Speaker 1: Hello and welcome to The Australian's Money Puzzle podcast. I'm
Speaker 1: Stuart Williams Citty in for usual host James Kirby. I'm
Speaker 1: a property friendly financial advisor and host of my own podcast, Investoperly.
Speaker 1: The daily news is always full of commentary about the
Speaker 1: direction of property prices. This includes commentary about interest rates,
Speaker 1: population growth, unemployment, lending volumes, and the list goes on.
Speaker 1: Everyone's got an opinion to share. Of course, what I'd
Speaker 1: like to get to the bottom of today is what
Speaker 1: economic indicators should long term property investors focus on. Now
Speaker 1: I've been following property really closely for more than two decades,
Speaker 1: So what I'm going to do is I'm going to
Speaker 1: share which elements I think a key to sort of
Speaker 1: focus on, and then I'm going to invite my guests
Speaker 1: today to not only share his thoughts but also critique
Speaker 1: what I've outlined. So he goes of course, we start
Speaker 1: with overall economic health. I think it's super important because
Speaker 1: that gives us the backdrop for property prices to potentially grow.
Speaker 1: Things like the unemployment rate, GDP growth, population growth and
Speaker 1: so on. But let's be real, Australia hasn't had a
Speaker 1: recession for more than three decades, so we might take
Speaker 1: that one for granted. And then there's three other factors
Speaker 1: that I think are really important to focus on. The
Speaker 1: first one is interstate migration. Now, overseas immigration tends to
Speaker 1: be relatively stable in terms of where it goes, which
Speaker 1: states it goes to. However, interstate migration can be a
Speaker 1: really good proxy for property owner sentiment. So good example
Speaker 1: of this was that interstate migration was negative in Perth
Speaker 1: for a long time and in around twenty twenty and
Speaker 1: twenty one it started to turn positive and we know
Speaker 1: what's happened to property price growth since same with Brisbane
Speaker 1: about twenty seventeen eighteen, same thing happened there. The next
Speaker 1: one is interstates and lending policy. But I think lending
Speaker 1: policy is more important than interst rate settings. Eighty percent
Speaker 1: of property in Australia is bought with a mortgage, and
Speaker 1: lending policy tells us which buyers will be most active
Speaker 1: and where. And lastly, housing supply. Now, of course it's
Speaker 1: really tough to change dramatically change housing supply in any
Speaker 1: particular location, and it's very expensive to do so. So
Speaker 1: if we're investing in established locations, really all were worried
Speaker 1: about then is change in density, and that can come
Speaker 1: down to housing apartment supply and then planning restrictions. Of course,
Speaker 1: I'm not an economist, so I invited the perfect guest
Speaker 1: on today's show to tell you if I'm crazy or not.
Speaker 1: He's worked at Macquarie Bank, Federal Treasury, the OECD. He's
Speaker 1: the chief economist at Australian ETF Behemoth Beta Shares. He's
Speaker 1: been on the show previously. Welcome back, David Massinese.
Speaker 2: Great to be with the Stuart and yeah, I'm looking
Speaker 2: forward to the discussion today.
Speaker 1: Excellent Dave. Let's start with the big picture. Then. If
Speaker 1: I'm planning to invest in property in an established suburb
Speaker 1: been a major capital city, what do you think of
Speaker 1: the two or three most important macroeconomic factors that I
Speaker 1: need to pay attention to.
Speaker 2: Well, I mean I think you have coven them. I
Speaker 2: mean in terms of interest rates, the economy. I mean, look,
Speaker 2: and you can summarize all of this into housing affordability.
Speaker 2: I mean, their various economists out there have these measures.
Speaker 2: I have one myself, and you can actually sort of
Speaker 2: broad the estimate. I'm talking nationally here. You know how
Speaker 2: high house prices are relative to income given the prevailing
Speaker 2: level of interest rates, and when that gets to a
Speaker 2: very high level, when affordability generally is very poor, then
Speaker 2: it's hard for house prices to grow strongly. And you know,
Speaker 2: after a major boom and house prices they tend to
Speaker 2: get expensive and you think, you know, from a macro
Speaker 2: national wide perspective, at least you're going to be struggling
Speaker 2: to get further strong gain. So that's like anything, you know,
Speaker 2: buying at the right time of the cycle, buying when
Speaker 2: house prices are relatively cheap is going to give you
Speaker 2: a better return at least in the shorter Depending on
Speaker 2: your time period obviously matters less. If it's a long
Speaker 2: term holding over thirty forty years and you're just getting
Speaker 2: set forever, but interest rates the economy, then I guess
Speaker 2: at the particular suburb, the yeah, economic prospects in that
Speaker 2: suburb supply probably even more important because people can move
Speaker 2: around in terms of where they work.
