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Speaker 1: Hello and welcome to The Australian's Money Puzzle podcast. I'm

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Speaker 1: Stuart Williams Citty in for usual host James Kirby. I'm

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Speaker 1: a property friendly financial advisor and host of my own podcast, Investoperly.

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Speaker 1: The daily news is always full of commentary about the

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Speaker 1: direction of property prices. This includes commentary about interest rates,

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Speaker 1: population growth, unemployment, lending volumes, and the list goes on.

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Speaker 1: Everyone's got an opinion to share. Of course, what I'd

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Speaker 1: like to get to the bottom of today is what

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Speaker 1: economic indicators should long term property investors focus on. Now

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Speaker 1: I've been following property really closely for more than two decades,

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Speaker 1: So what I'm going to do is I'm going to

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Speaker 1: share which elements I think a key to sort of

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Speaker 1: focus on, and then I'm going to invite my guests

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Speaker 1: today to not only share his thoughts but also critique

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Speaker 1: what I've outlined. So he goes of course, we start

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Speaker 1: with overall economic health. I think it's super important because

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Speaker 1: that gives us the backdrop for property prices to potentially grow.

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Speaker 1: Things like the unemployment rate, GDP growth, population growth and

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Speaker 1: so on. But let's be real, Australia hasn't had a

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Speaker 1: recession for more than three decades, so we might take

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Speaker 1: that one for granted. And then there's three other factors

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Speaker 1: that I think are really important to focus on. The

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Speaker 1: first one is interstate migration. Now, overseas immigration tends to

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Speaker 1: be relatively stable in terms of where it goes, which

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Speaker 1: states it goes to. However, interstate migration can be a

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Speaker 1: really good proxy for property owner sentiment. So good example

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Speaker 1: of this was that interstate migration was negative in Perth

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Speaker 1: for a long time and in around twenty twenty and

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Speaker 1: twenty one it started to turn positive and we know

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Speaker 1: what's happened to property price growth since same with Brisbane

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Speaker 1: about twenty seventeen eighteen, same thing happened there. The next

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Speaker 1: one is interstates and lending policy. But I think lending

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Speaker 1: policy is more important than interst rate settings. Eighty percent

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Speaker 1: of property in Australia is bought with a mortgage, and

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Speaker 1: lending policy tells us which buyers will be most active

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Speaker 1: and where. And lastly, housing supply. Now, of course it's

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Speaker 1: really tough to change dramatically change housing supply in any

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Speaker 1: particular location, and it's very expensive to do so. So

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Speaker 1: if we're investing in established locations, really all were worried

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Speaker 1: about then is change in density, and that can come

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Speaker 1: down to housing apartment supply and then planning restrictions. Of course,

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Speaker 1: I'm not an economist, so I invited the perfect guest

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Speaker 1: on today's show to tell you if I'm crazy or not.

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Speaker 1: He's worked at Macquarie Bank, Federal Treasury, the OECD. He's

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Speaker 1: the chief economist at Australian ETF Behemoth Beta Shares. He's

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Speaker 1: been on the show previously. Welcome back, David Massinese.

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Speaker 2: Great to be with the Stuart and yeah, I'm looking

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Speaker 2: forward to the discussion today.

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Speaker 1: Excellent Dave. Let's start with the big picture. Then. If

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Speaker 1: I'm planning to invest in property in an established suburb

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Speaker 1: been a major capital city, what do you think of

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Speaker 1: the two or three most important macroeconomic factors that I

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Speaker 1: need to pay attention to.

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Speaker 2: Well, I mean I think you have coven them. I

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Speaker 2: mean in terms of interest rates, the economy. I mean, look,

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Speaker 2: and you can summarize all of this into housing affordability.

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Speaker 2: I mean, their various economists out there have these measures.

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Speaker 2: I have one myself, and you can actually sort of

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Speaker 2: broad the estimate. I'm talking nationally here. You know how

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Speaker 2: high house prices are relative to income given the prevailing

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Speaker 2: level of interest rates, and when that gets to a

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Speaker 2: very high level, when affordability generally is very poor, then

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Speaker 2: it's hard for house prices to grow strongly. And you know,

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Speaker 2: after a major boom and house prices they tend to

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Speaker 2: get expensive and you think, you know, from a macro

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Speaker 2: national wide perspective, at least you're going to be struggling

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Speaker 2: to get further strong gain. So that's like anything, you know,

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Speaker 2: buying at the right time of the cycle, buying when

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Speaker 2: house prices are relatively cheap is going to give you

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Speaker 2: a better return at least in the shorter Depending on

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Speaker 2: your time period obviously matters less. If it's a long

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Speaker 2: term holding over thirty forty years and you're just getting

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Speaker 2: set forever, but interest rates the economy, then I guess

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Speaker 2: at the particular suburb, the yeah, economic prospects in that

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Speaker 2: suburb supply probably even more important because people can move

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Speaker 2: around in terms of where they work.

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Speaker 3: But what is important is how many.

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Speaker 2: Houses or how many units are able to be built

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Speaker 2: in that suburb. And that's where it does get a

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Speaker 2: little bit funny, because people want housing affordability. People you know,

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Speaker 2: at the moment, the political discussion is all about improving

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Speaker 2: housing affordability, and one way to do that is to

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Speaker 2: improve supply, to improve the density how many houses we

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Speaker 2: can cram into a certain area, which is great if

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Speaker 2: you want to get into the market, not so great

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Speaker 2: if you're looking to move into that suburb and invest

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Speaker 2: and then worry about, you know, all the influx of supply,

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Speaker 2: because that will depress your return going forward. You know,

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Speaker 2: it really depends whether you're a buyer or seller in

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Speaker 2: that reg are.

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Speaker 1: And of course we see property markets behaving quite differently

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Speaker 1: across Australia. You've got Brisbane, Perth and Adelaide that recorded

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Speaker 1: double digit property growth, Sydney about five percent and Melbourne

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Speaker 1: sort of slightly in decline. But of course we have

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Speaker 1: the same interest rate settings. You know that they're obviously federal.

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Speaker 1: What do you think is driving the disparity and growth

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Speaker 1: between those markets?

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Speaker 2: Firstly, the affordability. I mean, when Sydney and Melbourne, for example,

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Speaker 2: particularly Sydney gets very expensive relative to other capital cities,

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Speaker 2: you tend to see you know, some people leaving Sydney,

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Speaker 2: selling up and moving to cheap, cheaper cities. You see

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Speaker 2: investors looking for better value elsewhere, so you tend to

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Speaker 2: get us sort of re equival, you know, realignment of

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Speaker 2: valuations if they get too far out of line. So

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Speaker 2: there is that general cycle, but also also depends on

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Speaker 2: what is driving the economy at the time. For example,

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Speaker 2: if we're in a major mining boom, as we were

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Speaker 2: a decade or so ago, but he's went through the roof.

