Renegade Economist: The Michael Hudson Series

[Rajiv]

Prof. Michael Hudson on the global economic crisis. Views you will not get in the mainstream.

art 1 - The Housing Market (4 min)

Part 2 - The Bailout (2 min)

Part 3 - Income Tax (4 min)

Part 4 Economic Rent (3 min)

[lurker]

Re: Renegade Economist: The Michael Hudson Series

Thanks for that. Government coopted by FIRE destroys a nation, in part with regressive taxation policies.

[Rajiv]

Re: Renegade Economist: The Michael Hudson Series

Part 5 (3 min) at link below

Part 5 Public Enterprise

[LargoWinch]

Re: Renegade Economist: The Michael Hudson Series

Good stuff and posted before as well.

[*T*]

Re: Renegade Economist: The Michael Hudson Series

Part 4 sounds like Fred Harrison.

[Rajiv]

Re: Renegade Economist: The Michael Hudson Series

Both Fred Harrison and Michael Hudson are advocates of "Land Value Taxation" -- See Strittmatter's comment, and my response.

[Polish_Silver]

Hudson right and wrong

He makes several good points, but much of his assumptions could be questioned.

Points of AGreement:
Tax capital gains the same way as ordinary income.
No special breaks for real estate capital gains.
Social security should not buy T-bonds.

Property should be taxed according to the cost of the public infrastructure which raises it's value.
(Special tax district for land near subway stations). However, the system already works this way to a great extent.

Neutral:
Property taxes on appreciated land should increase.
Logically, taxes should cover the legitimate costs of local government services, including education, transportation, etc.
A portion of the apprecation could go to the government--the capital gains, or the property tax over time.

Disagreement:
1) Hudson claims income Taxes are highest on those with the lowest income.
He needs to consult the IRS data. The top 12 % of payers cover about 90% of the total! The bottom 48% of household pay almost no income tax (they still pay some social security, but they also get that back in the long run)

2) Hudson claims Rents are income without cost.
He has never rented out a house. Besides the interest (or up front capital), you have taxes, insurance, maintenance, legal costs, plus half the tenants don't pay or trash the place.
It might be more cushy for commerical real estate, but I doubt it. Margins are not as exhorbitant as he thinks. He's really locked into this "creditors and property owners are evil" thinking.

3) The reason taxes are so high now is because the government is doing so much more spending in every category from education to the military. It is not primarily because the rich are not paying.

4) Hudson claims Rents are "determined by the market" and independent of taxes.
Pure BS. Rents are determined by the landholders total costs. Generally speaking, the rent is the sum of taxes, insurance, and mortgage payments.
It may even be less than this total. Landlords sometimes accept negative cash flow because the land is appreciating. It does not appreciate only because of tax treatment. It appreciates because of increasing population density, rising local incomes, etc.

By the way, land values do not appreciate exponentially in real terms. They rise up to the point where
people can no longer afford to rent/buy it, then they stagnate.

[c1ue]

Re: Hudson right and wrong

2) Hudson claims Rents are income without cost.
He has never rented out a house. Besides the interest (or up front capital), you have taxes, insurance, maintenance, legal costs, plus half the tenants don't pay or trash the place.
It might be more cushy for commerical real estate, but I doubt it. Margins are not as exhorbitant as he thinks. He's really locked into this "creditors and property owners are evil" thinking.

In the short term, and for houses, you are correct. In the long term, and particularly for land, Dr. Michael Hudson is correct.

The point of divergence is treatment of the increase in rental property's value. If in fact you received rent equal to your cost, you are in fact getting free income in the form of the property's increase in value over time.

4) Hudson claims Rents are "determined by the market" and independent of taxes.
Pure BS. Rents are determined by the landholders total costs. Generally speaking, the rent is the sum of taxes, insurance, and mortgage payments.
It may even be less than this total. Landlords sometimes accept negative cash flow because the land is appreciating. It does not appreciate only because of tax treatment. It appreciates because of increasing population density, rising local incomes, etc.

I disagree with this totally. Rents are a function of renter income, further modified by vacancy rates.

Or put this another way: if you believe rents are purely a function of landlord costs, why then have rents not fallen precipitously in the face of ZIRP?

Clearly with historic lows of mortgage interest rates, landlord costs for servicing mortgages are lower than ever.

[Polish_Silver]

Rental Real Estate is competitive, not price gouging!

The point of divergence is treatment of the increase in rental property's value. If in fact you received rent equal to your cost, you are in fact getting free income in the form of the property's increase in value over time.

The income is not free. I have invested capital, taken risk, done paperwork. And often the return sucks.

Hudson's model works for land bought before a municipal infrastructure improvement, like a subway line. In this case
the value can appreciate quickly, because of capital invested by the community at large. In this case, a special tax on land near the subway makes sense. But often this is exactly what does happen. The people who just want to live there pay higher taxes, whether they use the subway or not. So it is not a great deal for them. But people who rent or sell the land do profit from the increased value.