Speaker 3: But what is important is how many.
Speaker 2: Houses or how many units are able to be built
Speaker 2: in that suburb. And that's where it does get a
Speaker 2: little bit funny, because people want housing affordability. People you know,
Speaker 2: at the moment, the political discussion is all about improving
Speaker 2: housing affordability, and one way to do that is to
Speaker 2: improve supply, to improve the density how many houses we
Speaker 2: can cram into a certain area, which is great if
Speaker 2: you want to get into the market, not so great
Speaker 2: if you're looking to move into that suburb and invest
Speaker 2: and then worry about, you know, all the influx of supply,
Speaker 2: because that will depress your return going forward. You know,
Speaker 2: it really depends whether you're a buyer or seller in
Speaker 2: that reg are.
Speaker 1: And of course we see property markets behaving quite differently
Speaker 1: across Australia. You've got Brisbane, Perth and Adelaide that recorded
Speaker 1: double digit property growth, Sydney about five percent and Melbourne
Speaker 1: sort of slightly in decline. But of course we have
Speaker 1: the same interest rate settings. You know that they're obviously federal.
Speaker 1: What do you think is driving the disparity and growth
Speaker 1: between those markets?
Speaker 2: Firstly, the affordability. I mean, when Sydney and Melbourne, for example,
Speaker 2: particularly Sydney gets very expensive relative to other capital cities,
Speaker 2: you tend to see you know, some people leaving Sydney,
Speaker 2: selling up and moving to cheap, cheaper cities. You see
Speaker 2: investors looking for better value elsewhere, so you tend to
Speaker 2: get us sort of re equival, you know, realignment of
Speaker 2: valuations if they get too far out of line. So
Speaker 2: there is that general cycle, but also also depends on
Speaker 2: what is driving the economy at the time. For example,
Speaker 2: if we're in a major mining boom, as we were
Speaker 2: a decade or so ago, but he's went through the roof.
Speaker 2: You know, everybody wanted to move to Perth to be
Speaker 2: part of the mining boom, and there was a brief
Speaker 2: period I think is around twenty sixteen where the median
Speaker 2: price of a Perth property was higher than in Sydney,
Speaker 2: and then Sydney, you know, Perth the mining boom ended
Speaker 2: and Perth went through you know, years of slumber where
Speaker 2: the where afford house prices went nowhere for a while
Speaker 2: and valuation, you know, relative value.
Speaker 3: Had to be restored in that market.
Speaker 2: So there are state differences in economic performance depending on
Speaker 2: what sectors are driving growth at the time, what mining
Speaker 2: boom being one, Tourism is another one. So when tourism
Speaker 2: is strong, it tends to favor the New South Wales
Speaker 2: the East Coast markets relative to the other markets. I
Speaker 2: actually come from Adelaide, originally. So I'm a little bit
Speaker 2: familiar with the Adelaide market, and Adelaide has gone nowhere
Speaker 2: for a long time. Adelaide is one of those markets
Speaker 2: where there is supply ample well I wouldn't say ample,
Speaker 2: but greater supply capacity as they moved, you know, built
Speaker 2: out into the suburbs. And so that's tended to hold
Speaker 2: back prices for a while. And also, people you know,
Speaker 2: generally leave Adelaide, so they don't get a lot of
Speaker 2: internal international migration. And many people you know have tended
Speaker 2: to leave Adelaide to see work opportunities elsewhere. So it
Speaker 2: hasn't had the population growth to drive prices for a while.
Speaker 2: But you know, if it's got cheap enough that people
Speaker 2: have come back or at least not have left. And
Speaker 2: it's going through a bit of a you know, a
Speaker 2: renaissance at the moment.