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Speaker 2: You know, everybody wanted to move to Perth to be

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Speaker 2: part of the mining boom, and there was a brief

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Speaker 2: period I think is around twenty sixteen where the median

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Speaker 2: price of a Perth property was higher than in Sydney,

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Speaker 2: and then Sydney, you know, Perth the mining boom ended

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Speaker 2: and Perth went through you know, years of slumber where

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Speaker 2: the where afford house prices went nowhere for a while

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Speaker 2: and valuation, you know, relative value.

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Speaker 3: Had to be restored in that market.

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Speaker 2: So there are state differences in economic performance depending on

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Speaker 2: what sectors are driving growth at the time, what mining

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Speaker 2: boom being one, Tourism is another one. So when tourism

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Speaker 2: is strong, it tends to favor the New South Wales

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Speaker 2: the East Coast markets relative to the other markets. I

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Speaker 2: actually come from Adelaide, originally. So I'm a little bit

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Speaker 2: familiar with the Adelaide market, and Adelaide has gone nowhere

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Speaker 2: for a long time. Adelaide is one of those markets

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Speaker 2: where there is supply ample well I wouldn't say ample,

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Speaker 2: but greater supply capacity as they moved, you know, built

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Speaker 2: out into the suburbs. And so that's tended to hold

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Speaker 2: back prices for a while. And also, people you know,

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Speaker 2: generally leave Adelaide, so they don't get a lot of

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Speaker 2: internal international migration. And many people you know have tended

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Speaker 2: to leave Adelaide to see work opportunities elsewhere. So it

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Speaker 2: hasn't had the population growth to drive prices for a while.

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Speaker 2: But you know, if it's got cheap enough that people

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Speaker 2: have come back or at least not have left. And

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Speaker 2: it's going through a bit of a you know, a

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Speaker 2: renaissance at the moment.

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Speaker 1: Yeah, not so cheap anymore. But if you talk about

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Speaker 1: relative value to Sydney, Melbourne's never been cheaper relative to

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Speaker 1: relative to Sydney. Do you think Melbourne's do for a

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Speaker 1: bit of a resurgence, and if so, what do you

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Speaker 1: think might be the impetus for that sort of to

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Speaker 1: change in price direction?

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Speaker 2: Yeah, Look, again, Look, another thing we haven't mentioned, another

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Speaker 2: variable into the mix, if you like, is government policy.

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Speaker 2: And you know, I think in Melbourne's case, you know,

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Speaker 2: they did impose you know, more costs and taxation on

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Speaker 2: investors in Melbourne, and that's tended to hurt the property

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Speaker 2: market relative to other other areas. Melbourne obviously was hurt

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Speaker 2: pretty well. It had a bigger period of lockdown, a

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Speaker 2: bigger shock due to COVID, and I think Melbourne is

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Speaker 2: slowly recovering from. You know, for a while there Melbourne

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Speaker 2: was booming relative to Sydney, and the medium price in

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Speaker 2: Melbourne almost got as high as Sydney.

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Speaker 3: But then you know, covids come along.

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Speaker 2: There's been some changes in government policy and it's sort

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Speaker 2: of you know, a you know taken a you know,

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Speaker 2: relatively speaking, has softened up.

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Speaker 1: Yeah, it's a good seguay to talk about sort of

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Speaker 1: property forecasting because you know, we just think back to

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Speaker 1: that sort of COVID period that all the major banks

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Speaker 1: were forecasting a twenty percent drop in prices and our

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Speaker 1: friend Christopher Joy jumped on that bandwagon as well.

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Speaker 3: With that, he's.

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Speaker 1: Sort of forecast around property price changes. Now, my view

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Speaker 1: around this is the behavioral economic side of things haven't

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Speaker 1: been really. I mean, you can build a model around

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Speaker 1: property prices, but it doesn't factor in the behavioral economic factors.

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Speaker 1: And of course two thirds of property buyers are own occupiers,

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Speaker 1: and own occupiers will go to great links to obviously

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Speaker 1: not have to sell their home. So for a twenty

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Speaker 1: percent price drop, we've got to see probably more sellers

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Speaker 1: than there are buyers. And how's that going to occur?

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Speaker 1: So do you have a view on this in terms

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Speaker 1: of property forecasts and how difficult I guess it is

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Speaker 1: to forecast property prices in the shorter term.

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Speaker 2: Well, I mean, I think property forecast in turn come

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Speaker 2: down to economic forecasts, and I think a lot of

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Speaker 2: the forecast for those big house price to clients during

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Speaker 2: COVID is that we thought we would go into a

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Speaker 2: wrenching recession. You know, we were facing lockdowns, were facing

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Speaker 2: many people losing their jobs, and I guess the concern

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Speaker 2: was that people would lose their jobs and be forced

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Speaker 2: to sell their homes. But what we saw two things happened.

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Speaker 2: A we didn't get the big increase in unemployment. We

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Speaker 2: did get an increase for a while, but many people

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Speaker 2: were kept in their jobs through the work Support program

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Speaker 2: from the federal government. And also importantly we kind of

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Speaker 2: had a Team Australia. You know, it was being called

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Speaker 2: Team Australia if anyone remembers that term, where every sort

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Speaker 2: of pitched in and helped each other out. And banks,

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Speaker 2: I think we're under a moral pressure, I think not

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Speaker 2: to force people into selling their home, even if they

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Speaker 2: were struggling due to COVID.

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Speaker 3: It was a combination of things.

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Speaker 2: Unemployment didn't go as high as we feared, and those

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Speaker 2: that did lose their jobs were given support from the government,

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Speaker 2: and banks didn't foreclose on properties to the extent that

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Speaker 2: many feared as well.

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Speaker 3: We got through that period.

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Speaker 2: Look, house prices did decline, I think nationally in Sydney

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Speaker 2: at least they were down ten percent or so at

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Speaker 2: one point, even with the RBA cutting interest rates. But

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Speaker 2: thereafter the economy stabilized and then obviously the immigration and

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Speaker 2: one of the factors there is immigration dried up, so

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Speaker 2: that source of demand went away. But then obviously with

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Speaker 2: COVID recovering and we reopened the borders and immigration surged back.

