Once you ‘see the cat’, you’ll finally understand the dynamics behind the land cycle

In the 1880s, Judge James G Maguire of the Superior Court of the city and county of San Francisco gave a speech to the New York Anti-Poverty Society. He said:

‘I was one day walking along Kearney Street in San Francisco when I noticed a crowd in front of a show window…I took a glance myself, but I saw only a poor picture of an uninteresting landscape.

‘As I was turning away my eye caught these words underneath the picture: “Do you see the cat?”

‘…I spoke to the crowd, “Gentlemen, I do not see a cat in the picture; is there a cat there?”

‘Someone in the crowd replied, “Naw, there ain’t no cat there! Here’s a crank who says he sees a cat in it, but none of the rest of us can…”

‘Then the crank spoke up. “I tell you”, he said, “there IS a cat there. The picture is all cat!…”

‘…and then, there it was! Sure enough, just as the crank had said;

‘But now that I saw the cat, I could see nothing else in the picture!…and I was never afterwards able, upon looking at that picture, to see anything in it *but* the cat.’

Maguire’s story was intended as a parable for land’s economic role.

Like the cat in the picture, it is blindingly obvious once it becomes clear — so obvious, in fact, it is hard to see anything but the land.

THE MAN WHO ELECTRIFIED THE WORLD

Maguire was inspired by a passage in the 19^th-century political treatise ‘Progress and Poverty’ by US journalist Henry George.

One of his famous passages was:

‘That as land is necessary to the exertion of labour in the production of wealth, to command the land which is necessary to labour, is to command all the fruits of labour save enough to enable labour to exist.’

George had no formal education to speak of.

He left school at 14 and drifted in and out of poverty until securing steady employment as a typographer for the newly created San Francisco Times — later going on to edit his own newspapers.

However, George was an avid reader, and he studied the great classical economists such as David Ricardo and Adam Smith.

He understood the relationship between the three factors of production, land, labour, and capital — and he used these tools to dissect the system.

He wrote:

‘Take now…some hard-headed businessman, who has no theories, but knows how to make money. Say to him:

‘“Here is a little village; in ten years it will be a great city—in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labour.”

‘“Will in ten years, interest be any higher?”

‘He will tell you, “No!”

‘“Will the wages of the common labourer be any higher…?”

‘He will tell you, “No the wages of common labour will not be any higher…”

‘“What, then, will be higher?“

‘“Rent, the value of land! Go, get yourself a piece of ground, and hold possession!”

‘And if, under such circumstances, you take his advice, you need do nothing more…’

The book started as a potential magazine article addressing the paradox of why ‘poverty’ rises in tandem with ‘progress.’

When it was published 17 months later, in 1879, during an industrial depression, George’s ideas electrified the world.

He had not only identified the underlying cause of the boom-and-bust cycle, but George also provided a practical remedy.

The book was an international bestseller.

It was translated into Chinese, Danish, Dutch, French, German, Hebrew, Hungarian, Italian, Norwegian, Portuguese, Russian, Spanish, and Swedish.

At its epoch, it was rumoured to have outsold even the Bible.

Seven years later, Henry George beat Theodor Roosevelt to almost get elected as mayor of New York City — the nation’s financial capital.

Henry George’s gravesite:

Chrystia Freeland, a current Canadian Liberal member of parliament, recently wrote:

‘George ran for mayor of New York again in 1897, but died four days before election day. He was given a statesman’s send-off — his coffin lay in state at Grand Central Station, where more than 100,000 people came to pay their respects. It was the largest crowd of mourners since Abraham Lincoln’s funeral in 1865.’

You can read the full version of her article here.

THE CORRUPTION OF ECONOMICS

Henry George didn’t have the modern tools of today’s economists.

So why, after 135 years, don’t economists once again ‘see the cat’?

Economists Mason Gaffney and Fred Harrison detail the history clearly in their book, The Corruption of Economics.

So persuasive were George’s arguments that several influential economists set out on an amply funded plan to suppress the knowledge that landowners were ‘reaping what they did not sow.’

Over time, ‘land’ and ‘unearned income’ were deliberately written out of university economics courses and textbooks.

The three factors of production were replaced with just two — labour and capital. Land had disappeared from view. When we talk about increases land value today, it is termed ‘capital gains.’

Except, real capital does not gain.

Capital is man-made — it depreciates with wear and tear.
Unlike land, capital’s supply can be increased with competition.

The only exception is when the owners of capital are granted monopoly power — such as taxi licences, for example. In contrast, land is fixed in location and, therefore, fixed in supply.

Taxes on capital reduce its supply, and so distort economic activity. However, taxes on land cannot reduce its supply. They merely reduce its value — falling on the landowner and stripping away the unearned gains that would otherwise be privatised.

For this reason, among others, a land tax is the most hated tax.

You can’t avoid it, hide from it, or ship it overseas.

Therefore, conflating land with capital enables large landowners and their financiers to argue for lower taxes on capital — and, therefore, lower taxes on land.

