How much land value uplift could Trad expect from Cross River Rail?

Queensland Deputy Premier-Treasurer Jackie Trad is facing a serious political crisis, after she delayed in declaring her husband purchased an investment property that could potentially be worth tens of thousands of dollars more as a result of the award of the Cross River Rail (CRR) tender which she had overseen. Courier-Mail state political reporter Steven Wardill has revealed that the winning bidder included a station closer to the Trad family’s investment property than other bidders (Rival CRR bid had station further away from Trad investment property). This looks more like carelessness than corruption to me, but it does raise the interesting economic question of how much uplift in land values is associated with public transport projects? (A related question is whether this value uplift can be taxed to help pay for such projects, which is the value capture question.)

There is a great deal of empirical evidence for the land value uplift associated with public transport projects. For instance, Cameron Murray has done some excellent work investigating the value uplift from Gold Coast light rail, which he summarised in his Conversation article Gold Coast light rail study helps put a figure on value capture’s funding potential:

I found that land within 400m of the stations increased in value by 7% more than land between 400m and 2km from the stations in the year after the light rail began operation.

Also, consider the Australian Bureau of Infrastructure, Transport and Regional Economics’ value uplift literature review found an average value uplift of 6.9% from heavy rail projects (see p. 3 of Transport infrastructure and land value uplift).

The Trad investment property is somewhere on Abingdon St, Woolloongabba, and may well be within 400 metres (or not much further away) from the planned Boggo Road CRR station next to the eco-sciences precinct (see screenshot below). So let’s assume the Trad investment property gets a value uplift of around 7%. The property was reportedly bought for $695,500, compared with the median house price in the suburb of around $787,000 (according to Your Investment Property).

For simplicity, let’s say the underlying land on the Trad investment property is worth around $500,000 (compared with the median land value in the suburb of $580,000, according to DNRME estimates). A land value uplift of 7% from CRR would be worth $35,000. If you assumed that half of the value uplift was already priced into the market in expectation of CRR, the value uplift would only be $17,500. I’d say $17,500 to $35,000 would be a reasonable estimate of the value uplift to the Trad investment property as a result of CRR and its planned stations being confirmed earlier this year.

Note these are estimates of static gains only. A property close to a CRR station may well appreciate in value faster than properties further away, giving the property owner additional gains over time. The potential amount of money involved is significant enough for the case to deserve the close attention it is currently receiving from the media and Opposition.

Abingdonst

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Quiggin’s Economics in Two Lessons should be on ECON101 reading lists for decades to come

John Quiggin, the UQ Vice Chancellor’s Senior Fellow in Economics, has a new book out, Economics in Two Lessons: Why Markets Work so Well, and Why They Can Fail so Badly, which I can highly recommend. I’ve enjoyed dipping in and out of it over the last couple of weeks and discussing it with friends and colleagues. The consensus appears to be that, while the book isn’t as original and provocative as his previous books (e.g. Great Expectations, Zombie Economics), it is nonetheless a great introduction to economics for the general reader. Furthermore, it is a useful refresher of key concepts for experienced economists, and it does contain several stimulating insights.

My favourite section of the book is Quiggin’s discussion of the economics of Bitcoin, in which he notes (on p. 233) “The Bitcoin bubble rests on no plausible premise.” Quiggin rightly observes:

Whatever happens to Bitcoin, we must not lose sight of a more fundamental, and worrisome development. A financial product with a purely arbitrary value has been successfully introduced in the world’s most sophisticated financial markets.

If the 2008-09 financial crisis wasn’t enough to convince you that financial markets occasionally go haywire, and the efficient markets hypothesis is nonsense, the bubble in Bitcoin certainly should.

The blurb on the back cover nicely explains why Quiggin’s book is called Economics in Two Lessons:

Since 1946, Henry Hazlitt’s bestselling Economics in One Lesson has popularized the belief that economics can be boiled down to one simple lesson: market prices represent the true cost of everything. But one-lesson economics tells only half the story. It can explain why markets often work so well, but it can’t explain why they often fail so badly—or what we should do when they stumble. As Nobel Prize–winning economist Paul Samuelson quipped, “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.” In Economics in Two Lessons, John Quiggin teaches both lessons, offering a masterful introduction to the key ideas behind the successes—and failures—of free markets.

It certainly is “a masterful introduction”. I was impressed by Quiggin’s very clear explanation of the concept of opportunity cost, and his presentation of a brain teaser on opportunity cost involving Eric Clapton and Bob Dylan concerts on the same night. You have a free ticket to see Clapton. Dylan costs $40 to see, but you’d be willing to pay $50 to see him, so what is the opportunity cost of going to the Clapton concert instead of the Dylan concert? Embarrassingly, a very high proportion of economists at an American Economic Association conference answered incorrectly when this question was posed to them. You can read the full story and find out the correct answer in Quiggin’s book on pp. 69-70.

Notwithstanding Quiggin’s extraordinary contributions to economic theory and the policy debate on a huge range of issues – including climate change, the Murray Darling Basin, privatisation, and toll roads among others – this book may well end up being his most enduring contribution to economics. I expect it will be enthusiastically recommended to students by first-year economics lecturers for decades to come.

