Australia’s Apartment Block Economy

The news on home soil has been intriguing. It turns out that the Australian government acted on advice from investment banks and accounting firms when deciding on the Qantas bailout. Well, the lack of a bailout. That doesn’t seem quite right.

Investment banks and accounting firms will be the first to profit if Qantas has to reshuffle its business. Finding suitors for joint ventures, capital raisings and new corporate structures are what these firms do. Conflict of interest anyone?

Then again, it’s good to see a government using some sort of financial cost-benefit-analysis. It would’ve been far easier to just chip in and save Qantas for political reasons. But, as we explained yesterday, even if the government gets its way over Qantas, the company is still very much under the finger of the government. A second law that won’t be repealed still restricts its practices. No doubt Qantas’ future struggles will be blamed on the law that was repealed, not the one that remains.

For now, the obvious answer to the Qantas problem is Jetstar. Tickets are much cheaper without the services being much worse. In any self-respecting capitalist system, that leads to one result. The other possibility is one Australia just learned the hard way with Holden.

Besides, cheap is valuable in Australia. The Economist Intelligence Unit reckons Sydney and Melbourne come in at fifth and sixth for the world’s most expensive cities to live.

These comparisons are always a bit dubious. For example, currency moves determined much of the outcome. But it still tells you something about the size of the opportunity waiting for those willing to take it.

Australian housing costs are of course our biggest gripe with Australia’s cost of living. Thanks to the RBA leaving rates at a 60 year low of 2.5% yesterday, that situation is only expected to worsen in the short run.

Wait, aren’t low interest rates making housing more affordable, not less? We doubt it.

That’s the irony in what the RBA tries to do. On the one hand, it tries to control the Australian economy by manipulating housing affordability through the interest rate. But it does so at the expense of making houses more expensive, or more unaffordable.

For every shift downwards in the interest rate to stimulate demand, Australian house prices rise more, making them less affordable. In the meantime, the debt load steadily rises, as lower rates just end up meaning borrowers take on more debt to pay for more expensive house prices.

In the end, people can afford…well…they’re willing to pay a certain amount a month to be in a house. Whether the interest rate is low or house prices high, the cost of owning a home will simply adjust. For now, it’s higher house prices.

Perhaps this explains the cannibalisation of housing on the rest of the Aussie economy. In Sydney, office towers are being converted into apartments at an increasing pace. In the CBD alone, 10 buildings are being remodelled.

Surely this isn’t what economists meant when they said a housing construction boom would replace the mining boom. Developers seem to be taking things a little too literally. Either way, the Australian stock market doesn’t seem fazed that Australia’s business capital is turning into an apartment block. But it’s not exactly conducive to economic growth, is it?

Regards,

Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.


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