is that land, in principle, is not a free market ‘commodity’ and should therefore not be on the market as a tradeable commodity. We as a society should be looking at ‘fair’ access to land for everyone, with ‘fair’ meaning that people pay the appropriate amount to gain access to land of different sizes and desirability.

It should also be noted that land is not a good or service which is consumed over time. Land is a permanent fixture – never created out of human labour, never consumed over time. This differentiates land from the goods and services for which the principles of supply and demand apply.

If ‘supply’ is meaningless in the notion of demand-and-supply of land, what about ‘demand’? Here ‘demand’ means monetary demand, i.e. the degree to which people are willing to trade money for land. Demand for land is therefore contingent on the supply of money. On the Fractal Economy Cooperative website we examine the fact that the banking system has to increase the supply of money on an ongoing basis. The banks issue new money with every loan in a process called credit creation; these loans (of which mortgages make up about 60%)[2] cannot be paid back with their attendant interest charges on the basis of the existing money supply. To prevent a collapse in the market (of shares, property etc.) caused by defaulted loans, the banks have to create more money and then issue it through loans. However, this newly created money generates even more debt. This leads to higher and higher levels of debt in society, as well as an ever-increasing supply of money. As part of this spiral, property prices go up, and up, and up. The growth in the money supply created by private banks and property prices is in almost total lockstep. Here is a graph charting the increase in money supply as well as land prices in certain Australian cities over the years 1979 to 2010. One could argue that property prices are simply caused by the increase in money supply – an increase brought about by the practice of credit creation by banks.

This graph was taken from The Australian Property Magazine (now discontinued), October 2011. The text in the key may be a bit hard to read, but they are:

  • In blue: Average Median House Price for Sydney, Melbourne, Brisbane & Perth (left)
  • In red: Australian Broad Money Supply (AUD$Billion) (Right)

To recap the above, : 1) the supply of land is fixed but 2) the supply of money is highly elastic and expandable according to how much money the banks want to, or can, create and then loan out. This intersection of fixed supply of land and highly elastic supply of money renders meaningless the idea of supply and demand for land. Thus, we should question any arguments about ‘market forces’ and ‘demand and supply’ when we look at the property ‘market’. There simply should be no market in property.

If we are not content with fixes that treat the symptoms but not the cause, we must thus address two issues in order to resolve the housing affordability crisis. Firstly, the notion of private banks’ ability to practice credit creation, and secondly, the notion that land should be a privately tradeable commodity.

A little more forensics on speculation and bank loans

Banks make what we call unearned income in the form of interest on their loans. It is unearned because they contribute nothing towards the production of goods and services in exchange for their interest ‘earnings’. The interest on loans that they make (not earn) derives from their ability to create new money out of nothing and then loan it out. This is one side of the equation. On the other side of the equation are the borrowers of these loans and mortgages. Leaving aside the people buying a land and house package to live in, there is a sector of society which is buying land as an ‘investment’. We should translate ‘investment’ to mean ‘a source of unearned income’. We should also understand that ‘investment’ in land (as opposed to buildings etc.) does nothing for increasing the productivity of society as a whole – the land is there before and after the ‘investment’.

There are two key reasons, two sources of unearned income, that attract investors into buying land. One is the rent that is to be derived from it; the other is the capital gains to be made. Capital gains are essentially the increase in the price of land. An investor makes money (unearned income) if the combined rent plus capital gains  on an asset is higher than the interest  that he has to pay for the loan. As the banks pump out more and more money into the economy as described above, this means that investors are more or less guaranteed a certain level of capital gain (CG), i.e. the CG is created by the very kind of bank loans that they are  taking out. Further, as land prices increase and people find it harder to service an ever increasing mortgage, rental rates also increase. For many investors, the rent takes care of the interest payments, and the capital gains is a form of accruing wealth by stealth.

Additionally, bank loans such as mortgages come with a requirement for  the borrower  to provide collateral. The people most able to come up with such collateral are those who have more assets and greater accumulated wealth. As the late comedian Bob Hope once quipped, “A bank is a place that will lend you money if you can prove that you don’t need it.” One might imagine a bank manager, in a fit of candour, saying the following to a loan applicant: “Well, Mr Smith, we can see that you are a person that does not need more money. But like us bankers, you probably think that too much is never enough. So it is with pleasure that I can inform you that the loan application for your fifth investment property has been approved.”

Thus mortgages are more easily accessible to the wealthy; and it is they who can take advantage of the banks’ largesse in creating new money for loans; it is they who can get wealthier with investment properties, and make unearned income in the form of rent and capital gains. The banks are one beneficiary of this institutionalised scam; wealthy investors are the other beneficiary. Meanwhile, the majority have to pay the price in the form of bigger mortgages or higher rent.

When investors borrow money for land speculation, the act of borrowing money triggers creation of new money which leads to the very price increase in land that the speculators are ‘banking’ on. To be exact, it is the net increase in loans which creates the increase in land prices. The net increase is the volume of new loans minus the rate which existing loans are being repaid. This means that the same speculators, as well as people wanting a home to live in, then take out more loans in anticipation of further increases in price, and so the madness continues.

In recent times, investors are speculating on land not primarily as a source of rental income but as a way to make capital gains. Many investors take out a loan without even intending to one day pay off the loan; they are relying on capital gains to outpace the interest on the loan.  If interest rates are very low, as they are at the moment, people borrow money like crazy and as a result, capital gains,property prices, and the size of new mortgages surge ahead uncontrollably. As has been discussed, the loans that investors take out increase the supply of money ,which then become the very source of these capital gains. As the banks make more and more money from the interest on these loans, they gain the right (in accordance with current capitalist banking regulations) to offer even more loans and to increase the supply of money even more. This is the background to why land prices are spiralling into stratospheric heights. It is my contention that the next ‘market correction’ will bring a major financial crisis that will dwarf anything we have ever experienced.

When we are faced with an ongoing and seemingly intractable problem that creates a lot of harm, we as a society should be looking deep into its causes and, in the face of an ongoing lack of plausible and realistic fixes, challenge the very paradigms we hold to be true. Do not rely on those with economic security and financial wealth – such as our politicians, bankers, superannuation funds, ‘investors’, and the commentariat who are paid to support the capitalist ideology – to take the initiative in these matters. They are too invested in the status quo. It is also pointless, in my opinion, to argue for a new approach to banking and land ownership – we need to make the new paradigm happen. This article on the Fractal Economy Cooperative website explains how the Fractal Economy Cooperative is striving to create a unique community bank that can achieve this goal as a grassroots project.


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