Speaker 1: Yeah, not so cheap anymore. But if you talk about
Speaker 1: relative value to Sydney, Melbourne's never been cheaper relative to
Speaker 1: relative to Sydney. Do you think Melbourne's do for a
Speaker 1: bit of a resurgence, and if so, what do you
Speaker 1: think might be the impetus for that sort of to
Speaker 1: change in price direction?
Speaker 2: Yeah, Look, again, Look, another thing we haven't mentioned, another
Speaker 2: variable into the mix, if you like, is government policy.
Speaker 2: And you know, I think in Melbourne's case, you know,
Speaker 2: they did impose you know, more costs and taxation on
Speaker 2: investors in Melbourne, and that's tended to hurt the property
Speaker 2: market relative to other other areas. Melbourne obviously was hurt
Speaker 2: pretty well. It had a bigger period of lockdown, a
Speaker 2: bigger shock due to COVID, and I think Melbourne is
Speaker 2: slowly recovering from. You know, for a while there Melbourne
Speaker 2: was booming relative to Sydney, and the medium price in
Speaker 2: Melbourne almost got as high as Sydney.
Speaker 3: But then you know, covids come along.
Speaker 2: There's been some changes in government policy and it's sort
Speaker 2: of you know, a you know taken a you know,
Speaker 2: relatively speaking, has softened up.
Speaker 1: Yeah, it's a good seguay to talk about sort of
Speaker 1: property forecasting because you know, we just think back to
Speaker 1: that sort of COVID period that all the major banks
Speaker 1: were forecasting a twenty percent drop in prices and our
Speaker 1: friend Christopher Joy jumped on that bandwagon as well.
Speaker 3: With that, he's.
Speaker 1: Sort of forecast around property price changes. Now, my view
Speaker 1: around this is the behavioral economic side of things haven't
Speaker 1: been really. I mean, you can build a model around
Speaker 1: property prices, but it doesn't factor in the behavioral economic factors.
Speaker 1: And of course two thirds of property buyers are own occupiers,
Speaker 1: and own occupiers will go to great links to obviously
Speaker 1: not have to sell their home. So for a twenty
Speaker 1: percent price drop, we've got to see probably more sellers
Speaker 1: than there are buyers. And how's that going to occur?
Speaker 1: So do you have a view on this in terms
Speaker 1: of property forecasts and how difficult I guess it is
Speaker 1: to forecast property prices in the shorter term.
Speaker 2: Well, I mean, I think property forecast in turn come
Speaker 2: down to economic forecasts, and I think a lot of
Speaker 2: the forecast for those big house price to clients during
Speaker 2: COVID is that we thought we would go into a
Speaker 2: wrenching recession. You know, we were facing lockdowns, were facing
Speaker 2: many people losing their jobs, and I guess the concern
Speaker 2: was that people would lose their jobs and be forced
Speaker 2: to sell their homes. But what we saw two things happened.
Speaker 2: A we didn't get the big increase in unemployment. We
Speaker 2: did get an increase for a while, but many people
Speaker 2: were kept in their jobs through the work Support program
Speaker 2: from the federal government. And also importantly we kind of
Speaker 2: had a Team Australia. You know, it was being called
Speaker 2: Team Australia if anyone remembers that term, where every sort
Speaker 2: of pitched in and helped each other out. And banks,
Speaker 2: I think we're under a moral pressure, I think not
Speaker 2: to force people into selling their home, even if they
Speaker 2: were struggling due to COVID.
Speaker 3: It was a combination of things.
Speaker 2: Unemployment didn't go as high as we feared, and those
Speaker 2: that did lose their jobs were given support from the government,
Speaker 2: and banks didn't foreclose on properties to the extent that
Speaker 2: many feared as well.
Speaker 3: We got through that period.
Speaker 2: Look, house prices did decline, I think nationally in Sydney
Speaker 2: at least they were down ten percent or so at
Speaker 2: one point, even with the RBA cutting interest rates. But
Speaker 2: thereafter the economy stabilized and then obviously the immigration and
Speaker 2: one of the factors there is immigration dried up, so
Speaker 2: that source of demand went away. But then obviously with
Speaker 2: COVID recovering and we reopened the borders and immigration surged back.
