Tag: property

Short sharp shocks

China’s changes will catch us by surprise regardless of whether they are good or bad.

In Atlantic Magazine’s China’s long history of defying the doomsayers, Stephen Platt and Jeffrey Wasserstrom put the case that the Chinese Communist Party is unlikely to fall in our lifetimes.

China’s military is presently powerful enough and its diplomacy stable enough that the Communist Party faces no realistic threats from outside. Internally, its control over society is effective enough that, while unrest and discontent may be widespread, there are neither well-organized opposition parties nor rebellious armies that might seriously challenge the central government.

They are probably right, it’s difficult to see any immediate threat to the power of China’s current leaders.

Although we should keep in mind that only a few decades ago it was inconceivable that the Soviet Union would disintegrate or the Warsaw Pact dissolve.

Had someone wrote in 1986 that within five years both would happen, they would have been written off as being foolish. But that’s what happened.

In the stock market it’s said “the market can stay irrational longer than you can stay solvent” and it’s true for any pundit – you may be right that property is overvalued, the US is in decline or the Eurozone will break up, but the powers that be will may be able to kick the can down the road and sustain the unsustainable for a lot longer than any of us expect.

Steve Keen found this with the ‘walking to Kosciusko” bet where he was railroaded into giving a fixed date of when the Australian property market would fall. He, nor anyone he made the wager with, had any idea of the billions of dollars governments would throw at the market to maintain prices.

All too often people make the right calls about property markets, economies or the fall of regimes but get their timing wrong.

In his book The Sun Always Rises Ernest Hemmingway’s character Mike Campbell describes how he went bankrupt – “Two ways. Gradually, then suddenly.”

And so it is with empires, nations, ideologies and even the most powerful corporation. When the change happens it’s sudden and unexpected.

Economic cholesterol

How Australia’s property prices are the real reason for the country’s poor productivity.

Australia’s productivity isn’t growing and it’s fashionable among business community to blame Australia’s productivity decline on high labour rates.

While there’s an argument that the cafe worker earning $25 an hour is overpaid – although we don’t hear the same criticism of multimillion dollar packages paid to executives with at best mediocre track records – the argument is far more complex.

In the McKinsey report linked to above, the mis-investment is put down to the recent resource boom, but is this really true?

To really understand why Australia hasn’t performed well, we need to look at why the country is so reluctant to invest in assets that will increase our productivity.

The role of property

Underlying the recent Australian “economic miracle” is the property industry. The country’s domestic building sector is one of the most efficient job generators in the world. Stimulate the Aussie property market and job growth ripples quickly through the economy.

This was one the lessons learned in the 1990s recession – successive governments and bureaucrats have learned the mantra “go early, go hard and go residential” when it comes to cutting interest rates and introducing home building incentives like the first home owners grants.

It was no coincidence that when the Rudd Government was faced by the Global Financial Crisis they launched a wave of initiatives to boost the property industry and shore household wealth. Just as the Howard and Costello governments did in response to the Long Term Capital Bank collapse, Asian economic crisis or the 2001 US recession.

While those stimulus measures have kept Australia out of recession for two decades, the failure to unwind the measures after the economic shock has passed leaves the nation’s property market remains “hyper stimulated” and over valued. That over investment in property has sucked funds away from other areas which affects the competitiveness of Aussie industry.

The great property squeeze

One of the great tragedies of the 1990s was Sydney’s East Circular Quay precinct which could have been one or two of the world’s greatest hotel sites, literally on the steps of the Sydney Opera House.

Instead, high priced apartments were built on the site and Sydney’s tourism and convention industries are crippled by a shortage of top end hotel rooms.

Tourism isn’t the only industry affected by the Australia’s obsession with residential property – across the country service stations, sports clubs and convention centres are being demolished to make way for high rise apartment developments. No economic activity seems to trump property speculation when it comes to attracting Australian investors.

Ideological beliefs

Adding fuel to the property obsession are the ideologies of the 1980s which are still closely held by the nation’s business and political leaders.

