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Home Economics

Deeply researched, beautiful charts on American housing, demographics, and happiness

By Aziz Sunderji

With a background in banking and finance, Aziz comes to the question of housing with a focus on asset pricing and investment incentives. This means he diverges from much of the public policy conversation that merely assumes home prices should always be lower, but planning regulations and zoning are in the way.

But he also comes with a lot of technical and design know-how.

He has built a website summarising the Great Debate on housing supply and price, and a mapping tool called ProMap. Aziz was able to show me live on screen how ProMap can reveal patterns in the data that are usually hard to see, such as the migration to the suburbs and the price gains in suburbs relative to city centres since COVID.

You could say that his ProMap tool has made housing analysis Great Again.

It would be a dream to have a tool like that for Australian property data.

I hope you enjoy our conversation.

Table of contents

0:00 Intro

2:51 Backgrounds in finance and property

12:43 Writing books about housing

20:54 The Great Debate compendium

31:56 Where AI helps and where it fails

36:15 The ProMap housing data tool

43:36 Urban cores versus suburbs

58:00 Doubting the zoning explanation

1:02:47 Housing as an asset with a yield

1:11:38 Monopoly, land, and patient owners

1:15:49 An elevator pitch for the housing crisis

1:19:57 What the housing crisis really is

1:33:44 Austin, Tokyo, and closing thoughts

References:

Aziz’s Substack, Home Economics

Aziz’s mapping tool, thepromap.com

Aziz’s microsite, The Great Debate

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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This is Part 2 of a four-part series coming to FET that I hope will become a reference point for understanding key concepts related to housing production.

1. Why a feasible change of use is different from commercial feasibility

2. How prices determine the construction cost of building new homes via choices of density and quality

3. Housing supply is not new housing production

4. Why landbanking is a normal market outcome of balancing present and future housing

Interested in learning more? Fresh Economic Thinking runs in-person and online workshops to help your organisation dig into the economic issues you face and learn powerful insights.

Enquire about FET workshops

If you value this content, please consider signing up as a paid FET subscriber to support this work and get access to all articles and audiobooks.

Subscribe now

Another way to help is to share these articles. I am aiming to get to 10,000 subscribers in 2027.

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In Part 1 of this FET article series, we defined the terms commercial feasibility and change-of-use feasibility. While doing that, we took as given the density and quality of a housing project to be the one that provides the highest residual value for the property owner today.

But as noted, the highest-value use might be future development, and the project's density and quality might look very different at that future time.

The purpose of this Part 2 is to explain how the choice of density and quality is caused by the market price, and hence, so too is the construction and development cost of homes caused by the market price.

Too often, we get this causality backwards.

We think that construction costs drive home prices; hence, reducing construction costs is a way to make homes cheaper. It will certainly make homes bigger, denser, and better. But not cheaper.

Property industry lobbyists claim that causality runs from cost to price, starting with land costs paid, and adding on all other costs (e.g. p10 here). If home prices are caused by the sum of costs, then adding costs makes housing more expensive.

This sounds intuitive.

But it’s wrong.

Indeed, one of the puzzles in recent years has been the shift towards lower-density, but more luxurious, high-quality apartments. But if construction costs are rising, you build smaller dwellings, not bigger ones, right?

Here’s the thing.

Average home prices are determined by overall asset markets, rent levels by renters' incomes, and rental variation across locations by differences in quality of life.

As we will see, when the price of homes rises, it changes the choice of density and quality of homes, justifying spending more on construction costs per dwelling to maximise returns.

The fact that the total land and development costs of a housing project are roughly equal to the price is just an equilibrium outcome about the choice of project and the way land value is derived.

Causality runs from market prices to the choice of density and quality, then to the cost (i.e. how much is spent per dwelling) of housing construction and development.

Developers choose what density and quality of homes to build on a site, and this choice determines both revenue and costs.

Home prices can’t be determined by cost, since the cost of producing a $1 million home is very different depending on the density of that home. A small budget house that costs $200,000 to build could sell for $1 million at the right location, or a fancy apartment in a CBD tower that costs $900,000 to build might sell for $1 million.

Which of these costs determines the price?

Abstracting away from the choice of density and quality makes it impossible to understand housing markets and housing development. There is no such thing as the cost of developing a new home. But there is such a thing as a massive range of costs to develop new housing of different densities and qualities.

Let’s take a look.

Adding density and quality choice to our analysis

The trick to understanding the choice of density and quality of a housing project is to recognise that there are construction diseconomies of density. It costs a lot more to build a dwelling with the same market value in a denser project.

Because costs rise with density, high-density housing is only the optimal choice in high-priced locations and at high-priced periods of time. High prices themselves lead to the choice of building higher-cost housing density and quality.

The table below illustrates this point.

I had put the paywall here, but decided it was more important that these ideas were widely read. If you get value from the rest of this article, please consider becoming a paid subscriber.

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The numbers are somewhat arbitrary, but they demonstrate clearly the economic relationships.

The top section of the table shows the density alternatives, the development cost per dwelling (for a dwelling with an equal market price in each project), and the number of dwellings in each alternative project design. The detached home has a construction cost of $500,000, but a dwelling in a high-rise tower with 120 apartments that sells for the same price would cost $950,000 per dwelling to construct.

The bottom part of the table shows the residual economic gain, which is the revenue minus the cost of each density project under different market price scenarios ranging from $600,000 for this dwelling to $1,100,000.1

At a market price of $600,000, only the single house is a change-of-use feasible development, with a price above its development cost.2 Building four townhouses is not, as they cost $600,000 each to receive the market price of $600,000. You are better off building one house instead. In fact, none of the higher density options provides a positive residual gain at this market price, as the cost per dwelling is higher than the price.

Notice that as the market price rises, the situation changes. The biggest gain for each market price scenario is highlighted in yellow.

At a market price of $700,000, building one detached house for $500,000 leaves you with $200,000. But building four townhouses for $600,000 each leaves you with $400,000. At this slightly higher market price, you are better off choosing the higher-density townhouses, even though they have a higher cost per dwelling to develop.

As the market price rises further to $800,000 per dwelling, you can still make money with a single house. Spend $500,000, and you have a $300,000 residual gain. You can also make even more money with townhouses, with a $200,000 margin on four of them for an $800,000 residual gain,

But now, 12 apartments leave you in the best situation.

The price is high enough to justify spending $700,000 per dwelling on development costs, and because there are now 12 dwellings with a margin on each of $100,000, you get a $1,200,000 residual gain.

We can see the pattern. Rising prices justify higher densities, even though they also increase the economic gain from developing at the same density.

The same is true for quality choices. Rising prices relative to cost justify improving the quality of housing in all aspects, from kitchens and bathrooms, appliances, to the quality of building common areas, to carparks and storage, to balconies and more.

Rising prices relative to construction and development costs change the choice of density and quality of homes more than the overall quantity. This is why thinking that some new, cheaper construction technology will mean more homes is mostly wrong—it will mean building bigger, better and denser homes. This is good and desirable. But it is a different outcome.

For those who love an economic chart, here is an animation of the choice of density at different market prices. The slope of the blue line is the market price of a dwelling, which hence determines the total project revenue at different densities. The yellow line is the total project cost at different densities, with the curve arising due to diseconomies of density.

As the market price rises (i.e. the blue line gets steeper), the optimal density choice increases, dragging up the total cost (and hence per dwelling cost too). Spending higher costs at higher prices is what provides the highest total project residual gain (the shaded area).

