After my post on the housing bust a few weeks back, someone forwarded me a link to The New City. It claims to be a “web journal of urban and political affairs”, but is fairly obviously linked to the right wing of New South Wales Labor. The mission statement says it aims to focus on “the future of the Australian labour movement and the disproportionate exercise of political, economic and cultural power by inner-city interests on urban planning and national, state and local politics.”

Much of the content involves smearing critics of the Sydney property development – construction – real estate complex as lunatic greenies and latte-drinking, terrace-house-dwelling, affluent aesthetes. The current editorial tells a story of Sydney’s development over the last few decades with enough fortuitous coincidences and happy endings for a soap opera: Rising inner city land values pushed light industry out west… just in time to provide local jobs for the masses whose desire for detached houses and outdoor lifestyles (rather than rising inner city land values) had drawn them into the suburbs. “Market-oriented reform” and “globalisation” simultaneously powered both dynamic small business and large scale big business campuses into the suburbs.

The hero of the piece: “responsive rather than prescriptive planning”, which is made flesh in “the best elements of the NSW government’s City of Cities plan”. The villains: environmentalists, do-good urban planners, and “progressive academics and commentators”. There is a token swipe at dastardly property developers who have a vested interest in “artificially inflated land values” from land-use controls – as a pretext for arguing that those controls should be lifted. The whole thing is a manifesto for Sydney’s mammoth real estate machine, a defence of the state government and an immunisation of NSW Labor against those fashionable anti-development ideas seeping in through the milquetoasts on the party’s left.

Rarely is a Sydney Morning Herald printed without suggestions of Labor’s ties to property development and its associated machinery. Why? One obvious answer is that the party is financially reliant on developers. The Herald reported last year that donations from property developers had become increasingly important for political parties, and NSW Labor “remained the donation kings of Australian politics”. In the lead-up to the last state elections, developers made up a quarter of the $6.05 million in donations received by the party, beaten only just by pubs. Five of the top ten donators were developers. The latest available figures (for the 2004/05 financial year) show that things look much the same as next year’s election approaches.

But beyond that, NSW Labor is so dependent simply because it’s the party in government, and any government of New South Wales is going to be a supplicant to real estate, developers and construction. State government revenue is highly susceptible to property market swings. A fifth of state tax comes from transfer duties, paid when properties are bought. Land tax, based on property values, makes up another tenth of state taxes. In the aftermath of the property downturn, in 2004/05, revenue from purchaser duty fell by a quarter, chopping a billion dollars out of the budget. Since total budgeted revenue is around $40 billion – with tax making up less than half – that might not sound like much, but it makes for wild swings at the margin. In this year’s Budget we saw the result: a $696 million deficit and attacks from all quarters. Luckily for the government another kind of capital gain came to the rescue somewhat – a rising sharemarket.

This creates a dilemma: the government is tempted to cut property-related taxes in the hopes of bringing real estate back to life, thus sacrificing more of that revenue. It’s more than dubious that vendor taxes were responsible for the slowdown, but one of the first things Iemma did as Premier was to cave in to the lobby and chop them, for an estimated cost of $382 million this year. Then at the start of this year, the land tax-free threshold was raised, with the Budget bragging about 12,000 investors released from its burden and a cost of $53 million this year. But so far it seems about as effective as a rain dance, if getting real estate moving again really was the aim.

Finally, the property cycle makes a massive difference to the Sydney economy as a whole. Besides cutting further into state government revenues, it’s deeply embarrassing since governments are widely seen as responsible for general economic conditions, and since the top priority of a capitalist government is to keep capitalism humming along. Last month the Bureau of Statistics reported that the New South Wales economy, as measured by final demand, didn’t grow at all in the first quarter of this year, despite the mining-based boom elsewhere. As Treasury Secretary Ken Henry said in a speech in May – noted with chagrin in that New City editorial – “I don’t think everybody in this room should be moving to Perth. But let me make this prediction: some of you will.”