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Speaker 2: Interest rates were for a time very low, so affordability

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Speaker 2: was looking good and house prices recovered. So just to summarize, really,

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Speaker 2: I think I guess the overly pessimistic housing forecasts during

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Speaker 2: COVID really came down to an overly pessimistic view of

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Speaker 2: the economy and the economy. Actually, you know, we got

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Speaker 2: through that better than feared because of a government support

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Speaker 2: and b you know, banks bank banks holding back from

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Speaker 2: forcing full clothes. You know, people were able to renegotiate

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Speaker 2: their loans for time and these sort of things.

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Speaker 1: Yeah, they're even offering interest only periods for people struggling

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Speaker 1: with three payments and so forth, So that you're right,

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Speaker 1: probably more useful for long term invest is longer term forecasts.

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Speaker 1: Of course they're not very newsworthy because they're probably pretty boring.

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Speaker 1: But if you were to forecast property prices, you know,

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Speaker 1: longer term, say over a decade period, would it be

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Speaker 1: true to say that you'd probably focus on more of

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Speaker 1: those macro economic fundamentals rather than the sort of geographical

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Speaker 1: market factors. So it's really I guess forming a view

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Speaker 1: around the economic health of Australia.

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Speaker 2: Yeah, look at it depends on how detailed you want

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Speaker 2: to get, Like at a macro level, you know, the

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Speaker 2: key drives of house prices are affordability, and the end

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Speaker 2: of the day, house prices can't rise by more that

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Speaker 2: assuming interest rates don't change, assuming they stay the same

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Speaker 2: over the next twenty years. As an example, house prices

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Speaker 2: can't rise more than household income because you reach a

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Speaker 2: certain point where you know you can't afford to buy

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Speaker 2: a house because the income you need to devote to

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Speaker 2: pay the mortgage is beyond people's capacity, and on average,

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Speaker 2: it's something like if you look at national affordability measures,

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Speaker 2: something like thirty on average, something like thirty percent if

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Speaker 2: of after tax family income devoted to a mortgage is

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Speaker 2: sort of where.

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Speaker 3: The limits are.

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Speaker 2: Once you get way beyond that, house prices get too expensive,

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Speaker 2: and below that they get affordable. So the constraint ultimately

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Speaker 2: is growth in the economy, growth in incomes, which is

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Speaker 2: something like probably five percent a year. You know, over

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Speaker 2: the long run, now we've had up until last few years,

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Speaker 2: we have had a period, you know, two decades.

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Speaker 3: Of a trend decline in interest rates.

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Speaker 2: This is where you know, many investors have got to

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Speaker 2: be careful because that's not going to be repeated. You know,

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Speaker 2: we had double digit interest rates in the late nineteen eighties,

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Speaker 2: back when we had high inflation, and the interest rates

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Speaker 2: have basically been trending down for you know, two decades,

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Speaker 2: which meant that you know, house prices could rise faster

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Speaker 2: than household income. But that's something that can't be repeated.

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Speaker 2: Your house interest rates aren't going to continue to trend

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Speaker 2: lower because they're already you know, relatively low. Another example

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Speaker 2: of you know, past performance is not an indicator of

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Speaker 2: future performance there, but I think you know, a reasonable

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Speaker 2: expectation is that broadly speaking, you know, house prices are

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Speaker 2: going to match growth in nationally growth in household incomes,

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Speaker 2: which is going to be something like you know, wages

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Speaker 2: growth and I think four to five percent on average. Now,

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Speaker 2: if you want to dig deeper, then you can look

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Speaker 2: at booming areas. You know, one of the big questions

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Speaker 2: in Australia have been the tree change or the well

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Speaker 2: there's things going on, people moving to cheaper regional areas

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Speaker 2: as they retire. We've it's seen booming regional areas, but

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Speaker 2: also generally a move from you know, rural to urban

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Speaker 2: that has been a trends. You know, urban property has

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Speaker 2: generally done better than regional property generally speaking. Because of

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Speaker 2: that movement of people away from the bush towards the cities. Now,

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Speaker 2: can that be reversed. Maybe that can be reversed with

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Speaker 2: government policy. It's certainly cheaper to live outside of the

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Speaker 2: major capital cities, but at the moment this is where

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Speaker 2: all the jobs and the activity is, and that's why

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Speaker 2: there's been that trend towards the major capital cities rather

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Speaker 2: than the regional areas.

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Speaker 1: Yeah, I've spoken a lot about trying to invest in

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Speaker 1: locations that aren't necessarily tied to household income, that there

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Speaker 1: is other sources of wealth to sort of fuel property

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Speaker 1: price growth. Anyway, that's really interesting. We're going to take

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Speaker 1: a short break and when we come back, I'm going

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Speaker 1: to ask Dave about housing supply and demand with you

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Speaker 1: in a moment. Hello, Welcome back to The Australian's Money

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Speaker 1: Puzzle podcast. I'm Stuart Williams and I'm talking to David Bassanese,

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Speaker 1: chief economist of Beata Shares. Dave, let's talk about housing

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Speaker 1: supply now, because obviously we can talk about demand, which

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Speaker 1: talked about housing affordability is a sort of big driver

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Speaker 1: I guess of demand. But if we talk about supply,

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Speaker 1: of course the Australian government's had an ambitious target of

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Speaker 1: a million more homes over the next five years. How

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Speaker 1: successful do you think the government's going to be around

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Speaker 1: housing supply? And I'll say that, you know, over the

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Speaker 1: last twenty years, almost every single year I've read a

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Speaker 1: report to say that concludes Australia's not building enough houses.

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Speaker 1: We're got a supply shortage. However, you don't see too

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Speaker 1: many homeless people, and you know the I mean there's

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Speaker 1: a bit of a rental crisis going on in terms

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Speaker 1: of occupancy, but that's driven by something different. So I'm

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Speaker 1: really interested to know how much weight should we be

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Speaker 1: putting on these sort of projections and what do you

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Speaker 1: think How sensitive is housing supply to government policy?

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Speaker 3: Yeah, there's a lot to unpack there.

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Speaker 2: Look, I think to think about the housing market, there's

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Speaker 2: two times. I mean in Australia, it is true that

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Speaker 2: supply is relatively constrained. I mean, if you think about Sydney,

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Speaker 2: I mean, you can't build further out to our east

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Speaker 2: in Sydney because it's right on the coast right half,

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Speaker 2: you know, there's water, and then you can only build

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Speaker 2: out west and then you hit the ranges and the hills,

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Speaker 2: so we are sort of constrained, and so within that area,

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Speaker 2: you know, it comes down to, you know, can you

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Speaker 2: build high rise apartment blocks to increase supply. But there's

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Speaker 2: been a lot of you know, I guess nimbiism in

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Speaker 2: that sense that there's been a you know and quote.