So what?

This might seem straightforward, but understanding how market prices relative to construction costs change density choices really matters for understanding the housing market.

In our example, rising prices led to the choice to build dwellings at a density that was more expensive to build. At a market price of $600,000, it was best to choose to spend $500,000 per dwelling on construction. But a 67% market price increase (relative to construction costs) meant a mid-rise apartment project was the best choice, even though the cost per dwelling was 76% higher than the cost of the detached home (at $880,000 per dwelling instead of $500,000 per detached house).

Along the highlighted diagonal of optimal density choices, development cost was always between 83% and 88% of the market price. It never fell.

So construction costs can’t determine prices. They can’t. Construction costs were 83% to 88% of the market price at all market prices because costs follow prices.

This example also helps us see what happens when prices fall relative to construction costs (from either rising costs or falling prices).

For example, instead of making $7.2 million on a mid-rise apartment project when the market price per dwelling is $1 million, a price decline of 20% to $800,000 means that the best possible project is now a small walk-up apartment block, which makes only $1.2 million, or an 83% decline in residual gains.

This enormous volatility arises because the residual gain to the property owner is a leveraged exposure to housing prices, as I explain here.

Notice that at higher market prices, the often-desirable middle densities are less economically advantageous than the higher densities. So to get those middle densities requires a market price high enough to justify them, but not too high that even higher densities offer a better residual gain. Or, they require preventing even higher densities in high-priced locations.

This relationship between market price and optimal density choice has long been known.

Here’s an image from Roy Wenzlick’s 1942 thesis on the Fluctuations of Urban Rents, Their Causes, and Implications. He clearly notes how rising office rents justify higher density. But when rents fall, the optimal density choice falls too. Even though offices are still development-feasible at these new lower prices, the same density is no longer the highest value use.

It was also the case that construction technology changed substantially during the 1920s, which allowed for much higher density without as much added cost. The combination of higher prices and falling construction costs (i.e. much higher market prices relative to construction costs) is why, in the highest-value locations of the period, the world’s tallest (densest) buildings were developed—the Chrysler and Empire State Buildings.

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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This is Part 1 of a four-part series coming to FET that I hope will become a reference point for understanding key concepts related to housing production.

1. Why a feasible change of use is different from commercial feasibility

2. How prices determine the construction cost of building new homes via choices of density and quality

3. Housing supply is not new housing production

4. Why landbanking is a normal market outcome of balancing present and future housing

Interested in learning more? Fresh Economic Thinking runs in-person and online workshops to help your organisation dig into the economic issues you face and learn powerful insights.

Enquire about FET workshops

If you value this content, please consider signing up as a paid FET subscriber to support this work and get access to all articles and audiobooks.

Subscribe now

Another way to help is to share these articles. I am aiming to get to 10,000 subscribers in 2027.

Share

What do we mean by feasible new housing?

The word feasible gets used in two ways. We should have two words.

First, the word feasible gets used to mean that the development of new housing today would provide a larger residual income stream to a property owner than the current use. Let’s call that change-of-use feasibility.

Second, the word feasible gets used to mean that buying a site today at the market price and building new homes today can be done in a way that provides a return on costs that exceeds the risk taken. Let’s call that commercial feasibility.

In a recent FET article, I explained how commercial feasibility can never be found—the price of land will ensure that, at best, new development profits reflect the risk that developers in the market would be willing to take. Commercial feasibility gets bid all the way down to zero via rising land values, such that development returns only reflect risk.

And yet, this concept is widely thought to be very important for town planners and policymakers to try to measure and target via policy.

Let’s use the diagram below to illustrate the difference between these two feasibility concepts.

The first column in light red represents the present value of the income stream of the current use of a site. This could be zero in the case of a vacant or empty site.

The next column is the total revenue from the development project of a design and density that, if undertaken today, would lead to the highest residual value after development costs and a margin that reflects the risks taken.

The third column shows the breakdown of how that revenue generates the maximum residual (yellow) after subtracting development costs (blue) and a margin that reflects the risk taken to complete the project (grey).

That also happens to be the minimum value of that land, or site, today.1

At that land value, the project is just barely commercially feasible for the most optimistic developer who thinks they can best manage costs and risks and design the project with the highest residual income.

Note that the land value (yellow) is higher than the present value of the income of the site in its current use (the light red first column). This scenario meets change-of-use feasibility, meaning that the value from development today is higher than the value of never developing and retaining the current use.

But the fourth column shows another scenario.

Here, the land is valued higher than what is needed to make the site barely commercially feasible today, and hence the project is commercially infeasible today. I have labelled the extra land value a delay premium.

This situation arises because property owners have more than two options: never develop or develop today. They can also develop at some point in the future. And since all expected future economic returns are priced in by traders today, buyers will often pay more for a site than it is worth for development today only. They pay a premium for the possibility of even higher gains from developing in the future.

The market of buyers and sellers of sites will sort out via their trades which sites are expected to be best to develop now, and which are best to develop later, and this will be reflected in the pricing of those sites. And indeed, the return from waiting to develop will, even at this higher starting price, reflect the risk taken and the rate of return in a market equilibrium. Waiting also pays. As it must.

For completeness, the final column shows the scenario of a clearly commercially feasible site, where the land, development cost and risk sum up to less than the revenue from the best project today. But since markets price in all risks and returns, land simply cannot trade at this low price and leave excess returns on the table, as I previously explained here.

These conceptual distinctions matter for policy design and analysis.

Many policy changes in recent years have been motivated by the idea of creating more feasible housing development sites. But the feasibility concept often being inadvertently applied is one of commercial feasibility, which we know cannot exist on average in a market.

We can’t create excess returns. They get immediately priced in via higher land prices.

Where the more appropriate change-of-use feasibility concept has been considered, it has usually been done without recognition that the market will sort sites into those best to develop today or in the future, and it will do this via pricing expected future gains. Adding more sites to a large pool of sites with feasible changes of use will simply cause them to be priced in a way that reflects that the highest-value use is development in the future, meaning that they remain commercially infeasible, but at a much higher land value.

Using two terms to ensure the two distinct meanings of feasible housing are used consistently is a first step toward building a sensible understanding of why and when new homes are built.

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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Also, we comment on the emergence of culture within subreddits and respond to some of the comments on Reddit about Cameron’s work. The rise of Pauline Hanson and One Nation becomes somehow relevant to the whole conversation too!

Enjoy this chat and leave a comment with your thoughts.

Starting next week at FET is a four-part analysis that I hope will become a reference point for understanding key concepts related to housing production.

1. Why a feasible change of use is different from commercial feasibility

2. How prices determine the cost of building new homes via choices of density and quality

3. Housing supply is not new housing production

4. Why landbanking is a normal market outcome of balancing present and future housing

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

Theme: Happy Swing by Serge Quadrado Music—Creative Commons Licence CC BY-NC 4.0

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Australia’s Productivity Commission (PC) is an in-house economic research group for the federal government. They run inquiries into matters referred to them by politicians, and respond with sensible policy comments and recommendations.

At the end of May, Treasurer Jim Chalmers asked them to look into Housing Supply Regulation. Those wishing to make a submission to the inquiry were given three weeks to do so, and the PC is expected to report their findings a month after that.

Two months to solve housing. Again.

I’ve attached below a submission I made with focussing on the economics of why new homes are built. You can read all the submissions to the PC here.