Speaker 2: Interest rates were for a time very low, so affordability
Speaker 2: was looking good and house prices recovered. So just to summarize, really,
Speaker 2: I think I guess the overly pessimistic housing forecasts during
Speaker 2: COVID really came down to an overly pessimistic view of
Speaker 2: the economy and the economy. Actually, you know, we got
Speaker 2: through that better than feared because of a government support
Speaker 2: and b you know, banks bank banks holding back from
Speaker 2: forcing full clothes. You know, people were able to renegotiate
Speaker 2: their loans for time and these sort of things.
Speaker 1: Yeah, they're even offering interest only periods for people struggling
Speaker 1: with three payments and so forth, So that you're right,
Speaker 1: probably more useful for long term invest is longer term forecasts.
Speaker 1: Of course they're not very newsworthy because they're probably pretty boring.
Speaker 1: But if you were to forecast property prices, you know,
Speaker 1: longer term, say over a decade period, would it be
Speaker 1: true to say that you'd probably focus on more of
Speaker 1: those macro economic fundamentals rather than the sort of geographical
Speaker 1: market factors. So it's really I guess forming a view
Speaker 1: around the economic health of Australia.
Speaker 2: Yeah, look at it depends on how detailed you want
Speaker 2: to get, Like at a macro level, you know, the
Speaker 2: key drives of house prices are affordability, and the end
Speaker 2: of the day, house prices can't rise by more that
Speaker 2: assuming interest rates don't change, assuming they stay the same
Speaker 2: over the next twenty years. As an example, house prices
Speaker 2: can't rise more than household income because you reach a
Speaker 2: certain point where you know you can't afford to buy
Speaker 2: a house because the income you need to devote to
Speaker 2: pay the mortgage is beyond people's capacity, and on average,
Speaker 2: it's something like if you look at national affordability measures,
Speaker 2: something like thirty on average, something like thirty percent if
Speaker 2: of after tax family income devoted to a mortgage is
Speaker 2: sort of where.
Speaker 3: The limits are.
Speaker 2: Once you get way beyond that, house prices get too expensive,
Speaker 2: and below that they get affordable. So the constraint ultimately
Speaker 2: is growth in the economy, growth in incomes, which is
Speaker 2: something like probably five percent a year. You know, over
Speaker 2: the long run, now we've had up until last few years,
Speaker 2: we have had a period, you know, two decades.
Speaker 3: Of a trend decline in interest rates.
Speaker 2: This is where you know, many investors have got to
Speaker 2: be careful because that's not going to be repeated. You know,
Speaker 2: we had double digit interest rates in the late nineteen eighties,
Speaker 2: back when we had high inflation, and the interest rates
Speaker 2: have basically been trending down for you know, two decades,
Speaker 2: which meant that you know, house prices could rise faster
Speaker 2: than household income. But that's something that can't be repeated.
Speaker 2: Your house interest rates aren't going to continue to trend
Speaker 2: lower because they're already you know, relatively low. Another example
Speaker 2: of you know, past performance is not an indicator of
Speaker 2: future performance there, but I think you know, a reasonable
Speaker 2: expectation is that broadly speaking, you know, house prices are
Speaker 2: going to match growth in nationally growth in household incomes,
Speaker 2: which is going to be something like you know, wages
Speaker 2: growth and I think four to five percent on average. Now,
Speaker 2: if you want to dig deeper, then you can look
Speaker 2: at booming areas. You know, one of the big questions
Speaker 2: in Australia have been the tree change or the well
Speaker 2: there's things going on, people moving to cheaper regional areas
Speaker 2: as they retire. We've it's seen booming regional areas, but
Speaker 2: also generally a move from you know, rural to urban
Speaker 2: that has been a trends. You know, urban property has
Speaker 2: generally done better than regional property generally speaking. Because of
Speaker 2: that movement of people away from the bush towards the cities. Now,
Speaker 2: can that be reversed. Maybe that can be reversed with
Speaker 2: government policy. It's certainly cheaper to live outside of the
Speaker 2: major capital cities, but at the moment this is where
Speaker 2: all the jobs and the activity is, and that's why
Speaker 2: there's been that trend towards the major capital cities rather
Speaker 2: than the regional areas.