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Speaker 3: You know, I'm not against that.

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Speaker 2: I mean, if you live in a nice traditional suburb

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Speaker 2: and you've got single story homes, you know, you don't

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Speaker 2: want twenty story tower blocks being left right and center.

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Speaker 2: So I'm certainly sympathetic to that. The problem in Australia,

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Speaker 2: just to take it to its basic point, is that

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Speaker 2: we're very urbanized. You know, we talk about Australia being

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Speaker 2: a large country and a small population, but all of

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Speaker 2: our population is squeezed along the East coast and you know,

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Speaker 2: the handful of major cities along the coast and the

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Speaker 2: rest of the country is pretty barren, so we squit

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Speaker 2: even though so we are very urbanized, very high proportion

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Speaker 2: of our population live in very urban areas. Plus we

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Speaker 2: have low, you know, sort of regulations against high rise

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Speaker 2: apartment blocks. So if you go to South Korea, for example,

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Speaker 2: flying to Soul, you'll see high rise apartment blocks as

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Speaker 2: far as the eye can see. That's how everybody lives

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Speaker 2: and that's why they can have you know, millions of

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Speaker 2: people living in a city and it's affordable. So do

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Speaker 2: we want to be like that? Maybe not?

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Speaker 3: So what is the solution.

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Speaker 2: The solution is either you know, you either build up

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Speaker 2: and have people living in the cities, or you build

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Speaker 2: out and live them, let them live in the out

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Speaker 2: of suburbs or the regions, but have very good transport

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Speaker 2: networks into where the jobs are in the cities, which

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Speaker 2: we haven't really done very well. Or we put the

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Speaker 2: you know, encouraged jobs in the regions. You know, so

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Speaker 2: there are various ways, but we've never really done either

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Speaker 2: of those successfully.

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Speaker 3: So at the end of the day, all.

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Speaker 2: The jobs, all the activity is in this capital cities,

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Speaker 2: so people want to live near those capital cities. But

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Speaker 2: we still have the development constraints against high rise apartment

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Speaker 2: blocks as far as the eye can see. So land

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Speaker 2: becomes a premium, the price of land becomes a premium.

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Speaker 2: That's why house prices in Australia are relatively high as

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Speaker 2: a multiple of income compared to many other countries such

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Speaker 2: as the United States, And you know, we can talk

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Speaker 2: about tech, we can talk about things so that you know,

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Speaker 2: a whole bunch of people, you know, a whole bunch

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Speaker 2: of arguments. For white house prices are high in Australia

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Speaker 2: relative to other countries, but that is a basically it

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Speaker 2: It's not it's you know, taxation, capital gains, negative gearing.

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Speaker 2: All of these things I think are sort of side

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Speaker 2: issue used to the big issue of high urbanization.

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Speaker 3: That's our choice.

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Speaker 2: But at the same time, then reluctance to become a

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Speaker 2: sort of South Korea in terms of high rise apartment blocks.

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Speaker 1: I mean, Victoria has a great reputation for building infrastructure

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Speaker 1: below budget and on time. Of course I say that

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Speaker 1: tongue in cheek, so I agree. It's not something that's

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Speaker 1: going to be easy to solve. You need to be

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Speaker 1: able to, you know, if you're going to leave one

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Speaker 1: hundred k's away from a major capital city, if that's

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Speaker 1: really serviced really well, like it might be in other

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Speaker 1: countries in Western Europe and Japan and so forth, it

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Speaker 1: can work. But you're right, everyone needs to flock to

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Speaker 1: the city. Do you think either of those things are

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Speaker 1: going to change infrastructure or density, you know, over the

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Speaker 1: next couple of decades or do you think you know

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Speaker 1: it'll just be more of the same, Because I'm asking

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Speaker 1: the question because if I'm an investor and I'm thinking, well,

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Speaker 1: property price is how you know? It's a common question

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Speaker 1: I get asked, how long can property prices continue to

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Speaker 1: grow at the pace they have over the last two

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Speaker 1: or three decades. Mathematically prices just become unaffordable. But if

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Speaker 1: you're investing in an area that's highly desirable, you know

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Speaker 1: that only the top twenty percent of the population can

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Speaker 1: afford to live in, well, then that price growth doesn't

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Speaker 1: isn't necessary linked to household income. So do you think

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Speaker 1: that the problem will be solved? Because if it isn't,

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Speaker 1: then investing in the eastern suburbs in Sydney is still

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Speaker 1: a great idea.

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Speaker 3: Look fundamentally, I don't think that.

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Speaker 2: I think Australian housing is always going to be at

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Speaker 2: the again where if you've got just to think about

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Speaker 2: economics one I want for a moment and think about markets.

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Speaker 2: If you have a supply constrained market, the price of

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Speaker 2: a product in that market is going to be based

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Speaker 2: on affordability. When there's a scarcity, people will pay up

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Speaker 2: to what they can afford to pay. And that's sort

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Speaker 2: of the way that the Australian market works at the moment.

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Speaker 2: People pay as much. You know, again, you get five

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Speaker 2: people turning up an auction, they're going to bid against

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Speaker 2: each other and they'll pay it up to the last

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Speaker 2: dollar that they can afford to pay. And that old

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Speaker 2: only is what is constraining the house price. But it

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Speaker 2: will go to that dollar, and going forward it's always

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Speaker 2: going to be given the supply constraints at that uncomfortable

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Speaker 2: affordable level for certainly people trying to get into the market.

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Speaker 3: I don't think that's going.

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Speaker 2: To you know, it could change, but I look the

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Speaker 2: other side of it is, on the one hand, governments

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Speaker 2: like to talk about housing affordability. On the other hand,

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Speaker 2: they don't want to see house prices crash either, you know,

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Speaker 2: they don't want to have too much supply that house

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Speaker 2: price is weak. And I mean I think John Howard,

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Speaker 2: ex Prime Minister, famously said a few years ago, you know,

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Speaker 2: no one's ever to complain to him about their house

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Speaker 2: price rising. There's two sides of the coin here in

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Speaker 2: terms of how this is dealt. My eye would I

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Speaker 2: like to I personally would like to see more focus

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Speaker 2: on encouraging regional development, encouraging people to be able to

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Speaker 2: live out in country towns and maybe telecommute. That's the

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Speaker 2: way of the future without needing to, you know, turn

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Speaker 2: nice inner city suburbs into high rise apartment wastelands. I'd

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Speaker 2: like to preserve, preserve what we have in the inner

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Speaker 2: cities and try to encourage some greater regional development and

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Speaker 2: allow people not to have to cram into the cities.