Despite the fact I disagree with a number of Quiggin’s policy suggestions, particularly the vague and Utopian “Job Guarantee” (p. 300), I have no hesitation in recommending this book to readers. You can pick up a copy at Dymocks on Albert St, Brisbane CBD, which had dozens of copies last time I checked.

Quiggin_cover

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No wonder TSBE is mad – Toowoomba businesses missing out on generous payroll tax discounts

Toowoomba & Surat Basin Enterprise, a chamber of commerce, has been annoyed by the Queensland Government’s decision to exclude Toowoomba from its 1% regional payroll tax discount, announced in the 2019-20 state budget. A recent email from TSBE, directing its contacts to its Payroll Tax Regional Discount Survey, announced:

TSBE believes that Toowoomba deserves the same discount in payroll tax that other regional areas will receive. We have the same challenges that other regional areas have in doing business including attracting staff, paying increased energy costs and internet connectivity and we believe that in this instance the Queensland Government is not applying public policy equitably and fairly across the regions.

The exclusion is a big deal for Toowoomba businesses, because its means the difference between a payroll tax rate of say 4.75% or a discounted 3.75% (for payroll up to
$6.5 million and over the $1.3 million threshold). This mean a business with a $5 million payroll would pay $37,000 less in payroll tax per year if it received the discount. Toowoomba businesses will be annoyed their competitors in other parts of regional Queensland, including in Townsville, Wide Bay, Cairns and the Outback, will receive the discount.

Toowoomba residents must be confused about whether they are considered part of regional Queensland or not. There do not appear to be any consistent definitions of South East Queensland or regional Queensland. Indeed, the Queensland Government is inconsistent in its classification of Toowoomba. For example, although Toowoomba has been excluded from regional Queensland in defining eligibility for the payroll tax discount, it was considered regional enough to be eligible for funding from the Regional Capital Fund in 2016:

Building our Regions: Current Fund Areas

Also, it appears Toowoomba is considered part of regional Queensland, and not as part of SEQ, in determining retail trading hours:

Allowable trading hours – Easter period and ANZAC Day 2019

For the record, I’m not necessarily supportive of regional tax discounts. I’d rather governments avoid complexity in the tax system and work on lowering rates in general, for all businesses across Queensland.

Toowoomba Railway Station

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Meat disruption: it’s here and now – guest post by Stephen Thornton

Billions of dollars have been invested in Australia’s beef value chain in recent years, inspired partly by a rapidly growing Asian middle class with an increasing demand for protein. But, as in other industries, there is the potential for disruption from new technologies. My friend and colleague Dr Stephen Thornton of BG Economics offers an interesting perspective on the potential for disruption to the Australian livestock industry and abattoirs. The views contained in this guest post are Stephen’s, and should not necessarily be attributed to me. GT

An AT Kearney report into how ‘cultured’ meat (a Cellular Agriculture or ‘Cell-Ag’ technique where an animal cell is grown in a controlled environment) and meat alternatives are disrupting the agricultural and food industries recently made news headlines. Although somewhat speculative, given its qualitative forecasting methodology, the AT Kearney report does provide a useful economic framework for understanding the future global meat industry, currently estimated to be $US 1,000 billion and growing.

The world’s population is expected to be nearly 10 billion by 2050, thereby increasing the demand for food protein. However, the AT Kearney report forecasts cultured meat and new meat replacement products will result in conventional animal-slaughtered meat consumption decreasing from 90 per cent of total meat consumption in 2025 to just
40 per cent in 2040.

I expect the acceptance of these new meat technologies will be greater and possibly faster in Australia than globally, given our relatively high household disposable incomes, our propensity to adopt new technologies and that 12.1 per cent of the population already have diets that are vegetarian or almost all vegetarian.

This raises obvious questions for Queensland livestock farmers and owners of feedlots, abattoirs and butcher stores around their continued profitability in regard to domestic sales, especially after 2030 as the shelf-price of cultured meat becomes more competitive due to scientific processes becoming more sophisticated. To provide some context, the size of the Queensland beef industry alone in 2014-15 was 11.2 million head (45.4% of the nation’s herd) with over 17,300 specialist beef enterprises and beef production at the farm gate valued at $5.07 billion, although the continuing drought and devastating floods earlier this year will impact on these figures to some degree.

Wagu_cattle

Is the beef industry ripe for disruption?

There is now a proliferation of small vegan cafes and restaurants in Brisbane and elsewhere (see examples here) as well as plant-based patties now on the menu at medium size Australian burger chains such as Burger Urge and Grill’d, which aims to have half the menu in its 138 stores plant-based by the end of next year. McDonalds is trialling a new McVeggie burger and the supermarket majors, Coles and Woolworths, have added a wide range of plant-based meat alternative products to their shelves with Woolies seeing a double-digit increase in demand for vegan products in the past year.

While the focus is currently on plant-based meat replacements, the biggest disruptor in the longer term will be cultured meat, given most people will likely want to continue with their current food preferences of eating beef, lamb, pork, poultry, and seafood. The impact on the Queensland meat export industry is probably a little more difficult to determine at this stage, but it’s not hard to appreciate that some or all of our current export markets may eventually simply grow their own meat. No more beef and lamb price hikes due to flood and drought.