Speaker 1: Yeah, I've spoken a lot about trying to invest in
Speaker 1: locations that aren't necessarily tied to household income, that there
Speaker 1: is other sources of wealth to sort of fuel property
Speaker 1: price growth. Anyway, that's really interesting. We're going to take
Speaker 1: a short break and when we come back, I'm going
Speaker 1: to ask Dave about housing supply and demand with you
Speaker 1: in a moment. Hello, Welcome back to The Australian's Money
Speaker 1: Puzzle podcast. I'm Stuart Williams and I'm talking to David Bassanese,
Speaker 1: chief economist of Beata Shares. Dave, let's talk about housing
Speaker 1: supply now, because obviously we can talk about demand, which
Speaker 1: talked about housing affordability is a sort of big driver
Speaker 1: I guess of demand. But if we talk about supply,
Speaker 1: of course the Australian government's had an ambitious target of
Speaker 1: a million more homes over the next five years. How
Speaker 1: successful do you think the government's going to be around
Speaker 1: housing supply? And I'll say that, you know, over the
Speaker 1: last twenty years, almost every single year I've read a
Speaker 1: report to say that concludes Australia's not building enough houses.
Speaker 1: We're got a supply shortage. However, you don't see too
Speaker 1: many homeless people, and you know the I mean there's
Speaker 1: a bit of a rental crisis going on in terms
Speaker 1: of occupancy, but that's driven by something different. So I'm
Speaker 1: really interested to know how much weight should we be
Speaker 1: putting on these sort of projections and what do you
Speaker 1: think How sensitive is housing supply to government policy?
Speaker 3: Yeah, there's a lot to unpack there.
Speaker 2: Look, I think to think about the housing market, there's
Speaker 2: two times. I mean in Australia, it is true that
Speaker 2: supply is relatively constrained. I mean, if you think about Sydney,
Speaker 2: I mean, you can't build further out to our east
Speaker 2: in Sydney because it's right on the coast right half,
Speaker 2: you know, there's water, and then you can only build
Speaker 2: out west and then you hit the ranges and the hills,
Speaker 2: so we are sort of constrained, and so within that area,
Speaker 2: you know, it comes down to, you know, can you
Speaker 2: build high rise apartment blocks to increase supply. But there's
Speaker 2: been a lot of you know, I guess nimbiism in
Speaker 2: that sense that there's been a you know and quote.
Speaker 3: You know, I'm not against that.
Speaker 2: I mean, if you live in a nice traditional suburb
Speaker 2: and you've got single story homes, you know, you don't
Speaker 2: want twenty story tower blocks being left right and center.
Speaker 2: So I'm certainly sympathetic to that. The problem in Australia,
Speaker 2: just to take it to its basic point, is that
Speaker 2: we're very urbanized. You know, we talk about Australia being
Speaker 2: a large country and a small population, but all of
Speaker 2: our population is squeezed along the East coast and you know,
Speaker 2: the handful of major cities along the coast and the
Speaker 2: rest of the country is pretty barren, so we squit
Speaker 2: even though so we are very urbanized, very high proportion
Speaker 2: of our population live in very urban areas. Plus we
Speaker 2: have low, you know, sort of regulations against high rise
Speaker 2: apartment blocks. So if you go to South Korea, for example,
Speaker 2: flying to Soul, you'll see high rise apartment blocks as
Speaker 2: far as the eye can see. That's how everybody lives
Speaker 2: and that's why they can have you know, millions of
Speaker 2: people living in a city and it's affordable. So do
Speaker 2: we want to be like that? Maybe not?
Speaker 3: So what is the solution.
Speaker 2: The solution is either you know, you either build up
Speaker 2: and have people living in the cities, or you build
Speaker 2: out and live them, let them live in the out
Speaker 2: of suburbs or the regions, but have very good transport
Speaker 2: networks into where the jobs are in the cities, which
Speaker 2: we haven't really done very well. Or we put the
Speaker 2: you know, encouraged jobs in the regions. You know, so
Speaker 2: there are various ways, but we've never really done either
Speaker 2: of those successfully.
Speaker 3: So at the end of the day, all.