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Speaker 2: But whether they do that, what we don't want to do.

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Speaker 2: You know what politicians do, you know, coming up to

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Speaker 2: an election, is they throw more money. You know, economists

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Speaker 2: hate this when they throw subsidies. You know, here's another

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Speaker 2: first home buyers subsidy.

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Speaker 3: And we know what happens.

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Speaker 2: All that does is all the first home buyers turn

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Speaker 2: up the auction and bid away that to the seller.

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Speaker 2: So the only person that benefits of the person selling

436
00:22:31,800 --> 00:22:35,680
Speaker 2: the house. And it's very frustrating. So those supply those

437
00:22:35,720 --> 00:22:39,720
Speaker 2: demand side sort of demand side affordability measures in a

438
00:22:39,760 --> 00:22:43,280
Speaker 2: supply constrained market don't work because all they do is

439
00:22:43,320 --> 00:22:44,159
Speaker 2: benefit the seller.

440
00:22:44,680 --> 00:22:47,520
Speaker 1: Yeah, one hundred percent. If we talk about the sort

441
00:22:47,520 --> 00:22:51,520
Speaker 1: of demand side, the affordability side. Some data that really

442
00:22:51,560 --> 00:22:55,320
Speaker 1: struck me more recently was released by CBA in its

443
00:22:55,400 --> 00:22:59,479
Speaker 1: results announcement a few weeks or months ago, and they

444
00:22:59,560 --> 00:23:05,159
Speaker 1: reported that seventy five percent of borrowers that are borrowing

445
00:23:05,200 --> 00:23:08,800
Speaker 1: for investment purposes had a household income of more than

446
00:23:08,800 --> 00:23:12,560
Speaker 1: two hundred thousand. I think that was twenty four percent

447
00:23:12,680 --> 00:23:16,280
Speaker 1: had a household income of more than five hundred thousand.

448
00:23:16,520 --> 00:23:18,480
Speaker 1: So really it is you know, if you don't have

449
00:23:18,520 --> 00:23:21,600
Speaker 1: a high income, because of the three percent interest rate

450
00:23:21,640 --> 00:23:24,760
Speaker 1: buffer that they use to test serviceability, you really just

451
00:23:24,800 --> 00:23:28,600
Speaker 1: can't participate. And of course that just fuels wealth inequality.

452
00:23:28,680 --> 00:23:31,240
Speaker 1: Doesn't know, I mean, you know, people with middle to

453
00:23:31,280 --> 00:23:34,800
Speaker 1: lower income owners sort of get locked out of the market. Now, APRA,

454
00:23:35,000 --> 00:23:37,800
Speaker 1: the banking regulator, will argue that, you know, that's just

455
00:23:37,960 --> 00:23:41,800
Speaker 1: crudential regulation. We want to have a healthy banking system

456
00:23:41,840 --> 00:23:45,760
Speaker 1: and so forth. But what should investors take away from that, Like,

457
00:23:45,800 --> 00:23:49,280
Speaker 1: what are the long term implications of you know, the

458
00:23:49,320 --> 00:23:52,879
Speaker 1: settings been so restrictive for people on middle incomes that

459
00:23:52,920 --> 00:23:56,119
Speaker 1: they're not able to get into the property market or

460
00:23:56,440 --> 00:23:58,040
Speaker 1: take that next step up the ladder.

461
00:23:58,160 --> 00:23:59,719
Speaker 2: Look so in terms of I mean, one of the

462
00:23:59,760 --> 00:24:02,159
Speaker 2: issues in Australia at the moment, of course, is that

463
00:24:02,240 --> 00:24:04,840
Speaker 2: if you're a high income earner, you know, your marginal

464
00:24:04,880 --> 00:24:07,800
Speaker 2: tax rate is fifty percent, right, if you run a company,

465
00:24:07,880 --> 00:24:10,119
Speaker 2: you know a company, the tax rate is in twenty

466
00:24:10,160 --> 00:24:13,600
Speaker 2: five percent, So there's this massive gap. And also you know,

467
00:24:13,600 --> 00:24:17,000
Speaker 2: you get at capital gains tax discount if you own

468
00:24:17,040 --> 00:24:19,159
Speaker 2: a property. So one of the issues going on at

469
00:24:19,200 --> 00:24:21,960
Speaker 2: the moment is that widening gap between the corporate tax

470
00:24:22,040 --> 00:24:24,840
Speaker 2: rate and the high ink and the high marginal tax

471
00:24:24,920 --> 00:24:29,960
Speaker 2: rate for people on high income paye income earners is encouraging, yeah,

472
00:24:30,000 --> 00:24:33,600
Speaker 2: at the margin more property investment. So more and more

473
00:24:33,920 --> 00:24:36,760
Speaker 2: high income earners that are facing a high marginal tax

474
00:24:36,880 --> 00:24:40,359
Speaker 2: rate are encouraged to try to you know, reduce that

475
00:24:40,480 --> 00:24:44,200
Speaker 2: tax burden through investing in property through negative gearing. Now,

476
00:24:44,400 --> 00:24:47,560
Speaker 2: funnily enough, if we were able to change the policy

477
00:24:47,720 --> 00:24:50,679
Speaker 2: so that the marginal tax rate wasn't fifty percent, it

478
00:24:50,760 --> 00:24:54,440
Speaker 2: was maybe thirty percent or something, the incentive to negatively

479
00:24:54,440 --> 00:24:56,320
Speaker 2: gearing a property would actually be less.

480
00:24:56,680 --> 00:24:57,600
Speaker 3: I think that's one point.

481
00:24:57,640 --> 00:24:59,399
Speaker 2: And you know, what we've seen over the years is

482
00:24:59,440 --> 00:25:01,840
Speaker 2: that more more people are now being pushed in that

483
00:25:01,960 --> 00:25:04,840
Speaker 2: top income tax bracket, you know, in it. Maybe many

484
00:25:04,880 --> 00:25:07,400
Speaker 2: people don't know this. In the United States or Europe,

485
00:25:07,560 --> 00:25:09,679
Speaker 2: to be in the top tax bracket, you need to

486
00:25:09,720 --> 00:25:12,359
Speaker 2: have your income needs to be like five six times

487
00:25:12,400 --> 00:25:13,240
Speaker 2: the average income.

