Tag: housing

Australia’s startup challenge

Creating a startup culture in Australia is tough when the nation is addicted to property speculation.

While I’ve been using CNet’s story on Kansas City’s startup community to compare Google’s Fiber project with the Australian National Broadband Network, the US article touches on something far more fundamental about Australia’s ability to build new businesses and industries.

The fundamental problem is property prices.

In Kansas City, local entrepreneurs wanting to set up a startup house can afford to take a chance.

The house is the pet project of Web designer and Kansas City local Ben Barreth, who did the insane last fall and cashed in his savings and liquidated his retirement account to put a down payment on a $48,000 house in the city’s Startup Village. Why? Barreth, a husband and father of two small children, wanted to be among the first to buy a house in a Google Fiber neighborhood.

$48,000 for a house is unthinkable in Australia. Even if we disregard Sydney and Melbourne, regional centres are vastly more expensive than their US counterparts. Geelong in Victoria for instance has an average house value of $390,000 while in Wagga Wagga in the New South Wales Riverina district houses sell for a median of over $300,000.

This pattern is true across almost all of populated Australia – it is very, very difficult to find a property under $250,000 and there are few, if any, regions in the country where a house can be bought for less than five times the average local income.

Expensive property comes at a price, it discourages people from starting businesses as the risk of being left out of the property market is so high. Leith van Onselen, co-founder of the Macrobusiness blog, made a very good point about this effect on his decision to set up a business.

Indeed, the main reason why I took the risk of leaving Goldman Sachs to concentrate on MacroBusiness full-time (a start-up business) is that I had all but paid-off my house and was in the fortunate position not to be saddled with onerous mortgage repayments. Had I a large mortgage, like many Australians, there is no way that I would have left a high paying, relatively steady job, to work on a business where pay is much lower and irregular, and where the outcome is unknown.

Leith was commenting on an article in the Sydney Morning Herald reporting the risks to Australian business should property prices fall.  In this respect, Australia has managed to paint itself into an economic corner.

The Sydney Morning Herald article illustrates Australia’s predicament – Michael Pascoe (the ‘Pascometer’) reported how Reserve Bank bureaucrat Chris Aylmer had warned of the dangers of falling property prices.

With most Australian businesses dependent on bank finance guaranteed by their proprietor’s home equity, falling property prices would see a nasty economic spiral as lines of credit were called in, forcing companies to slash expenses, including wages, which in turn would drive further real estate falls.

Property also makes up the bulk of Australians’ retirement savings, so a fall in property prices would smash consumer confidence.

It’s no surprise that in the face of a recession or economic shock the first thing Australian governments do is prop up the property market.

Another damaging effect of high property prices is that it turns the country conservative. This graph from Business Spectator’s Philip Soos does much to explain why Australians turned insular in the late 1990s.

Soos-graph-australian-property-prices

Having a population locked into paying their mortgages guarantees a conservative, risk adverse culture and that’s exactly what Australia has achieved over the last fifteen years – much of the opening up from the 1970s through to 1990s has been undone as the country looks inward at protecting its housing prices and bank repayments.

That safe, insular society has its attractions. However if you want to build an entrepreneurial culture, it’s safe to say you can’t get there from here.

While it’s not impossible to build a startup nation in a society addicted to property speculation,  it won’t be easy either.

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Are Australians too risk adverse for startups?

Does a culture of property speculation hinder new businesses and startups?

Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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Australia’s high cost quandary

Is property the answer to keeping Australia’s high cost economy afloat?

“Around the world our towncars are usually 30% more expensive than taxis, in Sydney it’s 20% as the cabs are pretty expensive,” said Travis Kalanick on launching the Sydney version of Uber’s hire care booking service.

It’s not just hire cars which are expensive in Sydney – the soaring cost of living in Australia is bourne out by Expatistan, a web site that crowdsources the cost of living in various cities.

Expatisan’s comparisons find Sydney up with Tokyo and London as the most expensive towns on earth.

That conclusion means Australian businesses, governments and policy makers have some important decisions ahead of them.

Cholesterol in the veins

High property prices have been the norm for two decades in Australia, the middle class welfare state that both political parties support gives tax and social security concessions to property owners while the banking system requires most business lending to be secured by property.

As a consequence, generations of Australians see property as the only path to financial success. If Bill Gates, or any of today’s entrepreneurial wizz-kids, had been born in Australia, they’d be encouraged to get a safe job and buy property than to take the risk of starting a new business.

The property obsession has another perverse effect in that it creates a short term outlook for Aussie business owners who have to consider getting,  and paying off, a mortgage quickly to secure their financial foundations.

A few weeks ago a business owner was profiled in the Sydney Morning Herald, which some call the Sydney Morning Property Spruiker, who paid 1.1 million Aussie dollars (a million US) for a property in Redfern – which is Sydney’s Bronx.