Submission To Pc Housing Supply Regulation Inquiry Helm And Murray June 2026

625KB ∙ PDF file

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One more time with feeling

When you step back a little, giving the PC two months to solve housing with yet another inquiry is comical political theatrics. Unequal access to housing has been an issue for centuries, and it reflects broader changes to economic inequality during both booms and busts.

The “coexistence of progress and poverty” emerges through uneven distribution of housing and land ownership during periods of rapid economic change, including inflationary periods.

Back in 1911, for example, there was the NSW Inquiry into Fair Rents that led to the 1915 Fair Rents Act. For the century since, we have constantly inquired, reviewed, and investigated housing. If you spend some time in the archives of Trove, you will notice this pattern. Below is a headline from 1963 about the housing shortage, for example.

The 1970s inflationary period most closely mirrors the 2020s in terms of the political debates about housing. For example, home asset prices in Brisbane doubled in the first four years of that decade, while inflation was about 40% cumulatively. In the past four years, Brisbane prices have increased 50%, and cumulative inflation has been 20%.

But we never seem able to zoom out and see these patterns.

Governments have responded to the cycle of public concerns with many reports and reviews in recent decades that focus on the micro level, seeking out a regulatory tweak here or there to leverage for large housing market effects, which never arrive. I noted as such a few years back in my submission to that year’s rental inquiry.

The table below is an AI summary of these many housing reports and inquiries (so please send me any corrections). As you can imagine, many more industry and think-tank reports on the same topics have been written as well.

Australia’s 2026 housing market in context

The strange part about all these inquiries is how they confuse the cyclical for the structural.

For example, the 2017 to 2021 period was one of the cheapest times to buy Australian homes in over two decades in terms of the cost of renting money to buy a home or the cost of renting a home directly. Falling interest rates, rising incomes, and flat nominal prices had resulted in a substantial market adjustment that was hard to see when looking at the asset price of homes alone.

During COVID, we dropped interest rates further and stimulated the economy, as did many nations, leading to a global housing price boom. In recent years, we tried to unwind this with higher interest rates, intentionally making buying a home more expensive to reduce home buying and, in the process, reduce home prices and new housing construction (to dampen inflation).

Yes, it is a difficult time to buy a home in 2026. No, it won’t always be like this, and it did not get like this because of long-term structural issues.

If we look at the more stable part of the housing market, the rental market, we actually see nearly four decades of flat rent-to-income ratios for renter households, who are generally occupying bigger and better homes.

The terms of reference for the new PC inquiry start with the claim that “Australia has a housing shortage.”

Does it really?

I’ve looked into housing shortage claims and analysis before and found they are generally very poor and often confuse the housing outcomes that emerge from both inequality and consumer choice to be a problem of having the wrong number of homes.

In fact, the stock of homes relative to the Australian population was at a record high just a few years ago, and this housing stock was bigger and better in quality than at any point in history. Since the borders reopened, this has come back a tiny fraction, which I suspect is a temporary adjustment—I predict that in 5 or 6 years we will hit a new record for dwellings per capita.

The strange part about the PC’s shortage claim is that even their own 2022 report showed a high level of disagreement about the idea of a housing shortage, as seen in this chart (p472).

The same housing shortage concerns are happening in the United States, which has totally different housing regulations and planning rules. Many people think there is a shortage, but no one knows the right number—maybe somewhere between 1 million and 8 million in a country with 150 million dwellings (or between 0.7% and 5% of the total stock).

So what?

Yes, buying a home is not easy in 2026 compared to the 2017 to 2021 period. Yes, there has been a rental squeeze as borders have reopened and incomes have risen unevenly.

But these are cyclical phenomena.

Despite all these inquiries, I don’t think there is general agreement on what is wrong with the housing market. I explain in my book, The Great Housing Hijack, why that is, but to briefly summarise, there is an inherent market symmetry that can’t be ignored. Landlords, developers, investors, and homeowners want prices to rise. New buyers and renters want prices to fall (at least until the day they buy). Renters want lower rents and landlords want higher rents. At every point in the market cycle, one or the other group is upset, and we must respond politically to that with an inquiry.

We first need to acknowledge as a nation how property markets work. Then we can decide how and when we might want to intervene, and for whose benefit. Despite all the inquiries for the past century, I don’t think we are there yet.

If you are interested in issues of construction productivity and its measurement, I can recommend this two-part FET series from last year:

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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In the 1940s, there was a heated academic debate in economics, now referred to as the marginal cost controversy.

It is still relevant today.

Just last week, I read a paper that had to make assumptions about marginal cost and price, which showed me that the controversy is far from resolved. And indeed, the controversy is very much alive when it comes to the price of land and housing (as I explained here).

The basic controversy rested on the assumption, which still prevails today, that prices being equal to marginal cost is the welfare-maximising point of economic activity.

Marginal cost is the cost of producing an additional unit of a product in a given period, taking as given the stock of capital and other historical sunk costs.

It is not the average cost of each unit, taking into account all input costs.

The image below helps differentiate the two cost concepts. It shows the output per period on the x-axis and the cost per unit on the y-axis. The average cost is the blue line, which includes the per-unit share of the capital costs. The more you produce per period, the lower the average unit cost because you are spreading the capital cost among more units.

The yellow line is the marginal cost of extra inputs needed to produce one more unit per period (for example, material inputs), ignoring the cost of capital.

Industries with any capital requirement and economies of scale will have a higher average cost than marginal cost. So, pricing at marginal cost means that the cost of capital investment can never be recouped.

Economies of scale are especially important in the case of city-wide utilities and large manufactories, meaning average cost and marginal cost will be vastly different, and this is why this was a major topic of economic interest in the 1940s.

The standard economic theory, then and now, says that marginal cost equal to price is socially optimal. But reality is that this can’t be true unless all capital investment is subsidised.

Hence the controversy.

A simple modern example could be software. Here, the cost of production is only in creating the code. The marginal cost of someone downloading and using an extra unit of that code is basically zero. But if the price were zero, no one would produce software because they could never cover the cost of producing it in the first place.

Standard economic reasoning of the time, and frankly, of today, is that a price of zero is the socially optimal price of this software.

So something is wrong here.

Where they went wrong

The wrong part is that marginal cost, being the opportunity cost forgone from selling in this period, and the input cost of production based on what was actually paid for capital and variable inputs, are being conflated in economic theory.

Many students of economics notice this.

They finish their first lessons on opportunity cost and sunk costs, then they get to the idea of firms and production, and the concept of cost is switched to input costs. Opportunity cost is waved away with the assumption that all input costs include a normal rate of return.

What is that normal return?

Oh, just what you could earn elsewhere on your dollar invested. But of course, you can only get a normal return elsewhere if other industries are pricing above marginal cost, and indeed above average cost!

This also presents problems because we know that market-clearing in all markets happens when rising supply curves (i.e. the willingness to sell different quantities at different prices) intersect with falling demand curves (i.e. the willingness to buy different quantities at different prices).

So how do we reconcile this? Subscribe to read on and indulge your inner econ nerd.

Read more

Mike has a deep understanding of bond markets, macro policy, and money. It was a good chance to ask him about Modern Monetary Theory (MMT), which is a school of thought in economics that focuses on monetary operations and both sides of the monetary balance, which includes the debt (the liability to the government) and the asset (the Treasury bond held by the public or other organisation).

Is the MMT view really that different from the standard macro view? And where does a lot of the fear about public debt come from? Who really bears the cost of interest on public debt?

We dig into these questions. Enjoy the conversation.

