We interrupt your regularly scheduled Markets and Money to bring you some views and comments from Markets and Money readers all over Australia. When we started the DR Australia in 2005 (your editor was in London at the time, but secured the services of one Kris Sayce) it was a letter without any readers. It was really just a hunch that Bill Bonner had that someone should be writing full time about what was happening in this part of the world.
Today, there are nearly 60,000 (mostly Australian) readers who get our letter every day. That makes for lots of comments that come into the in-box. And many of them are full of insight and real-world examples of the themes we write about. As far as we know, it’s the largest financial e-letter in Australia. And based on the comments below, we’d say we have the smartest readers too!
We’ll be back tomorrow with a look at iron ore, gold, and more on the red flags from the China story. And one quick note on the publishing schedule for the upcoming long weekend. There will be no Good Friday or Easter Monday editions of the DR. There will, Nick Hubble assures us, be a weekend edition published on Saturday. Now to the mail about housing, Australia, industry, and family…
After receiving my PhD in 2002 I started working at the University of Adelaide and later moved to Telstra Research Labs in Melbourne. When the TRL started falling apart I dumbed down my job and started working in IT. Twenty years ago we had quite a few R&D institutions such as Telstra Research Labs, BHP Labs, RTZ Advanced Technology Development etc. and a lot of people working on technological innovations with, in some cases, pretty good results.
Houses were just commodity. Now all those R&D institutions are gone and finding capital for even a product development is extremely hard which I know firsthand. At the same time the amount of money poured into housing is mind boggling.
I find it pretty amazing that the government is happy to waste billions of dollars on the FHOG and housing related projects such as roof insulation while very little is spent on R&D. I am not suggesting that they are the best body to support R&D but if they think that they have to stimulate, spending at least part of that money on R&D and innovative start-ups would create hope for something productive. There are a few Ausindustry programs but they are a complete joke.
I have no doubts that wasting capital to prop up the housing bubble will only make us poorer with very little productive capacity in the future.
I think there is no question that the national bias towards rising home prices is having a detrimental effect on the real wealth of the country.
A vast amount of money has been side-lined from more productive investment – building mines, new railways to carry ore, new ports for shipping ore, ships to carry ore etc. Most of the capital to do this has to be imported which is tantamount to selling off the farm. While there is no question that Australians with Australian capital could dig up the Pilbara or the Bowen basin at the same rate as we are now doing it with imported capital, it begs the question – why the hurry?
Especially as we are at the same time increasing the skilled immigration intake and this has resulted in, for example, Australian welders being layed off in favour of Philippino welders. The bigger issue with regard to labour, though, is the 2 speed economy effect where tradesmen are leaving many towns and heading to Queensland or Western Australia for wages which often double their previous earnings. This has resulted in many country towns losing most of their tradesmen and created a general inflation of trade hourly rates. This has been especially so in the building trade.
In Cairns much of the building over the last decade was of units to supply a tax mitigation demand for negative gearing, not to supply a demand by either growing population or tourism for accommodation. Cairns is in a slump now with more than 12% unemployment. Despite the fact that there are more renters because many have sold their homes, rents have come down and there is plenty of availability.
Investing in housing has been institutionalised in our national psyche. I note your recurring theme that our housing is overpriced, and this view was supported by a recent article in The Economist (at least based on housing value benchmarked against rental income). Yet the price keeps on going up.
House prices are also high relative to wage income, however that may not necessarily be a problem (for a while yet) if buyers have a lot of equity in the asset, or have backing from friendly sources such as parents. How much do we know about the structure of funding in the community, and the effect this might have on future risk of house price collapse?
I believe long term housing price inflation creates both (for now at least) short/medium term blind optimism and risk for future deflation if the bottom were to fall out of the economy (again), as some think it might. Short term optimism might be justified based on recent performance – the REAL question is WHEN it might come horribly undone, and WHERE. I do not think that the market is homogenous. Areas of higher demand, lower supply (because of recent high building costs or short supply of land) might be spared from the apocalypse you predict.