So, is lab grown meat just a passing fad for the top end of town? Probably not. While companies like Memphis Meats in California have seen Bill Gates and Richard Branson invest in this new technology, it’s not only capturing the attention of a few high net worth individuals. Tyson Foods, which produces 20 per cent of the chicken, beef, and pork in the US, with $US 40 billion of sales last year, has also diversified into this area. This is one to watch.

Dr. Stephen Thornton is principal economist at BG Economics.

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Qld Budget & Beyond event with Tony Makin, Judith Sloan & me on 18 July

I’m looking forward to participating in the Australian Institute for Progress’s upcoming Queensland Budget and Beyond event at Jones Lang LaSalle in Central Plaza One in Brisbane CBD on Thursday 18 July:

Come to this analysis and networking event and join our panel of Professor Tony Makin (Griffith University), Professor Judith Sloan (University of Melbourne), Gene Tunny (Adept Economics) and Natasha Doherty (Deloitte Access Economics), to discuss the recent state budget and alternative ways forward…

…The last state budget saw Queensland increasing debt and expenditure, with a heavy reliance on coal royalties to maintain surpluses. The government stressed its expenditure on job creating infrastructure, while the opposition stressed the need for financial prudence.

Who is right? Could they both be right?

That’s a nice summary of the issues from the AiP. As with all things in life, the challenge is achieving the right balance. I’m a great believer in fiscal prudence from governments, but, at the same time, I recognise the need to take the business cycle into account, so fiscal policy isn’t perverse. Austerity can be counter-productive in weak economies. That said, we should be forensically examining all our state government activities to identify savings we can make over the medium to longer-term, as I discussed in my 2018 book Beautiful One Day, Broke the Next.

If you’re in Brisbane on the 18th of July, please consider attending the AiP panel discussion. I’m sure it will be a lot of fun.

59491038_2434373029920036_1178202300586393600_o

The Qld Government “Tower of Power” dominates the skyline of the southern end of Brisbane CBD.

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Brisbane Club presentation on Qld economy & latest Value of the Census post at the Mandarin

Last Friday, I presented my thoughts on the economic outlook and the recent Queensland state budget at the Brisbane Club. I highlighted the positives (e.g. resource exports, international education) and negatives (e.g. low business confidence and subdued business investment across many sectors) in the Queensland economy, which are combining to deliver only modest growth. You can download my slides via this link:

Qld Economic update 21 June 19

I also noted the state government’s capital works program was expected to contribute to economic growth, as well as to Queensland’s ever-growing state debt. Queensland government capital purchases are  increasing substantially in 2019-20, from $8.9 billion in 2018-19 to a budgeted $10.2 billion (a 15.4% increase). Relative to the size of the state economy, this will be the Palaszczuk government’s highest level of capital works yet, at 2.7% of GSP (see figure below). Note, on current budget projections, it is expected to drop significantly in 2022-23 to 2.0% of GSP, but I expect the government will have found many new projects to invest in by then, so that may not occur. Of course, that probably means total state debt will increase beyond the currently projected $90 billion for 2022-23.

Qld_govt_capital_purchases_19_20

Readers may also be interested in the latest post relating to the Value of the Census project I’m working on with Nicholas Gruen and Matt Balmford from Lateral Economics:

Comparing the Census to alternative data or information: What is the right counterfactual?

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Qld Gov’t CAPEX – Brisbane’s inner city the big winner

Brisbane inner city workers and residents should start expecting some heavy construction activity around them soon as Cross River Rail capital expenditures are expected to amount to around $1.48 billion in 2019-20, according to the Capital Statement in the Queensland Government 2019-20 Budget Papers published last week. Cross River Rail means the Brisbane Inner City ABS Statistical Area level 4 (SA4) region has the highest level of Queensland Government capital purchases among SA4s (see chart below, noting the Cross River Rail Delivery Authority is part of the Treasury portfolio, presumably so Deputy Premier-Treasurer Jackie Trad can keep a close eye on it). Brisbane Inner City SA4 is also receiving the largest amount of capital works expenditures by the Education department, as the state government builds new (arguably unnecessary) inner city high schools (see my post Is the Dutton Park high-rise high school really necessary?).

capex_region_category

The capital spending in Brisbane Inner City looks extremely disproportionate when considered in per capita terms (see chart below, noting the dotted line is the state-wide average).

capex_per_capita_1

Sure, Cross River Rail will benefit more people than just inner city residents, so to be fair I’ve aggregated the Brisbane SA4s into one Brisbane grouping (see figure below). This reduces the disparity a lot, but it would still annoy many regional Queenslanders to see Brisbane getting above average state government capital spending per capita as a result of Cross River Rail.

capex_per_capita_2

Given the state government’s political need to improve its standing in regional Queensland, some ministers may now be regretting such a high level of capital expenditures in Brisbane’s inner city.

For a handy summary of what’s in the latest Queensland Budget for business, see Nick Behrens’s post:

Queensland Budget 2019-20 Business Update

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