Follow Mike’s terrific Housing Hell Substack here.

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

Theme: Happy Swing by Serge Quadrado Music—Creative Commons Licence CC BY-NC 4.0

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Post-budget, there has been a lot of fuss in Australia’s media about taxes.

Today, I want to experiment with simply sharing a few concepts that help me think coherently about taxation as an economist, and where the confusion and blind spots are in the taxation discourse.

The main question I ask to help make sense of it all is, “Where do I send the guy with the gun?”

Tax bases versus people taxed

The important thing is that a tax base is not a person, except in the case of a head or poll tax (which is what we call a per-person tax on simply being alive for a period).

People have claims to things after tax rules have been applied to tax bases.

The value you own is the value after the rules of society are applied, not before. Your home is your home after the rules of society about property rights apply, not before. Your income is your income after the rules of society about taxation apply.

We all know this. People are incentivised by their after-tax incomes, not their “before tax” personal income, or what I will call the tax base for personal income taxes.

One of the biggest conceptual confusions is that taxes take your income. No. Your income is determined after the rules have been applied and all the price and output adjustments have taken place.

Tax bases are not people—they are places we can send a guy with a gun.

This has a few implications.

First, it means that taxing big, observable things that cannot be hidden are the best tax bases. That’s why historically taxes were raised from trade—on imports and exports that went on ships, and on land and its trade.

The tax base could be the tonnage of the ship, and you could charge a fixed tax per commodity, or it could be the value of the cargo, and you charge a percentage on that (called a tariff). On land, the tax base could be the area of land, on which a per-area tax would be applied, or the value, which would be a percentage land value tax, or the value of all fixed improvements, a property tax, or it can also include mobile property like motor vehicles that are big and easy to track.

As the economy became more sophisticated, we began taxing tax bases that were previously unobservable and therefore hard to enforce, such as personal income. In a world with minimal record-keeping and few large-scale businesses, this is hard to do. So we created systems like withholding, whereby businesses that pay employees don’t even give the employees the before-tax income (the tax base), but give them the after-tax income and apply the tax to the tax base on behalf of the tax office.

We can easily send the guy with a gun to big organisations that own major facilities.

This also means that the complexity of the tax base is a killer. The Petroleum Resources Rent Tax (PRRT) applies to a tax base that is a special convoluted accounting construct that leaves many opportunities to account differently to minimise it.

Taxing unrealised capital gains (change in value of assets owned), for example, fails not because of any economic theory about the nature of this gain versus an income payment, but because there is no tax base there to be taxed. Without the sale, there is no value to tax. It fails because we don’t know where to send the guy with the gun.

In fact, taxing income from capital (dividends and capital gains from owning businesses, interest payments on loans, etc) is tricky in general because ownership and lending can occur across national borders for not much more cost within them. Why not relocate ownership to a lower-taxing jurisdiction? Ireland, for example, has one of the lower corporate taxes in Europe, so attracts a lot of ownership into the jurisdiction, most famously aircraft leasing services.

People who gain from minimising the tax base will always do it.

So make sure tax bases are an easy place to send a guy with a gun and won’t simply disappear or be relocated because of a tax.

Want to find out more about how property rights create predictable incentives and price patterns?

Come to my two-day intensive Land and Housing Economics Workshop in Brisbane tomorrow.

Will the workshop help you invest? Probably. Will it help you understand policy? Definitely. Will it help you cut through the media nonsense about housing? Certainly.

There are a few spots left. Last chance to book here.

Tax incidence

When we say tax incidence, what we mean is the net effect on the after-tax wealth and incomes of different people after new tax rules have been applied.

Adam Smith notably described how difficult it is to really work out which people are worse off or better off after a new tax is applied because behaviour and prices adjust (see the Wealth of Nations, page 690 of the version here).

Economists call the net effect on the income and wealth of different people due to a tax the tax incidence.

For example, stamp duty is a tax that applies to the tax base of the transaction price of a home. It is the responsibility of the buyer in the transaction to pay this tax to the state, not the seller. But the tax incidence is not on the buyer, but the seller. We know that the price of homes adjusts upwards by a dollar for every dollar a stamp duty is reduced, and vice versa. Imposing a stamp duty reduces the seller’s wealth and income on net, not the buyer’s, even though the buyer sends the money to the revenue office.

If you conflated the administrative payment of a tax with the “people it taxes”, you would be wrong. It can often be the case that this is true, but usually the tax incidence is less than 100% of the person or company with the responsibility of tax payments on a tax base.

Any given tax setting is just a system of rules operating, and there are no “before-rules” outcomes, except insofar as there are measurable things called tax bases.

For example, the stamp duty described above decreases the value of property trades, and in doing so, decreases its own tax base. The property value is already different because of the tax, so that value is not the “before tax” outcome.

Tax equivalences

Often, analysis of taxation will revert to what I call ad hoc equivalences. This means that people impose a model of how they think a fair world works and compare a tax to that imagined world.

A popular example of this is to assume that taxes on the tax base of personal income are actually meant to be taxes on personal consumption. Here’s an example of such an equivalence claim.

This is important - we have a background principle for an income tax of equal sacrifice where we are thinking about people in similar situations sacrificing similar amounts of consumption in order to fund government services. In all of this discussion this is a central principle.

Why should income taxes try to reflect an underlying principle involving consumption? The Goods and Services Tax (GST) is already a tax on the tax base of the value of consumer goods.

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Where does this central principle come from?

Consider supporting FET to read on to find out what’s wrong with this claim.

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Since then, I have kept track of his views on evolving macro-economic and demographic trends.

This conversation was a chance for me to see how his independent analysis had led him to some similar views to mine on housing markets, but also test where we differ on the likely social, economic and political effects of long-term demographic trends.

It was a surprise to hear that we have both arrived at a similar view on the application of monetary policy being too broad for many of the industry-specific inflation concerns we have today.

Enjoy this conversation and find Moses on Twitter here and at his Random Walk Substack below.

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"A multidisciplinary cast of mind . . . with a yen for synthesis." - Charlie Munger (about himself, not Random Walk)

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Prosper Australia released a report last week explaining how and why to price development rights.

Download a copy here.

The basic idea is that property rights are created and defined by the state. So when high-value rights are added to the bundle of an existing owner, they should be priced rather than given for free.

As the Prosper report explains:

The legal right to use land in specified ways is how society regulates the use of a common resource for the public good. There are no natural rights to landownership, and no rights inherent in land title – rather, the bundle of rights that makes up landownership is always and everywhere a creation of the state, and relies on active enforcement by the state.

…

The right to develop or intensify land use is not inherently part of this private bundle. In modern planning systems, development rights are retained by the state to be granted through planning approvals.

The limited nature of property rights makes total sense when we talk about other rights. The property rights to undersea mining, radio spectrum, or intellectual property are all clearly invented by the state and limited, and changes to those rights are a negotiation with the community that creates and enforces them.

The same is true with property rights to spaces (i.e. land).

Before I share an extract of the report with more explanation, I want to push back on a common argument that I expect in response.

That argument is that if you upzone small areas, the value of the extra property right is high, but if you upzone a whole city, the extra value is low, and hence there won’t be much value to capture from pricing the extra rights.

As one recent article noted:

Development rights are only valuable because our planning systems have choked the supply of new housing in the most desirable parts of our cities, driving up prices for everyone.

This is wrong.

Development rights are valuable because asset markets price them such that there is no arbitrage. That’s it. Just like all property rights.