Speaker 2: The jobs, all the activity is in this capital cities,
Speaker 2: so people want to live near those capital cities. But
Speaker 2: we still have the development constraints against high rise apartment
Speaker 2: blocks as far as the eye can see. So land
Speaker 2: becomes a premium, the price of land becomes a premium.
Speaker 2: That's why house prices in Australia are relatively high as
Speaker 2: a multiple of income compared to many other countries such
Speaker 2: as the United States, And you know, we can talk
Speaker 2: about tech, we can talk about things so that you know,
Speaker 2: a whole bunch of people, you know, a whole bunch
Speaker 2: of arguments. For white house prices are high in Australia
Speaker 2: relative to other countries, but that is a basically it
Speaker 2: It's not it's you know, taxation, capital gains, negative gearing.
Speaker 2: All of these things I think are sort of side
Speaker 2: issue used to the big issue of high urbanization.
Speaker 3: That's our choice.
Speaker 2: But at the same time, then reluctance to become a
Speaker 2: sort of South Korea in terms of high rise apartment blocks.
Speaker 1: I mean, Victoria has a great reputation for building infrastructure
Speaker 1: below budget and on time. Of course I say that
Speaker 1: tongue in cheek, so I agree. It's not something that's
Speaker 1: going to be easy to solve. You need to be
Speaker 1: able to, you know, if you're going to leave one
Speaker 1: hundred k's away from a major capital city, if that's
Speaker 1: really serviced really well, like it might be in other
Speaker 1: countries in Western Europe and Japan and so forth, it
Speaker 1: can work. But you're right, everyone needs to flock to
Speaker 1: the city. Do you think either of those things are
Speaker 1: going to change infrastructure or density, you know, over the
Speaker 1: next couple of decades or do you think you know
Speaker 1: it'll just be more of the same, Because I'm asking
Speaker 1: the question because if I'm an investor and I'm thinking, well,
Speaker 1: property price is how you know? It's a common question
Speaker 1: I get asked, how long can property prices continue to
Speaker 1: grow at the pace they have over the last two
Speaker 1: or three decades. Mathematically prices just become unaffordable. But if
Speaker 1: you're investing in an area that's highly desirable, you know
Speaker 1: that only the top twenty percent of the population can
Speaker 1: afford to live in, well, then that price growth doesn't
Speaker 1: isn't necessary linked to household income. So do you think
Speaker 1: that the problem will be solved? Because if it isn't,
Speaker 1: then investing in the eastern suburbs in Sydney is still
Speaker 1: a great idea.
Speaker 3: Look fundamentally, I don't think that.
Speaker 2: I think Australian housing is always going to be at
Speaker 2: the again where if you've got just to think about
Speaker 2: economics one I want for a moment and think about markets.
Speaker 2: If you have a supply constrained market, the price of
Speaker 2: a product in that market is going to be based
Speaker 2: on affordability. When there's a scarcity, people will pay up
Speaker 2: to what they can afford to pay. And that's sort
Speaker 2: of the way that the Australian market works at the moment.
Speaker 2: People pay as much. You know, again, you get five
Speaker 2: people turning up an auction, they're going to bid against
Speaker 2: each other and they'll pay it up to the last
Speaker 2: dollar that they can afford to pay. And that old
Speaker 2: only is what is constraining the house price. But it
Speaker 2: will go to that dollar, and going forward it's always
Speaker 2: going to be given the supply constraints at that uncomfortable
Speaker 2: affordable level for certainly people trying to get into the market.
Speaker 3: I don't think that's going.
Speaker 2: To you know, it could change, but I look the
Speaker 2: other side of it is, on the one hand, governments
Speaker 2: like to talk about housing affordability. On the other hand,
Speaker 2: they don't want to see house prices crash either, you know,
Speaker 2: they don't want to have too much supply that house
Speaker 2: price is weak. And I mean I think John Howard,
Speaker 2: ex Prime Minister, famously said a few years ago, you know,
Speaker 2: no one's ever to complain to him about their house
Speaker 2: price rising. There's two sides of the coin here in
Speaker 2: terms of how this is dealt. My eye would I
Speaker 2: like to I personally would like to see more focus
Speaker 2: on encouraging regional development, encouraging people to be able to
Speaker 2: live out in country towns and maybe telecommute. That's the
Speaker 2: way of the future without needing to, you know, turn
Speaker 2: nice inner city suburbs into high rise apartment wastelands. I'd
Speaker 2: like to preserve, preserve what we have in the inner
Speaker 2: cities and try to encourage some greater regional development and
Speaker 2: allow people not to have to cram into the cities.