Has Australia invested more in housing than productive areas – you bet! Our future financial prosperity is linked to our education standards, yet funding for (and management of) education has suffered over the past 10 years or so. Research and development incentives have been hacked to pieces by successive governments – the latest proposed changes remove the small entrepreneur from any real prospect of adding future value based on inventiveness. As a nation we add little value to the primary resources we dig up or grow. We are not investing enough into alternative sources of energy; our country is great, but it needs good management.
Our culture has shifted towards complacency. We have a great country. However sloth is rewarded in this nation state. In contrast wealth is treated with suspicion. Industry (as in ‘hard work’) is not exactly rewarded at least at government level. Government employment is still regarded as a great path to a comfortable retirement. Employment laws entrench an attitude of entitlement based on anything but merit. Government contributes to the hopeless inefficiencies through its gouging state taxes.
I do not wish hardship on this country – but I do think that some sectors of the country need a kick up the pants. No one seems to take the GFC seriously here!
Keep up the contrarian discussions. I enjoy the frankness of your opinions and I learn a lot about the connectedness of economies from you, even if I do not always support your views.
An Anonymous (but true) Baby-Boomer Story:
In the street where I grew up, my family was a family of firsts.
My mother was the first to work full time. She always seemed concerned that we were “latch-key kids” but said that she had no choice to work because the bills had to be paid.
In fact, my parents had comparatively large amounts of what’s now called discretionary income. But that money burned a hole in my father’s pocket. He loved treating our family to regular dinners out. This “lifestyle” was disparaged at the time. And it did lead to the home having to be re-mortgaged on two occasions.
In spite of this “shameful secret”, those outings are now remembered to be our family’s best times. And still, the house was paid-off free and clear in about 15 years.
Not long after, my mother inherited her dad’s house; which was encumbered by debt, but that was also paid-off within a few years.
Like many Australians, mum was very anxious for me and my brother to buy a house.
In turn, my brother and his wife; and then my sister and her husband got a leg-up into the property market by living at grand dad’s place rent-free while they saved for a deposit.
My turn never came. After dad passed mum needed the income from the rent. Besides, I wasn’t interested in mortgaging myself up to the eyeballs. The idea of McMansion living in satellite suburbs didn’t appeal to me.
Years have passed, and every year at the Christmas get-together I endure the hour or so of my brother and sister gloating about their “investment”… and how “rich” I would be now, if only I had bought when they did.
My mother’s 80th birthday and the 10th anniversary of my Dad’s passing align. And I suggest we all chip-in and take the old girl out to a nice restaurant, just like old times.
The idea is shot down immediately. They say they can’t afford it.
“Can’t afford it, or won’t afford it?” I ask.
No, they genuinely can’t afford it I’m assured.
Minutes later, my brother takes us to check-out his new wafer-thin TV set.
Days later, in a fit of pique, I take my mother out to celebrate her birthday. It’s just her and me. Not the whole family, but it’s an attempt. We toast Dad. It’s all so awkward. Imagine not being able to afford to take your own mother out for dinner on her 80th birthday! The same mother who propelled you into all this wealth you brag about. I lamely apologise on their behalf.
My mother informs me I obviously take after my father.
She also enquires when I’m going to buy a home.
It does seem amazing to what extent the government will go to protect the wealth of property investors and speculators. Young people have been sacrificed to protect the interests of baby boomers with investment properties. Even the first home owner’s grant simply pushed house prices up by more than the bonus. The government could have just given the money directly to vendors and bypassed the middle man.
I also have to question our high immigration rate. The post world war immigration was designed to provide factory fodder for Australia’s new factories. These factories are now closing to be replaced by housing and warehouses for goods from China. With Australian de-industrialising I have to wonder what skills we actually need. As someone who has worked in mining for many years I see exactly how few people are needed for the mining industry.
In the past we value added to our mining products but today we do as little as possible and export the raw product or concentrate. It is unlikely we will make copper from any new copper mines. Simply because high immigration benefited Australia in the past does not mean it will continue to do so. Is this simply another scam to keep house prices high?
If I was in my twenties trying to buy a house I would be manning the barricades! I suppose the odd handouts to the young people have been enough to distract them from realising just how much they have been shafted.
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