The Housing Bubble: Australia’s Dependent Economy ...
“Buy land, they aren’t making anymore of it.”
- Mark Twain
Property prices in Australia have been going up for some 6 decades. The inflation rate in the domestic housing market over the last 30 years is at 382%. Hey, but aren’t we being told by economists and the RBA that high inflation is a bad thing! However, investors and home owners love the fact that their properties keep increasing in value. $1.4 trillion, as of December 2022, is the outstanding debt in the Australian property market. The RBA website tells us that banks use deposits to lend out to investors and home buyers as mortgages, but this is not true. Banks create the liquidity for these loans out of thin air and this money pumps up the worth of the Australian economy by hundreds of billions of dollars annually. The housing bubble: Australia’s dependent economy is massively over-inflated by this long-standing process. Economies around the world are similarly placed but Australia leads the way in the overblown bubble stakes. Bubbles invariably burst and we are incredibly vulnerable economically because of our low manufacturing base and dependence on exporting minerals and fossil fuels to China.
“Economics and finance generally state that individuals with income deposit their money into banks and banks use those deposits to make loans to their customers. This is not an entirely accurate reflection of how banking and making loans works as this would imply that banks can only lend out the same amount of money that has been deposited with them, which is not the case; banks lend out much more money than customers have deposited with them.
Today, most of the money in circulation is in the form of deposits, which are created when banks make a loan (create credit). When banks make loans, their financial accounting creates two entries: one in the form of a loan asset and one in the form of a deposit liability. “
“Only by abolishing private property in land and building cheap and hygienic dwellings can the housing problem be solved.”
- Vladimir Lenin
The Australian Economy Ranks Poorly on Complexity
Australia ranks poorly on scales for complex economies, we are below countries like Ghana and Botswana. Successive governments have taken the easy option in economic management terms allowing manufacturing to wither away via their policies. The Australian car industry is a perfect of example where sustained investment is required to maintain a high-tech manufacturing operation and governments and the private sector were unwilling to do so. Sending rocks to China was far more profitable in the medium term but governments need to be looking ahead and ours have failed to achieve this. Economic growth in Australia has been achieved by bringing more people into the country. 400, 000 new migrants per year boosts productivity and stimulates domestic economic growth. One of our largest exports is the education of international students at our universities, worth some $6 billion annually. This export involves bringing these students into the country to study and a substantial amount of these students end up staying.
“The Department of Education has released year-to-date (YTD) January 2023 international student data. There were 448,274 international students on student visas YTD January 2023, this is 20% more compared to January 2022.30 Mar 2023.”
- Austrade
“In 2018, there were 876,399 enrolments generated by 693,750 full-fee paying international students in Australia on a student visa. This represents a 10.1% increase on 2017 and compares with an average annual enrolments growth rate of 10.8% per year over the preceding five years.”
These students and migrants provide much of our workforce for jobs in hospitality and other lower paying gigs that Australians will not do. During the pandemic Australia lost around a million of these people who returned to their countries of origin. Many of them are returning or have already come back to Australia. Our economy depends upon their participation to function fully, and this is why the government has opened the gates to facilitate their entry.
“You can spend the money on new housing for poor people and the homeless, or you can spend it on a football stadium or a golf course.”
- Jello Biafra
The Housing Crisis In Australia
Currently, however, we are experiencing a housing crisis with rental stocks at their lowest ebb. The shortage of available rentals has been impacted by a trend away from shared housing during the pandemic with less people living in each rental. In addition, there has been a growing move by investors and landlords into short stay accommodation via things like Airbnb, where they can make more money less encumbered by lengthy tenancy leases and responsibilities. Market forces have seen rents increase around Australia by some 22-30% over the last 2 years.
“In the past 12 months, rents in Sydney have surged by 29.6 per cent, while Melbourne and Brisbane each posted a 24.8 per cent increase. The smaller capital cities notched increases of between 5 per cent and 18.3 per cent on an annual basis.
In Sydney’s eastern suburbs, combined house and unit rents soared 47.1 per cent to $1064 a week over the past 12 months, while rents on the lower north shore increased 51 per cent to $1120.
Rents climbed by 31 per cent to $598 in Melbourne city, and by 36.5 per cent to $612 in the city’s inner east.”
The Australian inflation rate of 6.8% has been estimated by economists to be made up of rental increases to the tune of 22%. Of course, every time Philip Lowe raises the interest rate on the cash rate – now at 4.1% - this further pushes up rents across Australia. The housing bubble: Australia’s dependent economy will come under immense strain and perhaps breaking point with home loan interest rates on repayments having increased 7-fold or more in a year. Rental stress and mortgage stress will coalesce into a negative force capable of destroying the dreams and lives of many Australians. The market is not looking after the needs of everyday Australians. All those neoliberal promises are not worth the paper they were printed on back in the time of John Howard.