For example, say you owned the intellectual property rights to Medicine A, where the rights bundle expires in ten years. Your competitors own the intellectual property rights to Medicine B, but their rights bundle lasts in perpetuity.

Even if the same profits could be generated from each medicine each year, one property would be worth more than the other. As it must. The market price today of any property rights, intellectual or real, accounts for all future flows of profits and their risk.

If we changed the property rights for Medicine A through “intellectual property upzoning” so that they now last in perpetuity rather than ten years, would that mean there is more competition for longer-lasting intellectual property, and less competition for shorter-lasting intellectual property, so that the price of Medicine B and its intellectual property value will fall?

No.

The pricing of property in any form, whether real or intellectual, always reflects the most profitable way to exploit that bundle of rights.

We, as a society that creates, defines and enforces property, could sell the longer-term intellectual property rights for Medicine A. Only a ten-year period of rights has been granted. So from year eleven onwards, the state holds in reserve the intellectual property rights.

These longer-term rights could be auctioned off, whether in the form of a bundle that lasts another ten years or a bundle that lasts from the end of the current ten years in perpetuity.

To give them away to the owner of Medicine A’s ten-year intellectual property rights bundle would be a massive unpriced transfer. Yet that is how we do zoning in the cities.

Zoning rules describe what new property rights the state is willing to grant in different locations, and the planning system, through the approval process, hands over those valuable new property rights for free to those who apply.

Scroll down for a report extract and PDF.

Want to find out more about how property rights create predictable incentives and price patterns? Come to my two-day intensive Land and Housing Economics Workshop in Brisbane.

Will the workshop help you invest? Probably. Will it help you understand policy? Definitely. Will it help you cut through the media nonsense about housing? Certainly.

Book here.

Pricing development rights

There is a deep unfairness at the heart of Australian housing policy. State governments, by way of their planning systems, are routinely giving away public assets worth billions of dollars each year.

Legal permission to develop land in new and more profitable ways is a valuable property right. Development rights are created by and belong to the public. When transferred to private landowners, they should be priced at their private value. Right now, most states are handing them over for free.

The result is a system of enormous windfall gains. By way of rezoning and planning permission, development rights worth an estimated $11 billion are granted to private beneficiaries each year. This silent, legalised giveaway delivers vast sums to some of Australia’s wealthiest landowners, with the public receiving nothing in return. This is plainly unjust.

Development rights are public property, held in reserve for public purposes. To transfer these to private landowners is a healthy and necessary part of economic growth and change. But the value of these rights should accrue to the public, not the private owners who happen to hold title.

Such a giveaway would be plainly unacceptable if rights of the same value were transferred in the form of a separate, horizontally-defined land title. When public land is given away, or sold at ‘mates rates’, the injustice is obvious to all. And when private landowners sell land with a planning permit attached, they expect the price received to reflect the value of the permit. By contrast, the equivalent giveaway of public airspace remains the status quo within Australian planning systems. This is clearly unacceptable, and as the next section shows, the value being given away is enormous

The estimated $8 billion raised each year could pay for the abolition of stamp duty for all first home buyers, benefiting 90,000 buyers each year, while also funding an additional 195,000 social housing dwellings, a 43% increase on the current stock.

Pricing Development Rights 2026

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Are they the fairest tax that helps everyone start life on a more even footing? Or are they a nightmare of rules that require intrusive monitoring of gifts and that destroy family businesses?

We take some initial steps towards understanding how much tax revenue is possible, the problems involved, and the intergenerational issues at play.

An article of mine from 2014 on inheritance taxes is here.

And a link to The Australia Institute report we mentioned on inheritance taxes and gift duties is here.

Don’t forget that I am hosting a Land and Housing Economics workshop in Brisbane on 9-10th June 2026. Find out more here and come along to get into the weeds on property economics.

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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Here is a housing chart that looks like a banana.

In this post, I will show you some more banana charts and explain the economic reasons why such patterns are common but often misinterpreted.

Here’s another banana chart that was recently popular in housing circles. It was interpreted to mean that faster housing permit rates cause lower monthly rents.

Here’s one plotting the gross yield and purchase price of rental properties. This was interpreted to be the result of a trade-off between risk and return, notably of the lower long-term returns due to the poor condition of the housing amongst low-price, high-yield homes.

Here’s one with a rotated banana plotting lot land size (x-axis) and per square metre price (y-axis) in a major new subdivision. This banana shape has been interpreted by the popular analytical method of Ed Glaeser to be the result of planning regulations. He thinks that in the absence of zoning regulations, we would see a straight horizontal line.

Here’s another. The author interpreted it this way: “There’s no reason we can’t have wealthy and affordable cities. We just have to increase the denominator of aggregate income per household.” Regulations are implied to be the cause of the lack of data in the top-right corner of the chart.

Finally, here’s a banana chart that emerges when you plot financial returns and volatility (risk). It’s not housing, but it shows a similar pattern, with a rotated banana. The interpretation of this relationship is simple—markets price in risk.

Each banana chart usually has an ad hoc interpretation. You will notice many more charts and many more ad hoc interpretations as you dig deeper into housing or any other market.

Don’t forget about the upcoming Land & Housing Economics Workshop I am hosting in Brisbane in June. Tickets are here, and the event flyer with full details is below.

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Also, check out this recent conversation I had with Tim Williams on the Gimme Shelter podcast.

Is there an economic reason for these charts?

The reason for these banana-shaped relationships is simple but subtle.

Markets price in all trade-offs.

What does this mean?

Read on and subscribe to find out (you can also unlock this article with a free trial)

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This article was first published in 2017, but is relevant again in the context of the recent Artemis II mission and Blue Origin’s successful rocket landings.

Don’t forget about the upcoming Land & Housing Economics Workshop I am hosting in Brisbane in June. Tickets are here, and the event flyer with full details is below.

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Elon Musk has lost billions of dollars for nearly a decade trying to make electric vehicles at Tesla in a way that has never been done before.

In the new tech-billionaire space-race, where Musk has also been active with his SpaceX company, his competitor Blue Origin, run by Amazon CEO Jeff Bezos, has been running at an enormous financial loss, requiring Bezos to sell over a billion dollars of Amazon stock a year to fund his space venture.

In both of these sectors, electric vehicles and space transport, there is no guarantee of any long-term profit - there are threats from multiple new entrants as well as incumbents in both sectors. Yet billions of dollars are being poured into these experimental investments.

Facebook burned through $80 billion on its Metaverse, which is as real a loss for the economy as if the government wasted $80 billion on a failed technology misadventure.

But there is nothing “market-like” about long-term, long-shot gambles like these. This behaviour falls outside any core economic theory about the efficiency of markets in allocating resources. After all, most billionaires don’t spend their fortunes on privately-funded industrial policy with only a fleeting chance of any future payoff.

If a country wishes to expand its production capabilities, it seems foolish to rely on the type of luck that the United States finds itself with. Australia’s billionaires, for example, are busy fighting to keep their generous tax loopholes and government-protected monopolies, innovating more in their lobbying and corruption than in production.

Australia’s rich list is peppered with billionaires who made their fortune on the back of favourable government deals that handed them economic windfalls. There is barely a single innovator amongst them.

It should be no surprise then that Australia’s multi-decade de-industrialisation has finally become a mainstream political topic. According to research from Harvard, in the 20 years prior to 2015, Australia dropped from 49 to 77 in the country rankings of the complexity of their production capacity - that is, how advanced and diverse the country’s manufacturing capabilities are.

