On Monday the 28th  July 2008 Kathryn Ryan from  Radio New Zealand’s Nine To Noon  program interviewed Fred Harrison (an expert in economics and housing cycles) on which way the property market will follow over the next few years and how it may affect people who are wishing to sell property. Following is a transcript of the interview:

Fred Harrison:  That is correct.

Kathryn Ryan:  Nice to have you with us.  Sorry, this new book titled not that new a book but that the book title suggests that you believe a prolonged recession even depression is on its way.   What are you predicting?

Fred Harrison:  Yes, I am afraid there is no quick recovery from whets happening on the global scale.  Historically, the property cycles have occurred within national economies, but this time, in fact over the last cycle as well as this one, we have what is a synchronized global property market and cycle.  So were all going down at the same time, which means that the trauma goes worldwide and I am afraid that because of the particular circumstances of this downturn it is not going to be one that we will recover from with any great speed.

Kathryn Ryan:  What is the difference about this one?

Fred Harrison:  Well, It is the convergence of a variety of circumstances but most specifically it is that the housing cycle in the States in the UK, Spain, Ireland, Australia and New Zealand, they’re all trying to end that at the same time, which means that there is going to be a huge contraction of consumption, of spending, investment throughout the world and there is nothing to offset that.  No compensating trends that can buoy up the downturn in national economies which means that we effectively will end up in a depression rather than a relatively short lived recession.

Kathryn Ryan:  Worse than the situation the world economy found in say the mid 1970s in the oil crisis?

Fred Harrison:  Yes, that was the end of actually, look we call it an oil crisis but it was the end of an 18 years property cycle and it so happened that the oil Sheikhs decided to bump up the price of oil, so economist who do not like talking about problems associated with property are happy to call that the oil price boom.  Well, yes that was an oil price boom but it was actually just the end of yet another 18 year property land speculation cycle.

Kathryn Ryan:  When did you hit on this theory or formed your view on this 18 year property cycle?

Fred Harrison:  Well, actually it is not my original theory while researching the phenomenon of property/boom bust, I established that back in the 1930s, the number of American researches had identified the 18 year periods for property boom/bust.  So in fact the business cycle in the United States and when you look at the data which is very precise sure enough that they were actually linked to real state land speculation in the United States.  Well, that work was published but then promptly forgotten.  But I revived it, I went over there and talked to the guys who did the original research.  They were quite elderly but fortunately still alive and I put it to the test.  So like in 1983 when The Power in the Land was published, you could forecast the 1992 downturn.  So 10 year before 1992 I was able to forecast that it would happen.  So, similarly applying the same 18 years cycles, when I published the book called The Chaos Makers in 1997.  I said, “Look, the housing markets worldwide will start to go down at the end of 2008, beginning 2009” and I was absolutely right.

Kathryn Ryan:  What is it based on?  What is the cycle? Explain your theory as to why the cycle operates this way and to this sort of time frame?

Fred Harrison:  Yeah, the explanation not the description but the explanations too remain controversial and I am trying to get economists to test my theory.  It so happens that the long run rate of interest is around 5% and if you work on that basis then it so happens that people buying property at the beginning of a new cycle will recover their money at the end of 14 years, this is within the 18 year period.  We have 14 years phenomenon occurring and is to do where the rate of return on investment in property, very specifically land. It so happens that that cycle comes to an end just to the point when land prices are at the highest when people go mad speculating capital gains.  They all think that prices will never go down and of course they do just to the point where people cannot afford homes.  First time buyers are excluded from the market and the whole house of cards crashes.

Fred Harrison:  That is correct.

Kathryn Ryan:  Nice to have you with us.  Sorry, this new book titled not that new a book but that the book title suggests that you believe a prolonged recession even depression is on its way.   What are you predicting?

Fred Harrison:  Yes, I am afraid there is no quick recovery from whets happening on the global scale.  Historically, the property cycles have occurred within national economies, but this time, in fact over the last cycle as well as this one, we have what is a synchronized global property market and cycle.  So were all going down at the same time, which means that the trauma goes worldwide and I am afraid that because of the particular circumstances of this downturn it is not going to be one that we will recover from with any great speed.