“Government has to produce affordable housing. Government has to produce answers.”
- Alexander C. Pelosi
China’s Economy Is Not What It Was
Meanwhile, China’s economy is showing signs of tanking and our dependence upon it for markets for our mineral exports among other things will put serious clamps on our economic growth going forward. Our over-reliance on these exports like iron-ore, coal, and gas in a net zero environment and with China’s economy sliding into the doldrums does not make for optimistic reading. Our wealth is at risk due to the ongoing absence of value-added exports as part of our economic mix. During the Covid-19 pandemic, when international borders were closed, and lock downs delayed expected imports we woke up to the fact that we were too dependent upon outsourced manufacturing for many essentials. Our construction sector was reliant on cheap Chinese building materials and couldn’t get them. Since then, inflation has pushed up the prices of these materials and in tandem with rising wages has seen hundreds of builders go bust, as they were locked into fixed price contracts for their finished housing projects.
Is The Australian Housing Market A Ponzi Scheme?
Land and property prices are far too expensive in Australia – they are over - inflated in value. This means that everything that follows becomes prohibitively expensive as well. Rents, both residential and commercial, are too costly and this pumps up the prices of goods and services. Property prices and rents in Sydney are more expensive than in New York and London. If everything costs too much, then, this puts huge pressure on wages to catch up, so that Australians can afford to live here. Australia has become too expensive for its own citizens to live comfortably here. This is a failure of successive governments over decades. Inflation is now a real problem but inflation in the property market has been a problem for a long time. A lack of supply with an abundance of money chasing that commodity is a sure-fire recipe for high inflation. This is what we have had in the property market for many years, with banks lending trillions of dollars to investors. Plus, Australian governments subsidise speculation in property investment through negative gearing and no capital gains taxes. Our governments have been complicit in creating this mess, where ordinary hard-working Australians cannot afford to buy and now rent a home. Aussies are living in tents on the fringes of cities in public reserves and parks – this is a crisis.
“home is not a place, it’s a feeling”
- Unattributed
“Home sweet home. This is the place to find happiness. If one doesn’t find it here, one doesn’t find it anywhere.”
- M. K. Soni
Is A House A Home Or An Investment?
Psychologically it is important for human beings to have secure shelter – a home where they feel safe. Having an economy, which is dependent upon the housing market is counterintuitive for that basic requirement. If housing is all about making money and there are no safeguards in place for the many who miss out on the wealth, we find ourselves where we are now - on the precipice of societal upheaval. The reports about a youth crimewave in the media may well just be the tip of the iceberg for what is about to be unleashed if things remain on the current economic trajectory. A third of working age Australians rent. Of the remaining cohort a third of them have paid off their homes, which leaves those who have not in mortgage stress. We are talking about millions of Australians with little to no savings, after the pandemic, and facing evictions from their homes by landlords and banks. Many renters only have enough money to live month to month. People will be marching in the streets if rates and rents keep going up and the economy tanks. Ours is a very vulnerable economy because all its eggs are in the China basket.
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Record Levels Of Migration Into Australia
1,000 new migrants are arriving every day. High rates of migration into the country, whilst making the housing crisis much worse, is the only thing propping up our economic growth and preventing a technical recession. However, will the new waves of migrants remain content to stay when they soon discover that they cannot afford to live here. Wages are going backwards in terms of buying power with high inflation and rising CPI. The RBA dampening demand via monetary policy will send small businesses to the wall and this will begin to impact unemployment. The RBA wants to see an unemployment rate of 4.5% to 5%, as their traditional inflation beating buffer. That equates to around 500, 000 Australians out of work. This is despite the fact that this inflation is not the result of a wage-price-spiral but a profit-price spiral instead. A recent OECD report confirmed that Australian businesses have led the way by increasing their prices well beyond costs of production to fuel high inflation in this country.
“In the debate over what is driving inflation – the OECD has looked at 15 nations across the world and found that in Australia and most other nations, the answer is profits.
Research by the OECD as part of its 2023 Economic Outlook has confirmed what many economists around the world have argued that profits have been the major driver of inflation.”