488
00:25:13,600 --> 00:25:15,080
Speaker 3: In Australia it's two.

489
00:25:15,200 --> 00:25:17,520
Speaker 2: The top tax bracket in Australia cuts in at a

490
00:25:17,560 --> 00:25:20,560
Speaker 2: relatively low level anyway, So that's just one of the

491
00:25:20,680 --> 00:25:23,639
Speaker 2: one of the extra things that I think driving the market.

492
00:25:23,680 --> 00:25:26,639
Speaker 2: So in terms of proper investing, Yeah, you are going

493
00:25:26,680 --> 00:25:29,440
Speaker 2: to get those on higher incomes that are more eagerly

494
00:25:29,520 --> 00:25:32,399
Speaker 2: chasing those properties because they have this tax burden that

495
00:25:32,440 --> 00:25:33,679
Speaker 2: they're trying to deal with.

496
00:25:34,200 --> 00:25:36,520
Speaker 1: Yeah, that's really good. We're going to take another break

497
00:25:36,640 --> 00:25:39,639
Speaker 1: and when we come back, I'm going to answer question

498
00:25:39,760 --> 00:25:42,320
Speaker 1: from Sam and also take the opportunity to ask Dave

499
00:25:42,359 --> 00:25:52,119
Speaker 1: about direction of interst rates. Back with you in a moment. Hello,

500
00:25:52,160 --> 00:25:54,640
Speaker 1: and welcome back to The Australian's Money Puzzle podcast. I'm

501
00:25:54,680 --> 00:25:57,200
Speaker 1: still we so I'm talking to David Bassanese, the chief

502
00:25:57,200 --> 00:26:01,040
Speaker 1: economist at Beata Shares. Now, before before we get into

503
00:26:01,240 --> 00:26:03,960
Speaker 1: our listener question, Dave, I wanted to ask you about

504
00:26:04,040 --> 00:26:06,280
Speaker 1: I couldn't help asking you about the direction of interest

505
00:26:06,320 --> 00:26:09,320
Speaker 1: rates and I was interested to see that both Kolabar

506
00:26:09,440 --> 00:26:13,159
Speaker 1: Capital and Research Affiliates has done some work on what

507
00:26:13,359 --> 00:26:19,199
Speaker 1: happens when inflation rises significantly, and they're both concluded that

508
00:26:19,359 --> 00:26:22,720
Speaker 1: quite often, more than seventy percent of the time, inflation

509
00:26:22,960 --> 00:26:27,080
Speaker 1: will initially come back and then it will reexalerate. And

510
00:26:27,160 --> 00:26:30,919
Speaker 1: according to the RBA's own forecasts, inflation won't hit the

511
00:26:30,920 --> 00:26:33,280
Speaker 1: middle of the two to three percent ban until the

512
00:26:33,320 --> 00:26:37,000
Speaker 1: start of twenty twenty six. So if the risk that

513
00:26:37,200 --> 00:26:42,880
Speaker 1: inflation becomes entrenched or the inflation re exalerates, why wouldn't

514
00:26:42,880 --> 00:26:48,320
Speaker 1: the RBA hike interest rates now again to reduce that

515
00:26:48,520 --> 00:26:51,920
Speaker 1: risk if its own forecasts tell us that it won't

516
00:26:51,920 --> 00:26:54,399
Speaker 1: be in the middle point of the band for maybe

517
00:26:54,480 --> 00:26:55,800
Speaker 1: fifteen or so months.

518
00:26:57,000 --> 00:26:57,240
Speaker 3: Yeah.

519
00:26:57,280 --> 00:27:00,600
Speaker 2: Look, firstly, just on the idea that inflation re accelerates,

520
00:27:00,600 --> 00:27:03,000
Speaker 2: I mean, one of the examples many people use that

521
00:27:03,040 --> 00:27:04,920
Speaker 2: they look at the nineteen seventies. You know, we had

522
00:27:04,920 --> 00:27:08,080
Speaker 2: inflation go up in the early seventies, it did come back,

523
00:27:08,119 --> 00:27:10,960
Speaker 2: and then it bounced back in the late seventies early eighties.

524
00:27:11,280 --> 00:27:14,440
Speaker 2: Now we had two oil price shocks, we'd opeck one

525
00:27:14,480 --> 00:27:17,040
Speaker 2: in the early seventies where aill prices you know, surged

526
00:27:17,040 --> 00:27:19,000
Speaker 2: and then they came back, and then we'd hope, you know,

527
00:27:19,040 --> 00:27:22,959
Speaker 2: the oil price shock number two, so that you know,

528
00:27:23,080 --> 00:27:25,400
Speaker 2: I think that's one of the I'm not convinced that

529
00:27:25,920 --> 00:27:30,000
Speaker 2: there's necessarily this cycle that high inflation comes down and

530
00:27:30,040 --> 00:27:32,879
Speaker 2: then it bounces back. I mean, I'm not convinced that

531
00:27:33,080 --> 00:27:35,879
Speaker 2: is a given. And certainly in today's world of you know,

532
00:27:36,160 --> 00:27:40,200
Speaker 2: high globalization, a lot of tech technology disruption, I think

533
00:27:40,240 --> 00:27:43,960
Speaker 2: inflation is just generally going to tend to be lower

534
00:27:44,000 --> 00:27:47,200
Speaker 2: for longer. I think COVID was a special case where

535
00:27:47,200 --> 00:27:51,240
Speaker 2: we had massive supply and demand disruptions which initially caused

536
00:27:51,240 --> 00:27:55,960
Speaker 2: shortages and caused prices to go up to clear markets.

537
00:27:56,200 --> 00:27:58,480
Speaker 2: But prices have been coming down and I think they

538
00:27:58,520 --> 00:28:01,280
Speaker 2: will continue to come down now. Just in terms of

539
00:28:01,320 --> 00:28:03,720
Speaker 2: the RBA, I mean, the RBA has got a balancing act.