Or put this another way: if you believe rents are purely a function of landlord costs, why then have rents not fallen precipitously in the face of ZIRP?

ZIRP is what the banks pay to the fed, not what the borrowers pay to the bank.

How much lower are the rates for commercial real estate vs owner occupied homes?

The banks have a huge spread. Home mortgage rates are certainly not zero!

In general, rental real estate is fairly competitive. If profit margins were huge, someone would try to undercut prices and
gain market share. For example, I could have afforded higher rent in silicon valley 1994-1996, but the rent
was actually slightly less than the landowners monthly cost of mortgage, insurance, and tax. They were making out on the appreciation of the land. However, this is a fairly uncommon situation.

Only when "markets are tight" do profit margins increase.
In this case, rents may exceed what the buyer originally hoped for. However, as properties are bought and sold, the prices rise according to the expected rent, and the margin goes down again. Buying the land before the rise is very profitable, just like buying any other asset before a quick rise. There are many cases of land values stagnating, and even falling for extended periods (like japan 1990-2010)

I am not claiming that real estate is not benefiting for unfair tax advantage, or that hudson's idea of taxing property at a higher rate is bad. Only his assertion that profit margins on renting real estate are extravegant. Returns on REITs are not that great. Being a landlord is a lot of work and risk.

In silicon valley 1970-1990, the land values appreciated very quickly, due to rising incomes and population density.
A lot of middle class people profited from that. However, until proposition 13, many of them were threatened by property taxes, which were rising 10% /year, even though the family's income was going up slower than that. Many people just wanted to live in their house, and the increase in market value did not help them. However, rising taxes hurt them.

In general, land values only track inflation, as discussed by Shiller in "Irrational Exuberance". There are certain places where they go up faster, and other places where they go up slower.

Having said that, since land is purchased on leverage with negative or very low real rates, inflation can make land ownership very profitable. But it is the inflation that is doing it, not the "increased value" of the land.

[c1ue]

Re: Rental Real Estate is competitive, not price gouging!

The income is not free. I have invested capital, taken risk, done paperwork. And often the return sucks.

Once again, a matter of time scale.

For the first 30 years of a real estate purchase - i.e. during the period in which a mortgage is paid off - the above applies.

How then do you term the indefinite period afterwards? How much risk are you now taking? Add in such legislation as Proposition 13, and how much actual risk remains?

ZIRP is what the banks pay to the fed, not what the borrowers pay to the bank.

ZIRP doesn't mean zero interest rates for borrowers, but it does mean borrowers are enjoying historically low interest rates, perhaps even mathematically low interest rates.

Either way, it does not detract from the fact that ZIRP = lower mortgage servicing costs <> lower rents.

If historically low interest rates have zero lowering effect on rents, especially in a period where prices are equally flat or falling, then empirically rents cannot be a function of landlord cost.

Or are you going to try to argue the inarguable: that landlord costs are not primarily mortgage servicing costs?

[Polish_Silver]

Re: Rental Real Estate is competitive, not price gouging!

are you going to try to argue the inarguable: that landlord costs are not primarily mortgage servicing costs?

In most cases, the interest costs dominate. And the rent gives only a reasonable margin above them.

What are interest rates for rental real estate? Does anyone know?
In fact, rents do rise and fall according to various factors, including interest rates, vacancy, etc.

Of course it is better to inherit a prop 13 house, with mortgage fully paid, as I did last year, than to borrow and buy it. That is true of any asset. But even then the rent was not a great return. The house was estimated to be worth $600k. Taxes a mere $1200/year. But insurance and maintenance would have been $7k/year or more. Rent would have been about $30k annually, so about $22k gross. So the return is $22k/600k, about 3.8%. That is less than dividends you can get on some oil companies. And land values have stopped going up, so owning the house might actually be a capital loss.

Shouldn't capital get some return? I think it should. People should have an incentive to save and build up capital.

Data points:
Here is a house going for $2400/month, similiar to the one I inherited:
http://sfbay.craigslist.org/pen/apa/2986272716.html
$2400 / 3br - Beautiful Linda Mar Home Rental Open House (pacifica)

Say the mortgage is 4% , taxes 1%, insurance and maintenance $5k/year. Now carrying costs are
$26k/year--the rent barely covers costs. (assuming $500k home price, $400k mortgage)

[c1ue]

Re: Rental Real Estate is competitive, not price gouging!

Of course it is better to inherit a prop 13 house, with mortgage fully paid, as I did last year, than to borrow and buy it. That is true of any asset. But even then the rent was not a great return. The house was estimated to be worth $600k. Taxes a mere $1200/year. But insurance and maintenance would have been $7k/year or more. Rent would have been about $30k annually, so about $22k gross. So the return is $22k/600k, about 3.8%. That is less than dividends you can get on some oil companies. And land values have stopped going up, so owning the house might actually be a capital loss.