And our lazy billionaires were nowhere in sight.

Despite the benefit of billionaire industrial policy and a stable position in the country's ranking of economic complexity, Donald Trump made it to the White House, selling the message that manufacturing still matters in the United States.

So what does effective industrial policy look like when it doesn’t rely on lucky billionaires whose ambitions may not always match those of the rest of us?

The answers are simple.

If society accepts that losses from some experimental investments to make the impossible possible are worth the risk, it doesn’t matter who takes the losses—the public via government, or billionaires. After all, the macroeconomic implications are the same; real resources, the land, materials, human labour and its brainpower, are all diverted from productive uses to high-risk high-stakes experiments, be it in space, or the electrification of transport.

Typically, governments have been one of the few large organisations able and willing to make large long-term losses for a small chance of a broad long-term gain. There have often also been military motivations lurking in the background of such investments, but this need not always be the case.

NASA’s spending on the original space race, for example, was itself an extensive piece of industrial policy. NASA’s spending peaked at $5.9 billion in 1966, which was 4.4% of the federal budget, with limited direct commercial return. The graph below shows just how abnormally large the spending program was in the 1960s, and a back-of-the-envelope calculation shows it to be about 100 times larger than losses being made in the current billionaire space race.

In effect, the 1960s spending on the space race was a decade-long loss-making venture undertaken by the US government that radically expanded the production capabilities of the country. Indeed, if not for this earlier period of enormously costly industrial policy, the current private space race would have little reason to exist.

What happens with these types of experimental investments is that any future benefits often emerge indirectly. The materials and computer technology developed in the 1960s space race have dispersed through the economy, creating broad and indirect benefits that are very hard to see, but that nevertheless have expanded global production capabilities.

The other thing that competent governments have traditionally been good at is overcoming coordination problems that would stifle innovation happening in any one particular area. What good is a boom in private flight, for example, without air traffic control and a system to coordinate it? What good is developing the capability to build railroads without the ability to acquire the land to put them on?

Here again, we see billionaire industrial policy playing this coordinating role. Tesla has been investing in both new electric vehicles and the large infrastructure network of high-speed charging stations necessary for them to become a fully useful replacement for the petroleum-fuelled vehicle fleet. And again, like all vehicle manufacturers, they are relying on earlier public investments in the coordinating system that is the road network itself.

The trick to understanding the logic of industrial policy is this. Markets won’t automatically experiment with high-risk new investments with a fleeting chance of any future direct return. Somewhere, someone must make losses for a long time while experimenting with new types of production, knowing that there may never be a direct future return. Somewhere, someone must coordinate to avoid external conflicts that can arise and stifle new production.

With renewed interest in manufacturing, renewable energy, and space, governments can take on these traditional industrial policy roles while also supporting billionaire industrial policy if it emerges as well. There is no conflict. But if we want to build things that have never been built before, someone has to take on the short-term economic losses to get there.

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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Don’t forget about the upcoming Land & Housing Economics Workshop I am hosting in Brisbane in June.

There is ONLY ONE WEEK LEFT to get your discounted early bird prices.

Tickets are here, and the event flyer with full details is below.

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Wages are not incomes

I have previously explained that the wage price index published by the Australian Bureau of Statistics (ABS) should not be used as a proxy for personal or household incomes.

But it keeps happening.

I’m going to explain why this is inappropriate once again. I hope you all share this article when you see this error being made in future.

Households earn incomes from employment (salaries and wages), running a business (called mixed income), owning assets (shares, property, etc.) and from welfare payments.

If you want to know how much households are earning, you need to add up all of these sources of income.

The wage price index is not a good proxy for that total. It’s not even a good proxy for the wage share of that total.

That’s because the wage price index is not a measure of wage or salary income, but of the change in hourly wage for the same set of jobs in the economy. It is a price index, like the Consumer Price Index (CPI), but instead of measuring the relative price of goods and services over time, it measures relative hourly wages and salaries over time.

When the composition of jobs done in the economy changes so that there are fewer low-wage jobs and more high-wage ones, then incomes from salaries and wages will rise, even if the wage price index doesn’t.

Since people buy homes from their incomes, not from the wages for an unchanging average job, making comparisons between this index and the cost of housing is a huge conceptual error.

Below, I plot total per capita incomes in nominal terms from all sources (blue) against median incomes from salary and wage employment (red) and the wage price index (yellow).

Notice that per capita incomes have risen by 1.5x the wage price index over the past five years. This means the actual money households have to spend on housing and other goods has grown 50% faster than the hourly wage for the same set of job. Using the latter to assess the affordability of housing (or other goods) is wrong.

Australia’s housing turnover

One thing I find strange is that while the price of homes is set by all participants trading both new and existing homes in the market, there is a singular obsession pushing down prices by orchestrating a greater willingness to sell new homes. Little attention is paid to the willingness to sell homes from the existing stock of over 11 million homes.

Look at the chart below.

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Have you heard that Norway taxes their gas at 78% of profits, but Australia’s offshore gas pays next to nothing in terms of royalties or resource-specific payments? Yes, Australia has a Petroleum Resources Rent Tax (PRRT), which is meant to do the job of Norway’s oil and gas taxes. But it never seems to raise much in revenue, despite recent global gas price booms.

My mates at The Australia Institute (TAI) and Konrad at Punters’ Politics have been banging the drum about this for years. Now, Senator David Pocock is calling for a 25% levy on gas exports.

I highly recommend a paid subscription—it also gets you a big discount on my upcoming in-person workshop in Brisbane on the 9th and 10th of June.

There are TWO WEEKS LEFT of discounted early bird prices.

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Charging a market price for the right to extract minerals is not some socialist fantasy. Australia’s states own the property rights to onshore minerals and energy resources, while the federal government owns the property rights to offshore deposits.

It is the purest capitalist logic that the owner of a resource should act in a commercial manner and negotiate a market price for the right to that resource from those who extract it.

The tough question is how to price these resource rights.

Three common ways to price resources

State ownership

The first way for a government to capture resource rents is to own (partially or fully) both the resources and the company that leases those resources for extraction, refinement and sale.

Globally, this is one of the most common ways to ensure that excess profits during a resource price boom are shared with the state resource owner. It avoids the need for an extra layer of pricing and is akin to a business owning the building it operates from rather than renting it. However, it also entails the state taking financial risks on the major capital investments necessary to extract oil and gas.

The table below is from my 2024 report with Tim Helm, Rent-controlled resources: Why are we under-charging Australia’s mining tenants? It illustrates how common this approach is. Indeed, so successful is this approach in places with low-cost oil and gas reserves that resource profits replace a massive amount of taxation. Many Gulf nations, such as Saudi Arabia, have no taxes and fully fund their public sector from oil profits.

Special taxes on resource profits (super-profit taxes)

The PRRT is a type of super-profits tax that applies to offshore oil and gas in the federal government’s jurisdiction.

The PRRT essentially first allows the resource lessees a certain rate of profits, which are caught in the regular tax system. But after a certain amount of profit, a special extra tax applies to those super-profits above that.

Back in 2017, there was a review into the PRRT, which was raising very little revenue despite the expansion of offshore oil and gas.

Why not? If profits were high, the tax should raise revenue. Maybe profits weren’t high?

Right there is the catch with trying to tax super-profits. Profits are an accounting construct. There are many margins to play with to reduce top-line revenue, increase costs, and reduce bottom-line profits for the purposes of tax.