540
00:28:03,800 --> 00:28:07,359
Speaker 2: You are absolutely correct in that the longer the thing about,

541
00:28:07,680 --> 00:28:11,159
Speaker 2: the longer inflation stays high, the greater the risk that

542
00:28:11,200 --> 00:28:14,159
Speaker 2: it gets entrenched into wage and price stting behavior. We

543
00:28:14,240 --> 00:28:16,479
Speaker 2: saw that in the nineteen seventies and then it did

544
00:28:16,560 --> 00:28:19,840
Speaker 2: take wrenching recessions in the early eighties to actually, you know,

545
00:28:19,920 --> 00:28:22,679
Speaker 2: finally break the back of that inflation. So that is

546
00:28:22,720 --> 00:28:25,440
Speaker 2: the challenge. You can't wait forever for inflation to come

547
00:28:25,480 --> 00:28:28,280
Speaker 2: back down again. But at the same time is you know,

548
00:28:28,400 --> 00:28:30,840
Speaker 2: if you can get inflation into the target ban in

549
00:28:30,840 --> 00:28:33,200
Speaker 2: the next six months, how do you do that smack

550
00:28:33,800 --> 00:28:36,560
Speaker 2: raise rates and cause the recession. So you've got to

551
00:28:36,600 --> 00:28:39,600
Speaker 2: find a middle ground somewhere there, and that's where central

552
00:28:39,640 --> 00:28:42,840
Speaker 2: banks around the world, including the RBA, have been, you know,

553
00:28:42,920 --> 00:28:45,520
Speaker 2: trying to find that middle ground. So the RBA's judgment

554
00:28:45,560 --> 00:28:48,719
Speaker 2: at the moment is and I think correct inflation is

555
00:28:48,760 --> 00:28:52,360
Speaker 2: coming down. I think various measures of underlying inflation now

556
00:28:52,360 --> 00:28:54,960
Speaker 2: around about four percent. A year or so ago they

557
00:28:55,000 --> 00:28:57,600
Speaker 2: are over six percent, So it's come down and I

558
00:28:57,640 --> 00:29:00,640
Speaker 2: think continuing to come down back toward that percent. And

559
00:29:00,720 --> 00:29:04,240
Speaker 2: if you look at surveys of long term inflation expectations,

560
00:29:04,640 --> 00:29:05,160
Speaker 2: they are.

561
00:29:05,040 --> 00:29:06,960
Speaker 3: Still relatively well contained.

562
00:29:07,040 --> 00:29:11,120
Speaker 2: So provided the RBA thinks that inflation expectations are contained,

563
00:29:11,200 --> 00:29:14,600
Speaker 2: provided it thinks that what we're seeing isn't beencoming embedded

564
00:29:14,600 --> 00:29:17,560
Speaker 2: into wage and pricending behavior, then they can afford to

565
00:29:17,600 --> 00:29:20,200
Speaker 2: wait a little bit and not smash the economy. Some

566
00:29:20,200 --> 00:29:23,440
Speaker 2: people say, oh, we can't take that risk, Well, you know,

567
00:29:23,960 --> 00:29:26,440
Speaker 2: it's worth taking the risk if it avoids a wrenching

568
00:29:26,480 --> 00:29:28,960
Speaker 2: recession where hundreds of thousands of people lose their job

569
00:29:29,000 --> 00:29:31,520
Speaker 2: in my mind, and that's the sort of judgment we're

570
00:29:31,560 --> 00:29:34,240
Speaker 2: taking at the moment. And again I go back to

571
00:29:34,600 --> 00:29:38,920
Speaker 2: I think that due to globalization, due to competition in

572
00:29:39,040 --> 00:29:42,000
Speaker 2: markets being a lot tougher than it was ten twenty

573
00:29:42,280 --> 00:29:46,320
Speaker 2: thirty years ago, the natural tendency is for inflation to ease,

574
00:29:46,400 --> 00:29:48,240
Speaker 2: and I think we will see that over the next

575
00:29:48,360 --> 00:29:49,720
Speaker 2: year or so.

576
00:29:50,040 --> 00:29:52,800
Speaker 1: And money markets are pricing in about a one percent

577
00:29:52,880 --> 00:29:56,320
Speaker 1: drop of the course of the twenty five calendar year.

578
00:29:56,520 --> 00:29:59,040
Speaker 1: Do you think that seems reasonable? Do you think the

579
00:29:59,080 --> 00:30:01,000
Speaker 1: money markets are right in terms of prising that.

580
00:30:01,000 --> 00:30:02,920
Speaker 3: In yes, I do.

581
00:30:03,120 --> 00:30:06,760
Speaker 2: I've got the RBA cutting rates in February of twenty five,

582
00:30:06,880 --> 00:30:09,280
Speaker 2: and I think we're going to see we need to

583
00:30:09,280 --> 00:30:12,120
Speaker 2: see inflation continuing to come down bottom l At the moment,

584
00:30:12,160 --> 00:30:15,560
Speaker 2: inflation is still too high. So the underlying measure of

585
00:30:15,600 --> 00:30:18,440
Speaker 2: inflation in Australia, it's called the trim mean. For example,

586
00:30:18,520 --> 00:30:21,160
Speaker 2: the year on year rate is three point eight percent

587
00:30:21,640 --> 00:30:25,479
Speaker 2: now by early next year, and that's the June quarter measure.

588
00:30:25,920 --> 00:30:29,440
Speaker 2: We get two more quarterly CPI reports the September quarter,

589
00:30:29,560 --> 00:30:31,800
Speaker 2: the December quarter, we get the December quarter one in

590
00:30:31,880 --> 00:30:34,800
Speaker 2: late January of twenty five. If that annual rate is

591
00:30:34,840 --> 00:30:36,800
Speaker 2: down to three and a half or even a bit

592
00:30:36,840 --> 00:30:39,520
Speaker 2: below three and a half, I think that's enough of

593
00:30:39,640 --> 00:30:42,880
Speaker 2: progress on inflation for the RBA to at least start

594
00:30:42,920 --> 00:30:44,960
Speaker 2: to take the foot off the break. I mean, interest

595
00:30:45,040 --> 00:30:47,880
Speaker 2: rates are restrictive levels in Australia, and so it's not

596
00:30:47,920 --> 00:30:51,400
Speaker 2: about you know, stimulating the economy. It's just taking the

597
00:30:51,400 --> 00:30:53,800
Speaker 2: foot off the break a little bit. And as inflation

598
00:30:53,920 --> 00:30:58,360
Speaker 2: continues to progressively come down, I think they'll then be

599
00:30:58,440 --> 00:31:01,120
Speaker 2: able to, you know, what we call RIP normalized rates

600
00:31:01,160 --> 00:31:04,080
Speaker 2: is bring them back to a more normal level, which

601
00:31:04,120 --> 00:31:07,440
Speaker 2: is closer to three percent than the four point three

602
00:31:07,480 --> 00:31:08,720
Speaker 2: to five that we have at the moment.