Capital gains tax concessions introduced by the Howard government in the late 1990s made property and share speculation far more attractive that invention, innovation or entrepreneurship.

To make matters worse, Australia’s social security policies and taxation laws favour capital gains – any Australian over thirty who has tried to build a business has plenty of mates who did far better out of negatively geared property than those who foolish enough to create new enterprises.

For those older entrepreneurs facing retirement, they are in for a nasty shock if their businesses don’t sell for what they hope. They would have been far better staying in a safe corporate job and buy a few negatively geared investment properties.

Again, this ideological belief that capital gains trumps wage or business income means investment is steered away from productive assets and into residential property that can be held for a capital gain.

The Ticket Clipping Culture

Australia’s failure to invest in productive assets is not just a feature of the household investor, the corporate sector has a lot to answer for as well.

While good in theory, the superannuation system has been a failure in providing a capital pool for new and innovative businesses and productive investments.

The superannuation trustees have largely focused on hugging the index, the ticket clipping funds management culture means that any real investment for productive assets is restricted to funding toll roads where fat management fees and guaranteed commissions mean an easy life for those fund managers.

In a perverse way, the short term appearance of the ticket clipping might mean increased productivity as costs are cut to improve profits. In the medium and long term, the lack of investment in these assets means in the long term these assets too cease to add productive capacity to the economy.

Of course there’s more to infrastructure investment than toll roads and airports with crippling parking charges, but the ticket clipping classes of Australia’s investment community don’t see a quick buck in that.

Increasingly the boards of Australia’s major companies are appointed by those running the superannuation funds and these people have the generational bias away from productive investment. Instead they see slashing IT, training or asset investment as costs to be cut in the quest of boosting bonus delivering profits.

More fundamentally, three decades of consolidation in most of Australia’s industries has seen a generation of Australian executives whose main expertise is that of maximising their market power at the expense of their competitors. Investing in productive capacity is not a major concern for those corporations.

Fixing the problem

Getting Australians – whether mom and dad property speculators or high paid fund managers parking money in the ASX 200 or plonking money in the latest toll road boondoggle – to change attitudes and invest in productive capacity is going to take a generational change.

As long as the attitude persists that property is a safe investment that doubles in real value every ten years then Australians are going to continue to ply cash into apartments and houses.

It is possible that a period of Australian Austerity that suppresses property prices may force that change in investment attitudes. An weak property market is one of the unspoken effects of the spending cuts advocated by many right wing commentators,

The question is whether those commentators, or the political classes who derive their much of their policies from right wing ideologues, view have the stomach for disruption that will come when weaning Australians from the teats of corporate ticket clipping and property speculation.

Looking at the wrong curve

Times have changed, have we?

“We don’t understand it, there’s a property shortage but prices are going down,” bleats the property expert in a recent interview.

Property booms are always excused with claims of “shortages”. The US, Ireland and the UK in recent years property markets all collapsed despite business and political leaders claiming there was a “property shortage”.

The shortage meme happens because the property spruikers, economists and finance writers focus on the wrong curve – they look at the supply curve and assume prices are going up because there isn’t enough property to go around.

What drives speculative booms is easy credit – demand driven by access to money drives speculation, not supply shortages.

Australia’s long term property boom which started in the late 1960s and went onto steroids in the late 1990s has been driven by access to credit. Banks were prepared to lend to property buyers, who were increasingly speculators, and government policies favoured those speculating on property over investing or building businesses.

The crisis of 2008 was the end of the easy credit era and the Australian property speculation boom is over. For the policy makers, politicians and economists the basis of the 1980s corporatist ideology is crumbling around them.

No ideologue lets go of their beliefs easily – that’s why Western governments who bought into the corporatist worldview are pumping trillions of dollars into supporting zombie banks and releasing constant stimulus packages to prop up the property market.

Like the communists of the 1970s, today’s corporatists are looking at choosing the statistics that suit their ideological views.

To support their beliefs they look at the wrong curve and then wonder why the world isn’t working as they thought it would.

Times have changed. Have you?