The PRRT built in features like allowing generous escalations of carried-forward losses, which do not apply in the regular tax system, and have been the main mechanism for reducing profits in the special accounts subject to the PRRT.

Imagine how this type of mechanism for paying rent to a resource owner would work for a business tenant paying rent to a shopping centre landlord.

The landlord would ask the business tenant, “Did you make any excess profits last year?” The tenant would produce accounts they have created to show that, no, in fact, they didn’t, and the two might then argue about it in an unending game of cat-and-mouse.

To avoid this nonsense, most landlords charge a market rent regardless of the income of the particular tenant.

Norway is able to administer such taxes more effectively as the state there is also a part owner of all facilities tapping their gas resources.

My submission to the 2017 PRRT review is attached below.

2017 PRRT Review Prosper Australia Submission

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Royalties

Instead of taxing the bottom line profit, after the accountants have gone to work subtracting everything they can from the top line, a resource owner can simply charge for the resource based on top line revenue from resource sales, using a royalty.

This is the standard way Australian states charge for their onshore mineral and energy resources. Royalties are also common in other areas of property, like intellectual property, where owners of rights get a percentage share of top-line revenues from books, music and so on.

This is exactly what David Pocock and TAI are proposing for offshore oil and gas—a top-line tax of 25% of revenue.

Since a royalty applies to the top line, the rates are typically much lower. Coal royalties in New South Wales, for example, are about 10%. Iron ore royalties are about 7.5% in Western Australia.

These are simple to enforce, as we can just send the tax man to the port or rail line to check production volumes and prices, and companies generally have an incentive to be honest with investors about high top-line revenues and business growth.

The problem with fixed royalty rates is that price variation is high over time and across resources

A 10% top line royalty on gas revenues seems better than the PRRT for offshore oil and gas. In fact, that is what I proposed to the PRRT review back in 2017 as a replacement for the PRRT.

But, as you might imagine, the simplicity of a fixed royalty rate has a trade-off.

Resource markets are characterised by:

1. large variations in costs of extraction across deposits, and

2. large variations in the market price of the tradeable resource over time.

Property markets will often vary prices by location and time. For example, the price to rent a holiday home varies not only with its location, but also over the year, being much higher during peak periods like school holidays.

The illustration below shows how the variation in costs of extraction across different resource locations means a fixed rate royalty cannot share in the economic rents of lower-cost resource deposits and will discourage higher-cost deposits from being worked.

On the left, we see resource deposits ordered from Deposit A, with the lowest extraction cost, to Deposit F, with the highest cost. A fixed rate royalty will reduce the net-of-royalty price, shown by the decline in the orange price line. The shaded grey area is the royalty revenue.

Notice that the lessee of Deposit A gets a huge excess profit, or super-profit, but Deposit F becomes uneconomical because the net-of-royalty price is not high enough for the lessee to earn a return on the capital they need to invest to begin working it.

On the right, we see a situation in which property owners price optimally to leave only a small super-profit for each lessee. Each gets a normal return on capital invested, but the resource property owner collects more from Deposit A, a little less for Deposit B, and so on, while collecting nothing for Deposit F.

This would maximise the return to the resource owner while ensuring maximum output of the resource. This is the intended way the PRRT and other super-profit tax regimes operate.

In Australia, we do make some adjustments to royalty rates to reflect the differing costs of extracting different resources. For example, in New South Wales, coal royalties are 10.8% for open-cut mines and 8.8% for deep underground mines

But the other pricing issue is the variation in price over time, which can be much more important than variation in extraction cost across deposits of the same resource in the same jurisdiction.

The next illustration shows what happens when the price of the tradeable extracted resource doubles.

On the left, with a fixed royalty, the resource owner gets the same proportion of the higher revenue, so revenue doubles when there is a doubling in price. But the actual amount of excess profits may have tripled, or more, as shown on the right.

So fixed rate royalties, when prices are low, make marginal deposits uneconomical, and when prices rise, collect only a small proportion of the excess profits available.

How to make royalties work better

After this little economic lesson, what should we make of a 25% royalty on gas exports?

I think it is probably good politics but bad policy.

Yes, a 25% royalty rate when the gas price is abnormally high would be good. But gas prices rise and fall quickly.

Let’s have a quick look at the market.

Asian gas prices are high relative to the last two years at 19 USD per MMBTU. But not excessively so. Prices were half of that just months ago.

A 25% tax at, say, $20/MMBTU equals $4, leaving a net-of-royalty $16/MMBTU for the gas lessees. But at a $10 price, the same 25% leaves lesses only $8 net of royalties. At a $5 market price, they receive just $4 net of royalties.

When the global price is $20, states should probably charge more than 25%. But if the price is $5, they should charge a lot less.

Other than shifting to gameable resource super-profits taxes, what can we do?

The solution is to apply a variable royalty that operates much like progressive income taxes, with higher marginal rates at higher resource market prices.

Queensland has applied this approach to gas and coal in recent years, raising billions in extra revenue during the post-COVID resource price spikes.

Below is the Queensland royalty schedule for liquid petroleum. The royalty rate is 3% of revenue below a price of $50/bbl, with a marginal rate of 11.5% applies for prices from $50/bbl to $100/bbl and a marginal rate of 12.5% applying above $100/bbl.

For coal, the approach is shown below, with marginal rates rising from 7% to 40%. Notice that the royalty price rises more than in proportion to the market price. This is exactly what it should do to capture super-profits.

This is the type of aggressive variable royalty schedule I would apply to offshore gas. Yes, states should charge a high marginal and average royalty when the price is abnormally high, to get a share of the boom. But they should also charge a much lower rate when the price is low. Variable royalties do just that.

Variable royalties are also a feature of privately negotiated prices. Often, intellectual property royalties are like this—the more books you sell, the higher the royalty rate you get. Applying variable royalties to resources seems te me to be a more commercial approach for government resource owners than fixed royalties.

A final royalty design tweak

You might notice that defining market price thresholds and percentage rates in a royalty schedule opens up the same problems as leaving income tax brackets fixed over time. What about inflation? What about bracket creep?

We have indeed had substantial inflation since Queensland’s variable coal and gas royalty schedules were introduced in 2022. A $100 coal price doesn’t leave mining companies and their shareholders with as much profit as it used to, especially when their input costs have risen by nearly 50% over the past few years. That is certain to lead to ongoing lobbying and endless efforts at the back end of state government to work out what kind of adjustments are necessary.

Tim Helm and I proposed that instead of fixing nominal brackets and dealing with these problems, states could instead scale the royalty rate based on the ratio of the current resource price to a long-term median price metric. This would allow for a set-and-forget approach with only one political bargain over the base rate of royalty.

The formula would take the ratio of the current benchmark price, or the current price received by a firm with longer-term contracts, and the median market price over a long period, such as 10 years. Then it would apply this scaling factor to a base royalty rate.

So if the base rate is 7% of revenue and the current market price of the extracted resource is the same as the 10-year median, the miner pays a 7% royalty.

But if the miners are receiving double the 10-year median during a boom period, they would pay a 14% royalty. This results in a royalty price that scales with the square of the current price relative to the long-term benchmark, which is exactly the kind of more-than-proportional growth in royalty revenue the schedule of marginal tax brackets is trying to achieve.

The beauty of this model is that resource prices can boom by many multiples, but cannot fall below zero. So there is a massive asymmetry of price variation to the upside relative to the median 10-year price.

