Last night, the Australian Government announced a new budget. Many of the stated premises of the budget seemly clearly out of touch with the current reality. Either the government is unaware of the current reality, or the government is not being completely open with the electorate.So what is out of touch with reality?
- Economic Situation.
- Forward Growth Projections.
- Altering Negative Gearing will destroy house prices.
- The Housing Bubble and Bank Exposure
1. The Economic Situation.
It is presented that ‘Australia has the highest growth rate in the OECD’! This is meant to imply our economy is doing very well relative to other countries. The reality is that what we have is the highest population growth in the OECD. Growth per person is not strong at all, and growth per typical person (as opposed the the very rich) is way below the average for Europe. I have taken the graph to the above right from here. Note Australia is ‘yellow’ while other OECD countries are either ‘yellow-green’ or ‘green’. This colouring is due to the higher population growth.
So reality is that what Australia really has, is ‘strong population growth’. Not a particularly strong economy, at least in per capita terms.
2. Forward Growth Projections.
There was discussion of growth returning to the long term trend. This ‘long term trend’ was established during the 20th century, when global population growth was at record levels not again anticipated for hundreds of years at least. There is no prospect of returning to the conditions of ‘long term trend’, therefore therefore there is no prospect of returning to the growth enjoyed during those conditions, without something dramatic and different taking place.
3. Altering Negative Gearing will Destroy House Prices.
Australian house prices are currently extremely high. Almost all analysts suggest that the ‘negative gearing’ tax rules contribute towards driving houses further and further from affordability, and unnecessarily lower taxation revenue. The opposition suggested a change to ‘negative gearing’ that very creditable analysts and modelling suggest could impact house prices by 2%. Although no modelling has been released in support of the claim, the government states that this small change would in fact destroy housing prices. Clearly way more impact than 2%. If impact would truly be only 2%, then government is being untruthful an unnecessarily allowing a tax loophole. Even the prime minister himself has previously declared ‘negative gearing’ is simply ‘tax avoidance’. So either the government has advice it is not prepared to share, or the government is being misleading in order to simply ‘play politics’.
4. The Housing Bubble and Bank Exposure.
Could it be that the government has advice on the housing bubble and bank exposure that leads them to believe even a 2% drop in housing prices could burst a bubble and they are telling the truth about collapsing house prices. Clearly house prices will not ‘collapse’ due to negative gearing alone, but what if the government has advice that pricing is very fragile?
Australian house prices are at record price to income levels. Far higher than the levels prior to crashes in other countries. However they are supported by that high population growth figure. At time when population growth globally is declining. Maintaining the high population growth will require increasing immigration levels as the Australian population, as in every other OECD country, does not have birth rate that would even maintain the current population.
The high population growth itself is under threat. Australian official statistics show 27.7% of Australians were born overseas. To keep the same percentage growth through immigration we have to grow the number of immigrants as the population grows. Now remember that OECD population graph? Only countries who are destinations of immigration are even close to the growth level for Australia. To keep up supplying immigrants, ‘rich countries’ in general would have to keep raising the percentage of their population leaving for Australia every year. Either Australia allows the immigration rate to fall, or Australia accepts immigrants from poorer countries where population growth it strongest. Either way, the pressure on house prices drops.
Once you drop pressure on a bubble, as they found in many places in the US during the GFC, it bursts. Housing prices in Australia are kept high by limited supply compared to demand. Clearly, the demand is at risk. Almost uniquely, once pressure comes of off prices and suddenly the supply could increase. It turns out many homes are simply not being used in Sydney and Melbourne. Sitting idle, owned by speculators who do not use the properties, and able to suddenly become available if the speculators exit the market.
Now Australia’s national wealth is very tied to the strange valuation of property. The same pool of national real estate can be valued highly simply if seen in demand within that country. Increase demand slightly, and prices can double. The real estate owned by the population is the exact same real estate, but suddenly the citizens consider themselves now rich on the basis of the real estate they owned at the outset. Drop the demand and suddenly these same people can see themselves as poor, despite the fact that nothing has changed in terms of what they own.
So the national ‘on paper’ wealth of Australia could suddenly drop, or be decimated if the ‘bubble’ bursts. And by any measure things are fragile. Then suddenly the banks do not have assets underwriting their loans and all gets very nasty.
So is it this what the government fears? That a ‘soft landing’ to the real estate ‘bubble’ is no longer possible and any small drop will start an avalanche?
The government is either ignorant of all of these issues, or does understands but does not with to discussion with the electorate. Either way, it does seem a little like ‘get elected no matter what the consequences’. But there is little evidence the other side of politics is any better. Have they taken the government to task on any of these issues?