That poor guy not only has a fat mortgage to pay off, but he has to pass those costs onto his customers. Just to pay the bank is a fat chunk out of his business before he pays his staff, landlord and the various other expenses before he can take his profits.

Having to pay the bank for living costs is the main reason why Aussie businesses don’t invest in capital equipment, which in turn makes  them less competitive than overseas competitors.

One of the myths in Australian business is that competitiveness is solely due to labor costs, what the ideologues preaching this miss is that even if Aussie workers were paid a bowl of rice a day, Chinese and Mexican factories would still be more productive due to the investment in modern equipment.

For the sake the argument, we won’t even discuss German, Japanese or Swiss manufacturers who are still competitive despite Australian level cost structures.

This last point is what’s missed in much of the discussion about Australia’s economic future – apologists for Reserve Bank governor Glenn Stevens and the self congratulatory Canberra monoculture say that the high Aussie dollar is here to stay and mining will be driving the economy.

Should the mining sector stall, which currently seems to be the case, then housing development will pick up the slack according to the policy-makers’ groupthink.

That housing development is going to come at a high price, with Australian land and homes already among the world’s highest. Given Australia’s private sector debt is among the highest in the world already, it’s hard to see where the money will come from to fuel further property speculation.

Right now Australia has a serious problem in determining what the future will be for the country.

If the future is a high cost economy underpinned by massive property property prices, then the future has to lie in high value added sectors.

The question is ‘what sectors’? Australian business, governments and society in general seem to think that property speculation is the future.

Property speculation turned out not to be the future for Spain and it looks like China’s speculative boom is meeting its obvious end.

Australians are going to have to hope that it really is different down under and that young people and immigrants are prepared to spend huge amounts of money to keep the economy afloat.

If the policy makers are wrong, then the worry is that there is no Plan B.

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Australia’s one trick economy

Businesses need fall back plans, particular when the nation doesn’t have one.

Earlier this week, Reserve Bank of Australia Governor Glen Stevens gave a speech to the Australian Industry Group on the world’s changing economic currents.

That presentation has a number of pointers for Australian businesses on how we use technology, our investments and, most importantly, where the Canberra sees our economy going.

Much of the Governor’s speech discussed how those of us who at the beginning of the century believed Australia’s economy had to diversify into new industry sectors — such as the IT sector — were proved wrong by the Dot Com Bust and the subsequent boom in the resources sector.

“Australia would probably do best, in its production structure, to stick to its comparative advantages in minerals or agriculture or various services.” Mr Stevens quoted from ten years ago, “but it was hard going trying to make sensible points against the barrage of market and media commentary.”

Perfect hindsight

It’s impressive the Governor had this perfect hindsight which can overlook the role of ramping the housing markets by the Rudd and Howard governments to avoid the 2001 and 2008 US recessions along with the sheer good luck of having a resources boom through the last half of the decade.

During his speech the governor referred to an RBA research paper, Structural Change in the Australian Economy which casts an interesting light on the comparative advantages in those “various services”.

That paper shows that service sector employment has risen to nearly 85% while its share of GDP has stayed around the same for the last twenty years, which to this non-economist’s mind implies the portion of national wealth is declining for service based workers and businesses.

Sleepwalking into the dutch disease

Of course those of us in the service sector could make it up by exporting but here again, service sector exports haven’t done much over the last decade which won’t be helped by the current high Aussie dollar — another aspect of the Dutch Disease we seem to have sleep walked into over the Howard and Rudd years.

Those same statistics show mining employment has declined over that period as well and if you’re considering sending your kids down the pit, or even packing in your own city job to drive a mining truck, you might want to read the interesting work being done by the University of Sydney’s school of robotics.

Generously, Governor Stevens didn’t completely write off the role of technology observing that, “in the old versus new economy stakes, it was probably in the use of information technology, rather than in the production of IT goods, that the gains would be greatest.”

Invest in, but don’t develop, technology

The Governor’s messages are clear to business people; our businesses have to invest in technology to be more efficient and we need to understand that government policy will be geared around the mining sector.

Most importantly, we need to understand that on a national level there is no Plan B.

In the last election it was clear both sides of politics based their policies, such as they were, on the assumption the China boom will last for the foreseeable future. Yesterday’s speech shows Glenn Stevens and the Reserve Bank share that outlook and no other alternative is being planned for.

That’s fine for Glenn, Julia, Tony and their colleagues as they have safe, indexed pensions when they deign to cease giving us the benefit of their visionary leadership.

In the business community we don’t have that luxury; a plan B is required just in case things don’t quite work out the way we hope. As the Governor says:

Succeeding in the future won’t ultimately be a result of forecasting. It will be a result of adapting to the way the world is changing and giving constant attention to the fundamentals of improving productivity. That adaptability is as important as ever, in the uncertain times that we face.

That’s excellent advice. How adaptable is your business in these uncertain times?

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