Kathryn Ryan:  What is the difference about this one?

Fred Harrison:  Well, It is the convergence of a variety of circumstances but most specifically it is that the housing cycle in the States in the UK, Spain, Ireland, Australia and New Zealand, they’re all trying to end that at the same time, which means that there is going to be a huge contraction of consumption, of spending, investment throughout the world and there is nothing to offset that.  No compensating trends that can buoy up the downturn in national economies which means that we effectively will end up in a depression rather than a relatively short lived recession.

Kathryn Ryan:  Worse than the situation the world economy found in say the mid 1970s in the oil crisis?

Fred Harrison:  Yes, that was the end of actually, look we call it an oil crisis but it was the end of an 18 years property cycle and it so happened that the oil Sheikhs decided to bump up the price of oil, so economist who do not like talking about problems associated with property are happy to call that the oil price boom.  Well, yes that was an oil price boom but it was actually just the end of yet another 18 year property land speculation cycle.

Kathryn Ryan:  When did you hit on this theory or formed your view on this 18 year property cycle?

Fred Harrison:  Well, actually it is not my original theory while researching the phenomenon of property/boom bust, I established that back in the 1930s, the number of American researches had identified the 18 year periods for property boom/bust.  So in fact the business cycle in the United States and when you look at the data which is very precise sure enough that they were actually linked to real state land speculation in the United States.  Well, that work was published but then promptly forgotten.  But I revived it, I went over there and talked to the guys who did the original research.  They were quite elderly but fortunately still alive and I put it to the test.  So like in 1983 when The Power in the Land was published, you could forecast the 1992 downturn.  So 10 year before 1992 I was able to forecast that it would happen.  So, similarly applying the same 18 years cycles, when I published the book called The Chaos Makers in 1997.  I said, “Look, the housing markets worldwide will start to go down at the end of 2008, beginning 2009” and I was absolutely right.

Kathryn Ryan:  What is it based on?  What is the cycle? Explain your theory as to why the cycle operates this way and to this sort of time frame?

Fred Harrison:  Yeah, the explanation not the description but the explanations too remain controversial and I am trying to get economists to test my theory.  It so happens that the long run rate of interest is around 5% and if you work on that basis then it so happens that people buying property at the beginning of a new cycle will recover their money at the end of 14 years, this is within the 18 year period.  We have 14 years phenomenon occurring and is to do where the rate of return on investment in property, very specifically land. It so happens that that cycle comes to an end just to the point when land prices are at the highest when people go mad speculating capital gains.  They all think that prices will never go down and of course they do just to the point where people cannot afford homes.  First time buyers are excluded from the market and the whole house of cards crashes.

Kathryn Ryan:  So, this is always the mathematical theory here?  It comes back to how quickly you recover your investments, make you capital gain or whatever that starts the tune on the cycle as you say.  It prompts a certain behavior?

Fred Harrison:  That’s right.

Kathryn Ryan:  Who’s at the heart of this then, you mentioned investors, investors in this country we think about, were a bunch of home owners, well many of us anyway, well around a third, and then there were those who have investment properties or investments in property elsewhere, is that where you look if you like to explain this phenomenon?

Fred Harrison:  No, because you see it is to do with the land market and the buying and selling land but you look over the centuries, like in 18 century it was canal building speculation.  Investment in canals pushed up land values, made some people rich and left a lot people very poor.  Then in the 19 century, building railways meant that a lot of land values rose around the stations of trains and so on, pushed up land values, a lot of speculation again left a lot of people ruined because they came into the market too late.  Then so now in the 20th century of course we democratized property ownership.  We left the aristocracy behind and so all think we are landowners now.  And so in the 20th century although, second half of it, it was to do with the home owner for sure enough.