The toothless tigers, like the Australian Competition and Consumer Commission (ACCC), have overseen the greatest corporate concentration in most sectors of our economy ever seen. Banking – see the big 4. Miners – BHP, Rio Tinto, Fortescue, and Newcrest. Media- Murdoch and Fairfax. Airlines - Qantas and the shell they still call Virgin. Supermarkets and Liquor – Woolies and Coles. Gas – just 4. Energy- just a couple really. Telecommunications – Telstra, Optus, and Vodafone. Tech -Google. Microsoft. Advertising- Google and Facebook. Auditing and Consultancy – PwC, Deloitte, KPMG, and Ernst & Young. Think about where you spend your money and whether there is any real substantial competition in the market. In Australia, there is bugger-all. This means that these corporations can set the price, which is how they are achieving record profits and driving inflation. This is a global phenomenon of course and is part of the rentier economic trend taking over everywhere. These corporations extract rents from those that do business with them. This way of generating revenue does not much care about productivity as a major driver for their business model. Thus, productivity around the world is not greatly increasing and has not for years. Workers are not going to be able to increase their productivity, rather it is only going to come via things like AI and further automation, which will further see the demise of many jobs and more unemployment. Philip Lowe going on about linking wage rises to increased productivity is like listening to a grey ghost from another era – out of touch and dangerously directing Australia toward a serious economic disaster.
Labour Hire & Wages In Australia
“Labour hire is a form of employment in which an employer (“host”) hires a worker from a labour hire agency (“provider”) for a short period of time. In Australia, it’s estimated that at least 600,000 workers are employed in the labour hire industry. In fact, every ASX20 listed company (i.e. organisations whose shares are traded on the stock market) uses labour hire; with the majority in the financial, material, health care and consumer staples sectors, including Commonwealth Bank, Afterpay, Wesfarmers and Telstra. What started as a last resort for companies that found themselves in unpredictable emergency situations has since exploded over the last 30-something years into a key feature of the organisational structure of many Australian businesses. The result? A ruthless and largely unregulated industry predicated on employing low-paid workers with few benefits in ongoing roles – the ramifications of which are huge.”
Labour hire, if you speak with lawyers in the fair work field, is a pernicious beast that feeds on the rights of workers to trim the bottom line of business. A decade of LNP conservative government has seen union bashing become par for the course and the manipulation of something that was initially designed to help companies fill labour shortages in emergency situations. Instead, now you have vast swathes of people doing the same job and being paid different amounts in firms like Qantas and in the mining sector, in particular. Successive governments have banged on about making Australian businesses more internationally competitive, but at what expense. At the expense of workers being ripped off and losing rights. Do we really want to live in a country of haves and have nots? The mining sector is not short of a quid and reaps huge rewards from their investments into our national resources. Indeed, Australia, in comparison to a country like Norway, fails to tax these corporate giants properly and provides them with huge tax breaks.
Big Business Backing Labour Hire In Advertising Campaign
Big business has mounted a campaign to fight the possible move of the Albanese government to legislate against some of the more blatant exploitation of labour hire and close some loopholes in existing labour laws. It will be interesting to see if the mood of the nation is supportive to their message in the current economic climate. Scare campaigns like the one run against the super mining tax back in 2011 can be effective in the right circumstances. Labour hire in the current high volume migration period is a big issue and will have a profound impact on the lives of those coming into Australia to start new lives.
“The Bureau of Statistics finds 84% of workers on labour-hire contracts don’t have access to paid leave entitlements. Their median annual earnings are A$33,100. Labour-hire work is insecure and poorly compensated for being insecure.
Labour-hire workers are also more likely to sustain workplace injuries due to inadequate training and management practices.”
Same job, same pay sounds pretty fair to me. All this malarkey about it not recognising seniority is a furphy, of course, longtime employees can be paid more in recognition of their longer service. You just can’t pay new employees under the odds. Companies can pay their older employees more. Australia has a real problem about companies underpaying their workers. BHP was the latest. The ABC has been guilty of it. Woolworths, Super Retail Group, Qantas, Commonwealth Bank, Michael Hill, Sunglass Hut, Bunnings, Rockpool, Grill’d, Subway, 7-Eleven, Commonwealth Games, Endota Spa, and these are just the more prominent employers. The list is very long and makes for depressing reading if you are a struggling worker living in Australia. The public service has been underpaid for many years and cuts have seen massive amounts of outsourcing to consultancy firms like PwC. The Morrison government in its last year before being ousted spent some $20.8 billion on consultancy outsourcing.
Wages & The Wealthy
CEOs received on average a 15% increase to their annual wage in 2022. The average base CEO renumeration for an ASX 200 boss is $1.6 million, according to the Governance Institute. (Daniel Ziffer, ABC News, 15 June 2023) I wonder if they receive a bonus for keeping the wages of their workers as low as possible? Luxury goods are booming and seem immune to the cost-of-living pressures and high inflation. Could it be that a certain section of the community are laughing all the way to the bank. Australians are famously apathetic, which may go someway to explaining the ease with which they have been hoodwinked by business leaders and governments into settling for second best whilst some revel in huge rewards at their expense. It will be interesting to see if poverty and homelessness will spark some of us into action.