Consequently, the economic rent from land becomes ‘income’ rather than ‘unearned income’, and our cities become Monopoly boards — enriching the rentiers whilst impoverishing the tenants.

Which would you rather be?

MOST MODERN DEBATE IS JUNK

The effect of this corruption of economics still impacts debate and policy today.

When Thomas Piketty released his magnum opus Capital in the Twenty-First Century in 2014, it attracted more attention than any other economics book in recent history.

Praised by Nobel-prize winners and politicians alike, Piketty claimed to have produced a ‘new theoretical framework that affords a deeper understanding of the underlying mechanisms of Capital and Inequality.’

According to Piketty, the world risks ‘terrifying consequences’ unless a global wealth tax is implemented — a policy that requires universal recognition across country borders.

Without it, Piketty argues that the accumulation of capital will become increasingly concentrated in the hands of the rich, accentuating the inequality gap and keeping the poor poor.

However, a few weeks ago, Matthew Rognlie, a 26-year-old US grad student completing his doctorate at the Massachusetts Institute of Technology, hit the headlines by asserting that Piketty had ‘Got it wrong!’

Rognlie split Piketty’s data between the net capital income from land and the net capital income from all other sources and noticed something shocking:

‘A single component of the capital stock—housing (land)—accounts for nearly 100% of the long-term increase in the capital/income ratio, and more than 100% of the long-term increase in the net capital share of income.’

In other words, it is land (not capital) that has taken all the gains.

Bloomberg declared it ‘a dramatic, startling insight that was somehow overlooked before Rognlie came along.’

The Economist heralded it the ‘most serious and substantive critique that Mr Piketty’s work has yet faced.’

However, this may not be surprising to my subscribers.

Rognlie had merely done what the classical economists had been doing for centuries before him. He separated land from capital, and in doing so, Rognlie ‘saw the cat’.

I am telling you this because whatever your view on Henry George, he demonstrated how changes to tax policies could either mute or inflate the housing cycle.

TAX CUTS SETTING THE FOUNDATION FOR THE ‘WINNER’S CURSE’ 2024–26

And right now, as headlines are focusing on the massive immigration bomb that is hitting our shores – tax policies are being put in place that are likely going to inflate prices as we run into the 2026 peak of the current real estate cycle.

Upwards of 600,000 immigrants per annum are flooding primarily into Sydney and Melbourne — leading to an unprecedented rental crisis, the worst in recent history.

SQM Research has reported that rental vacancy rates in Sydney have reached their lowest point since 2011.

The resolution pumped in the mainstream is, ‘We need more investors, we need more construction!’

However, as I explained here, there are many nuances to the supply argument.

Likely if we had tax policies in place to encourage owners to employ vacant land sites into use and not hold vacant properties out of use, it could go a long way to uncovering a lot of latent ‘hidden’ supply that is not seen in the published statistics.

The solution promoted most recently by the property lobby is for APRA to remove the serviceability buffer that is locking investors out of the mortgage market and for governments to gift more tax breaks to big developers in the build-and-rent sector.

From Owen Wilson, REA Group CEO:

‘APRA needs to review and address its policy that requires discriminatory mortgage pricing for investors. This has occurred despite research showing investor loans are no more risky than those of owner occupiers. It’s time to level the playing field for mum and dad investors.

‘For larger investors, we need the right tax settings to make build-to-rent a more attractive asset class. In NSW, WA and Victoria land tax discounts have been offered for BTR projects, but we haven’t seen other states follow suit.’

Undeniably, there’s enormous pressure on governments to set favourable tax policies to stop a spike in homeless couch surfers in the months ahead.

‘The Queensland Opposition has warned the housing crisis gripping the state is at “desperation levels” after the party supported a tax break for developers aimed at unlocking thousands of more homes.

‘A new policy will exempt investors of build-to-rent projects from foreign investor land tax and duty surcharges for two decades, unlocking 3,000 dwellings over the next four years alone.

‘Developers will also see land tax halved if one in 10 units are set aside for “affordable housing”.’

Let’s not forget also, that incoming immigrants are not all renters.

From Leith van Onselen over at MacroBusiness

‘…international students will also help drive up house prices.

‘Over the weekend, a five-bedroom Californian bungalow in the Melbourne suburb of Canterbury sold $860,000 above reserve (to $5.11 million) to an international student on behalf of his parents.

‘“He was confident in his bidding and stayed in control”, agent Julian Badenach said.

‘“The family had an interest in getting a good property in the area and to move here themselves, they didn’t say if they would be moving straight away so it was important the house was in good condition.”

‘Badenach said the buyers were all “new to Australia” and “seeking land for a luxury new home.”’

Add to this the potential for the RBA to put rates on hold in the shorter term (and potentially cut into 2024). And the foundation for the winner’s curse phase of the cycle - the most bullish two years from 2024 to our forecast peak in 2026, prior to the next global downturn into 2028 - has been set.

Best Wishes,

Catherine Cashmore
Editor - The Land Cycle Investor and Cycles, Trends & Forecasts 

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