The problem is that you're comparing rent to the supposed market value of the property. That ain't how accounting works.

As the property is a Proposition 13 house, I would be unsurprised if its purchase price was well under $100K. Thus the actual return on capital is $22K/original purchase price = 20%+ or much, much more for perpetuity. If you actually sum the net rental returns over the entire lifetime of the property to date vs. the actual original cash outlay, I guarantee you'll find the annual return is well over the 3.8% you posit.

Furthermore the $600K - (original purchase price) difference is the 'rent' accumulated over the years. The mechanism by which much of this 'rent' accumulated is partly natural (population growth) but also significantly non-natural (fiat money supply growth).

Treating price appreciation as capital is exactly what the banksters do.

[Polish_Silver]

It's the land appreciation, and nothing else!

The problem is that you're comparing rent to the supposed market value of the property. That ain't how accounting works.

Eastham Capital uses that kind of metric, so why shouldn't I? I evaluate stocks based on the profit or dividend return relative to the price.

The house was not purchased, but built by my parents during 1959-1961. There was never a mortgage.
Over the 50 year period 1961-2011, inflation was 5X, if not more. There certainly was some property appreciation.
I think they paid $5k for the 5000 square foot lot. Today that lot is worth about $400k.

Just taking the land, and ignoring inflation, the return is 9.1% annually. That is a good return, and many middle class people achieved that in the SF bay area. Those who borrowed actually did better, since their mortgage devalued with inflation.

However, significant land appreciation is quite rare.

Counting inflation at 5X since 1961, the real return is 5.7% annually. Still better than stocks !


Yes, buying cheap land that happens to appreciate 16X over 50 years is a great financial boon. Tell me where the next big land appreciation is, and I'll gladly buy some real estate there! Exploiting that does not depend on being a bank or real estate baron, but just being lucky! If my father had moved back to Denver in 1965, like his closest friend, his Colorado diggs would have barely kept pace with inflation.

[c1ue]

Re: It's the land appreciation, and nothing else!

The house was not purchased, but built by my parents during 1959-1961. There was never a mortgage.
Over the 50 year period 1961-2011, inflation was 5X, if not more. There certainly was some property appreciation.
I think they paid $5k for the 5000 square foot lot. Today that lot is worth about $400k.

Just taking the land, and ignoring inflation, the return is 9.1% annually. That is a good return, and many middle class people achieved that in the SF bay area. Those who borrowed actually did better, since their mortgage devalued with inflation.

Thank you for providing that excellent example of unearned rent. The land alone cannot be said to have materially changed from 1959 to today, but in turn $5000 cash was quite a large sum of money, though nothing compared to 400K today.

As for those with mortgages, difficult to say if they were better off. On the one Hans, there was inflationary gains. On the other hand, the mortgage holders were paying significantly more, up to twice as much for the same property as someone paying cash.

Certainly property appreciation makes up for a lot of sins, but then again it seems difficult to imagine how the US might turn back the clock in order to bring back the opportunity to buy land prior to a financialization of the economy. Much as gold now is still a buy, but cannot possibly be a as good a buy for someone just steadying out, sometimes the cat can only be let out of the bag once.

As for Eaton, there are always those who can choose whatever metrics desired for their one purposes.

I will note that there are few examples of other capital investment opportunities where the capital good always appreciates upward.

[Polish_Silver]

Why the land went up

The land increased in value because it was close to silicon valley. It was not because of public works or any tax paid expenditure. So I don't see why the government should get the windfall.

If I count property taxes paid over 50 years, the return would be closer to 5%, in the range of what stocks could provide.

On the one Hans, there was inflationary gains. On the other hand, the mortgage holders were paying significantly more, up to twice as much for the same property as someone paying cash.

The mortgage holders got an incredible deal. The inflation of the 1970's devalued their monthly payments, at the same time the land appreciated in real terms. When they retired in 80's and 90's, those people could sell their house and live on the proceeds.

My parents had to rent while they carefully saved to buy the lot and building materials. The people who borrowed got housing and capital appreciation for the same monthly payment.

The money saved by my parents has to be evaluated via exponential discounting, just as the monthly payments of the mortgage holders.

My major point is that middle class and working class people were able to take advantage of the land appreciation. Those same people have a huge up-hill battle if buying there now.

True land appreciation, as opposed to inflation, is very rare.

The FIRE economy is not harming us by causing small regions of land to appreciate gradually over 40 year periods. It is harming us by fomenting asset bubbles and over indebtedness.

If you want to keep $500k in an illiquid asset that returns a net cash flow of $22k/year,
be my guest!

The new owners will be paying taxes of $5k/year on a house with 1150 square feet on a 5000 sq foot lot. So who is making out on that deal?