Did Someone Say Credit?
Indeed, some of us will most likely need to borrow funds to get through the winter with energy bills set to rise between 25% and 40% after the 1st of July 2023. Many Australians only have a month’s worth of rent up their sleeves and if a vehicle breaks down or some other calamity besets them or their family they will have to access credit. Banks are more reluctant to lend in the current high interest rate climate. Things like Afterpay and the like will probably get a real workout. Understanding the consumer credit reporting system is always a wise idea but especially so during lean times. The Chinese call these periods ‘the time of the Rat’ because rats are exceedingly good survivors. Rats can get by on the smell of an oily rag, as they beg, borrow and steal sustenance during droughts and famines. So, my fellow and sister rats get to know your credit file and how the system works.
Request a free copy of each of your credit reports from the 3 bureaus:
Illion Ph. 1300 734 806
Experian Ph. 1300 783 684
Equifax Ph. 138 332
You are entitled to a free copy every 3 months and anytime that you are refused credit on the basis of what is in your file. Pore over every single detail contained within your consumer credit report to ensure that no errors have been made. Your file must be exactly true in every detail or you have grounds for the information to be corrected. If you find mistakes contact the lender and the bureau to request it gets fixed post haste. Be on the look out for any instances of identity fraud because it is fast becoming as common as cake. Check and recheck that the information pertaining to your credit history is precisely accurate in every detail. If you are unsure about your rights, according to the law, there are specialist expert consumer credit lawyers who can help.
If you spot things on your credit report that should not be there, immediately contact the police and the Australian Cyber Security Centre - https://www.cyber.gov.au/report-and-recover
Australia’s dependent economy feeds on the property market and a never-ending conga line of new arrivals into the country. New arrivals spend plenty of money to get established and this keeps stimulating the domestic economy. It is currently, staving off a recession, as Philip Lowe beats it over the head with his monetary policy lever - interest rate rises. Many Australians are questioning the legitimacy of this like never before, as more of us have become au fait with economics in the 21C. What will our economic future look like when the China tap is turned off? Net zero fast approaches and fossil fuels have been pencilled out as no longer fitting the bill. We pretty much don’t have a manufacturing sector, so how are we going to generate revenue in this country? If the bubble bursts and all this over-inflated wealth disappears in a puff of overheated bad air, there are going to be a lot of sad and angry people. If the banks get broken by the $1.4 trillion of debt in the mortgage pipeline, what will the outcome look like? Governments have been taking the easy options for so long, avoiding any electorally unpalatable decisions, that the road back for something like manufacturing is just a faint dirt track – a memory in the mind of a few old timers really. We need to get moving on this score right away. The housing market has been out of control for a long time, even Philip Lowe is aware of this. Governments and the private sector need to invest in value added industries for the future of this nation. Australians need to make things again, but even better this time around. We must be willing to make mistakes because this is the only way to get things going. We cannot be afraid of a few expensive stuff ups. There are nations like those Scandinavian countries that make quality things and they pay their workers really well. They can be a model for our transformation. Manufacturing does not have to equate with doing things on the cheap and paying workers poorly via labour hire. We have top quality universities and students and we need to hang onto them by valuing them. Australia can develop a sophisticated economy if we invest in it. We need to be smart and value smart. It is a lot about education and investing in the future of the nation. We would be best served by putting the breaks on the housing market via policies designed to stop pumping it up on steroids. The banks are a big part of this problem, as are the legions of real estate agents. Perhaps, talking about property can become ‘non ingrediar’. Poor form at dinner parties to mention housing and money in the same breath. The housing bubble will burst and there will be collateral damage.
References
Aust Bureau of Statistics, Lending indicators, April 2023, Viewed 19 June 2023.
Aust Government Dept Education & Training, 2018 International Student Data, Viewed 20 June 2023.
Beale Gemma, Business is trying to scare us about the ‘same job, same pay’. But the proposal isn’t scary, The Conversation, 8 June 2023, Viewed 20 June 2023.
Jericho Greg, OECD confirms that inflation has been mostly driven by corporate profits, Australia Institute, 8 June 2023, Viewed 19 June 2023.
Johnston Matthew, Why Banks Don’t Need Your Money to Make Loans, Investopedia, 25 April 2023, Viewed 19 June 2023.
Sweeney Nila, Record monthly rent surge is a time bomb for inflation, Financial Review, 14 February 2023, Viewed 20 June 2023.
Winter Velvet, Here’s a running list of Australian businesses that have underpaid staff in 2019, SBS News, Viewed 20 June 2023.