The attached documents below explain this in more detail and show various simulations. They show that adopting this type of scaled variable royalty would have raised about $15 billion per year in extra revenue if applied to coal, iron ore and gas over the decade from 2013 to 2023.

Scaled Royalty Working Paper

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Prosperrentcontrolledroyaltiesreportnov2024

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Prosper Rent Controlled Royalties

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So what?

The debate about taxing gas needs to have some sensible economic logic behind it. A 25% flat royalty on the top line might be fine if gas prices never fall substantially. But we know that resource markets are subject to booms and busts.

A scaled variable royalty can achieve the same outcome in a boom, and an even higher average royalty during very large price booms, while scaling back automatically when resource prices inevitably fall again.

Combine this approach with different base rates for deposits with quite different extraction costs and states could end up with nearly the full effect of an economically ideal super-profits tax without any of the accounting trickery.

As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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So how does an economist think about war, and emergent cultural and political forces that create conflicts amongst groups?

Paul Frijters runs Academia Libera Mentis, a new education institution for minds that dare. He documents this grand education experiment here at his Subtack.

Paul and I go way back. Paul was my PhD supervisor, and we co-wrote Rigged, a book that dives deep into the way political favouritism operates in Australia. He has studied the way human societies function, particularly how the underlying emotional drivers of greed and love generate loyal groups as well as fierce competition.

He even has a book with Gigi Foster about that called An Economic Theory of Greed, Love, Groups, and Networks.

This underlying understanding of humanity should be extremely helpful for assessing potential scenarios in major global events, like the war in Iran. Although I am very much on board with the economic thinking about greed, love and groups, I am very much in the dark about the history and current tensions driving this new conflict in the Middle East.

Paul has recently lived in Saudi Arabia and has been studying the region in detail. So enjoy this chat and keep in mind how things have unfolded between when we recorded, on 16th March, and what is happening when you listen to it.

Stories of Academia Libera Mentis

The unfolding story of a new academy in a castle in the Ardennes where young minds discover how things actually work, how to form productive proud communities, and how to reform our broken societies.

You can find Paul’s academy website with details of upcoming open days and events here.

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A persistent idea in planning and housing policy debates is this: Cities need enough sites that are zoned for housing and financially feasible today to build many new homes for decades into the future.

How many is enough? Who knows.

In New Zealand, councils are required to estimate feasible zoned housing capacity. This has led to arguments about whether the current zoned capacity for triple or quadruple the number of homes is enough. In Canada and many parts of the United States, similar debates are playing out.

In Victoria, Australia, councils are required to “ensure sufficient realisable capacity” exists in their planning schemes, while in New South Wales, councils “need to identify the theoretical development capacity in their existing land use controls” and take into account “the feasibility of development and likely take up rates of the capacity identified.”

The Grattan Institute released a report last year arguing that:

The federal government should ask the Productivity Commission to regularly assess the performance of state and territory land-use planning systems, including through regular assessments of commercially feasible capacity for new homes.

The idea that feasible zoned housing capacity is both extremely important and easy to identify is embedded in many administrative processes around the world.

But it is not. This whole exercise is seriously flawed.

Why?

Because it ignores basic economics and hence fails the efficient property markets hypothesis test. Since all the gains to future development are priced in today, there should be no excess returns to development. Finding feasible housing capacity is equivalent to finding excess returns in the share markets—essentially impossible on average.

Let’s dig in to see why in more detail.

I highly recommend a paid subscription—it also gets you a big discount on my upcoming in-person workshop in Brisbane on the 9th and 10th of June.

Tickets here, and a PDF event flyer with full details is downloadable below.

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The efficient property markets hypothesis test

Feasible housing capacity is usually taken to mean that the returns on today’s costs from development today exceed the cost and risk of development today.

In practice, this is measured by examining sites across a city or region and estimating the potential revenue from developing each site to the highest density allowed under zoning rules.

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One thing Steve taught me is to really think about the hidden assumptions in our economic models, which has been extremely valuable to me during my economic journey.

Our conversation starts with Steve’s concerns about the Vietnam War draft, and moves on to his epiphanies about what was missing from economics education. We discuss his attempts to model the key insights of Hyman Minsky about the economic behaviour that generates macroeconomic cycles, and the state of the economic debate.

Oh, and we talk about the very controversial issue of money creation by banks and the public Treasury!

Find Steve’s YouTube channel here.

Steve’s Debunking Economics podcast is here.

And of course, Steve writes on Substack at Building a New Economics, which is where you can find his latest writings and conversations.

Building a New Economics

The systems-based alternative to mainstream economics

By Steve Keen

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It surprises me that many people confidently know how many homes there should be.

They loudly claim that the current quantity is the wrong one. “There’s a housing shortage!” they scream.

Even more than knowing what the quantity of homes should be, they also know what type of homes should be built and at which locations. Craziest of all, they know what the price of homes should be!

I wish I had such powers to solve the economic calculation problem.

We wouldn’t need markets nor private property. We could simply build the right homes in the right places and allocate them to the right people at the right price.

Even funnier is that many who loudly proclaim a shortage don’t know how many homes or people there are, or how these two numbers have changed over time. A twitter poll I ran a couple of weeks back showed that the majority of people thought that the number of dwellings had grown much slower than the population for the past 30 years.

But the data shows that in fact the housing stock grew 60% while the population grew 50% (though remember that demographics plays a big role too).

Another surprise is the rewriting of housing history constantly taking place. When I search the archives for that mysterious abundant housing era, I can never find it. Every place or time I’m told is a great example of cheap and abundant housing seems much worse than recent years.

I’ve even heard that 19th-century European cities had abundant housing. Yes, they changed and grew a lot. For example, Paris tripled its population in the second half of the 19th century, from 1m to 2.8m. But this is exactly the same population and growth experienced by my city of Brisbane in the past 50 years. And home sizes nearly doubled in Brisbane, too. And yet we still complain of a housing shortage.

Which era has abundant housing and which does not?

Don’t forget about the upcoming Land & Housing Economics Workshop I am hosting in Brisbane in June. Tickets are here and the event flyer with full details is below.

Ground Rules Workshop Flyer

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Today, I want to take a tour across time and space to see how the apparent housing shortage always seems to be present and always based on complete nonsense analysis, which I unpick for you. The ever-present housing shortage is perhaps an even more deceptive idea than that of the ever-present skills shortage.

Oh, and remember, if there isn’t a current housing shortage, then there is an imminent one. Must not rest on our laurels!

History of shortages

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But Jim is more than a businessman.

He has written multiple books, has a PhD, and will run for election in Northcote, Victoria with the Libertarian party in November 2026.

I wanted to find out what motivated Jim to run for politics, ask him about where he sees government waste and interference reducing our quality of life, and of course broach the topic of fertility, which he has a unique view on.

It turns out that zoning and planning regulations are a big deal for Jim. Although we weren’t able to agree on much about this topic, we were able to break apart why our views differed.

Find out more about Jim, his books, and try chatting with “AI Jim” at his website, jimpenman.com.au. Find him on X/Twitter here, and pre-order his new book Birth Rate Crisis here.

Don’t forget about my upcoming Land and Housing Economics workshop on 9th and 10th June in Brisbane. Tickets here. PDF flyer attached below

Ground Rules Workshop Flyer

2MB ∙ PDF file

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As always, please like, share, comment, and subscribe. Thanks for your support. You can find Fresh Economic Thinking on YouTube, Spotify, and Apple Podcasts.

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