Kathryn Ryan:  So, it is the same phenomenon that people make back their money at a certain time and the market overheats about that time and then it crashes; it is the same phenomenon wherever it’s happening?

Fred Harrison:  That is right.  You got it right.  And there was one chance, one really good chance where the reforms could have been put in place.  And actually, New Zealand plays a part in this and unfortunately it didn’t happen.  If you are interested I will tell you.

Kathryn Ryan: Hmm

Fred Harrison:  Okay.  Back in the 80s Margaret Thatcher came to power in Briton, she did not quite know what she was going to do.  But she heard that in New Zealand you were doing something interesting in the way of privatisation.  She got this idea from New Zealand she launched privatization in the UK and off we went.  That led to the Boom/Bust of the late 80s crashed in 1992.  Now, if New Zealand when it had introduced the first privatizations which attracted the attention of Margaret Thatcher had said “look by privatizing states assets and encouraging investment in new infrastructure and so on, this will necessarily push up land prices which will lead to the overheating and the crash”.  So, what we do is simultaneously with the privatization what we in New Zealand ought to do is to revive the idea of the land based tax.  New Zealand founded its success in the late 19 century on the idea of funding infrastructure out of land values.  Now, if that idea had been paralleled to the privatization program in the 1980s, if Thatcher had also understood therefore the economics of land taxation and had adopted that at the same time then this would have been the countervailing influence against the booms and the bust that we would have had --.

Kathryn Ryan:  What is the land tax in that respect we have often debated the capital gains tax as a means to try to slow the housing market in particular, but a land tax as opposed to income taxes is direct sales taxes we have in this country. A land tax works how?

Fred Harrison:  You actually do have a site value based municipal tax.

Kathryn Ryan:  Rates in other words.  What we would call rates?

Fed Harrison:  Rates! Correct, and that is based on the site value alone.  Now, a capital gains tax is bad news because it’s a levy on someone on a one off basis on an event.  We know economically that certainly does not forestall behavior like property speculation.  The only way that we can counter this cycle which has been going on for centuries is to change the incentives.  At the movement, the tax regime that we have, that you have as well is we punish people who go to work by taxing them pretty heavily relatively.  We reward people who choose to speculate in property meaning very specifically land.  We talk about “oh it is good to invest in bricks and mortar” but actually the capital gains are in the land not the bricks and mortars.  So, we got a very perverse tax regime. Now, Australia and New Zealand built their colonies (when they were colonies) on the back of a site value based tax which we call the rates yes sure enough.  But over the last century this – the rights were diminished in importance under the ideological influence coming mainly from the United States and now as I say the biases in favor of punishing people who go to work who add value to the economy and we reward people who indulge in land speculation.

Kathryn Ryan:  They results is that boom /bust cycle that we got to say.

Fed Harrison:  Well, it just reinforces it and we do not therefore do not have this countervailing policy, which is the only way to crush the boom/bust cycle.

Kathryn Ryan:  Have you got any politician interested in the suits of tax changes and then seen to changes you are talking about.

Fed Harrison:  Well, I talked to many of them but they always say where’s the constituency for it, it’s a good idea.  We know no noble prize winning economist endorse it.  We know that historically it is confirmed by classical economist that it is the best for the productive economy the best way of raising public revenue but there is always the chickening out factor.  We do not think that today the home owner would like it.  Yesterday, it was the aristocracy would not like it.  So, the answer is until somebody stands up and actually initiates a public debate and explains how things can be run on a rational basis.  So, that in stead of these booms and busts because a lot of people are going to loose their homes over the next two three years.  We really want to get rid of this kind of activity, we are going to have to have a rational public debate, explore the issue properly with all the evidence to demonstrate that we are all actually going to get richer by switching the bias of the tax system.

Kathryn Ryan:  Good luck with the debate Fred Harrison.  Thank you so much the Fed Harrison his book again Boom Bust, House Prices, Banking and Depreciation of 2010 and also Power in the Land that published in 1993.

The audio can be listened to at Radio National New Zealand's website