603
00:31:09,520 --> 00:31:12,680
Speaker 1: Yeah, excellent. We're going to take a listener question now

604
00:31:12,720 --> 00:31:16,320
Speaker 1: from Cray. Craig Rights. My wife and my wife and

605
00:31:16,360 --> 00:31:19,200
Speaker 1: I are in our early thirties, currently expats in the

606
00:31:19,320 --> 00:31:21,960
Speaker 1: US with the intention to return to Australia in the

607
00:31:21,960 --> 00:31:24,360
Speaker 1: coming years. I'm thinking it might be a good time

608
00:31:24,360 --> 00:31:27,040
Speaker 1: in our lives to engage a financial planner for the

609
00:31:27,080 --> 00:31:30,040
Speaker 1: first time to help setting things up in terms of

610
00:31:30,080 --> 00:31:33,600
Speaker 1: asset allocation now as we have a host of new

611
00:31:33,640 --> 00:31:37,120
Speaker 1: complexities to think about. My question is do people engage

612
00:31:37,160 --> 00:31:39,640
Speaker 1: financial planners for this sort of one off piece of

613
00:31:39,680 --> 00:31:43,400
Speaker 1: advice to set the strategy in the right place. Any

614
00:31:43,440 --> 00:31:46,360
Speaker 1: other insights you may have on the topic for typical

615
00:31:46,400 --> 00:31:50,760
Speaker 1: fees charged would be much appreciated. So Craig James had

616
00:31:50,840 --> 00:31:53,680
Speaker 1: Jackie Clark on the show back in the start of September,

617
00:31:53,880 --> 00:31:57,840
Speaker 1: the fifth of September, and they talked about how financial

618
00:31:57,920 --> 00:32:01,200
Speaker 1: advisor numbers in Australia of half over the last five

619
00:32:01,360 --> 00:32:04,160
Speaker 1: ish years, so there's a sort of shortage of supply

620
00:32:04,200 --> 00:32:08,200
Speaker 1: of financial advisors if you like, and that most advisors

621
00:32:08,400 --> 00:32:12,880
Speaker 1: only work with ongoing clients just because of resourcing issues really,

622
00:32:13,560 --> 00:32:16,880
Speaker 1: and that the average fee starts based on their research

623
00:32:16,960 --> 00:32:20,479
Speaker 1: they talked about in that podcast episode, around five thousand

624
00:32:20,600 --> 00:32:23,520
Speaker 1: dollars a years. Look, I think it's probably worth while.

625
00:32:23,840 --> 00:32:28,160
Speaker 1: There are some unique complexities to expats returning to Australia,

626
00:32:28,240 --> 00:32:31,160
Speaker 1: and property is a big element as well. That is

627
00:32:31,200 --> 00:32:33,480
Speaker 1: typically win to buy the family home if you don't

628
00:32:33,520 --> 00:32:36,760
Speaker 1: already have it, and how much to spend and how

629
00:32:36,760 --> 00:32:39,160
Speaker 1: to make that not only a good lifestyle decision, but

630
00:32:39,240 --> 00:32:42,520
Speaker 1: also ultimately a good financial one as well, So I

631
00:32:42,520 --> 00:32:45,400
Speaker 1: think there's probably value in making sure that you execute

632
00:32:45,400 --> 00:32:48,520
Speaker 1: on those things correctly and not make any mistakes. What

633
00:32:48,680 --> 00:32:52,600
Speaker 1: could be challenging, however, is to firstly find an advisor

634
00:32:52,640 --> 00:32:57,280
Speaker 1: that has both that property and shares and super expertise,

635
00:32:57,920 --> 00:33:01,200
Speaker 1: but then also most importantly, finding is that's going to

636
00:33:01,200 --> 00:33:04,080
Speaker 1: give you that one off advice. Do you have anything

637
00:33:04,080 --> 00:33:05,000
Speaker 1: to add, Dave.

638
00:33:05,760 --> 00:33:07,840
Speaker 3: No, I think that's pretty pretty sensible.

639
00:33:07,840 --> 00:33:10,520
Speaker 2: I mean, if you can afford the financial advice, you know,

640
00:33:10,640 --> 00:33:13,720
Speaker 2: certainly it's always a good idea. I think financial advice,

641
00:33:14,200 --> 00:33:16,480
Speaker 2: you know, really does pay for itself. If certainly, if

642
00:33:16,520 --> 00:33:18,280
Speaker 2: you've got a lot of assets and you can afford

643
00:33:18,360 --> 00:33:21,239
Speaker 2: to get the advice, it certainly makes sense. And as

644
00:33:21,280 --> 00:33:23,880
Speaker 2: I said, I think it doesn't necessarily, and the idea

645
00:33:23,880 --> 00:33:26,480
Speaker 2: of even just a one off you know, you get

646
00:33:26,800 --> 00:33:30,280
Speaker 2: taking stock of the situation as you come back, is good.

647
00:33:30,280 --> 00:33:33,120
Speaker 2: I mean, they might offer you a more ongoing service.

648
00:33:33,160 --> 00:33:34,560
Speaker 2: It's really up to you whether you want to go

649
00:33:34,640 --> 00:33:37,320
Speaker 2: down that path as well. But yeah, certainly, if you

650
00:33:37,320 --> 00:33:40,640
Speaker 2: can afford advice, it's usually I think it's certainly well

651
00:33:40,680 --> 00:33:41,520
Speaker 2: worth the investment.

652
00:33:42,520 --> 00:33:42,720
Speaker 3: Yeah.

653
00:33:42,760 --> 00:33:45,320
Speaker 1: One of my mentors have told has told me many

654
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Speaker 1: times to it. Professional advice pays for itself, you know,

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Speaker 1: whether it's legal advice, financial advice, whatever it might be. Dave,

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Speaker 1: that's been a really interesting discussion. I'm sure our listeners

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Speaker 1: have really enjoyed it as well. I mean, there is,

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Speaker 1: as I said in the introduction, a lot of information

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Speaker 1: for past some predictions and opinions out there with respect

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Speaker 1: to economic settings and property price growth, and I think

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Speaker 1: that helps our listeners really understand and put a bit

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Speaker 1: of context around it. Just a reminder, folks, if you

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Speaker 1: have any questions or feedback, would love to hear from you.

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Speaker 1: The email is the Money Puzzle at the Australian dot

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Speaker 1: com dot au. Please keep those questions coming. James Girard

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Speaker 1: will be back with you on Thursday, and I'm sure

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Speaker 1: you'll be relieved to know that James Kirby will be

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Speaker 1: back in this seat this time next week. I really

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Speaker 1: hope you've enjoyed today's episode. Thanks very much, Dave.

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Speaker 3: Now always great to be with you all.

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Speaker 1: Thanks for having us buffin out