Speaker 2: But whether they do that, what we don't want to do.
Speaker 2: You know what politicians do, you know, coming up to
Speaker 2: an election, is they throw more money. You know, economists
Speaker 2: hate this when they throw subsidies. You know, here's another
Speaker 2: first home buyers subsidy.
Speaker 3: And we know what happens.
Speaker 2: All that does is all the first home buyers turn
Speaker 2: up the auction and bid away that to the seller.
Speaker 2: So the only person that benefits of the person selling
Speaker 2: the house. And it's very frustrating. So those supply those
Speaker 2: demand side sort of demand side affordability measures in a
Speaker 2: supply constrained market don't work because all they do is
Speaker 2: benefit the seller.
Speaker 1: Yeah, one hundred percent. If we talk about the sort
Speaker 1: of demand side, the affordability side. Some data that really
Speaker 1: struck me more recently was released by CBA in its
Speaker 1: results announcement a few weeks or months ago, and they
Speaker 1: reported that seventy five percent of borrowers that are borrowing
Speaker 1: for investment purposes had a household income of more than
Speaker 1: two hundred thousand. I think that was twenty four percent
Speaker 1: had a household income of more than five hundred thousand.
Speaker 1: So really it is you know, if you don't have
Speaker 1: a high income, because of the three percent interest rate
Speaker 1: buffer that they use to test serviceability, you really just
Speaker 1: can't participate. And of course that just fuels wealth inequality.
Speaker 1: Doesn't know, I mean, you know, people with middle to
Speaker 1: lower income owners sort of get locked out of the market. Now, APRA,
Speaker 1: the banking regulator, will argue that, you know, that's just
Speaker 1: crudential regulation. We want to have a healthy banking system
Speaker 1: and so forth. But what should investors take away from that, Like,
Speaker 1: what are the long term implications of you know, the
Speaker 1: settings been so restrictive for people on middle incomes that
Speaker 1: they're not able to get into the property market or
Speaker 1: take that next step up the ladder.
Speaker 2: Look so in terms of I mean, one of the
Speaker 2: issues in Australia at the moment, of course, is that
Speaker 2: if you're a high income earner, you know, your marginal
Speaker 2: tax rate is fifty percent, right, if you run a company,
Speaker 2: you know a company, the tax rate is in twenty
Speaker 2: five percent, So there's this massive gap. And also you know,
Speaker 2: you get at capital gains tax discount if you own
Speaker 2: a property. So one of the issues going on at
Speaker 2: the moment is that widening gap between the corporate tax
Speaker 2: rate and the high ink and the high marginal tax
Speaker 2: rate for people on high income paye income earners is encouraging, yeah,
Speaker 2: at the margin more property investment. So more and more
Speaker 2: high income earners that are facing a high marginal tax
Speaker 2: rate are encouraged to try to you know, reduce that
Speaker 2: tax burden through investing in property through negative gearing. Now,
Speaker 2: funnily enough, if we were able to change the policy
Speaker 2: so that the marginal tax rate wasn't fifty percent, it
Speaker 2: was maybe thirty percent or something, the incentive to negatively
Speaker 2: gearing a property would actually be less.
Speaker 3: I think that's one point.
Speaker 2: And you know, what we've seen over the years is
Speaker 2: that more more people are now being pushed in that
Speaker 2: top income tax bracket, you know, in it. Maybe many
Speaker 2: people don't know this. In the United States or Europe,
Speaker 2: to be in the top tax bracket, you need to
Speaker 2: have your income needs to be like five six times
Speaker 2: the average income.
Speaker 3: In Australia it's two.
Speaker 2: The top tax bracket in Australia cuts in at a
Speaker 2: relatively low level anyway, So that's just one of the
Speaker 2: one of the extra things that I think driving the market.
Speaker 2: So in terms of proper investing, Yeah, you are going
Speaker 2: to get those on higher incomes that are more eagerly
Speaker 2: chasing those properties because they have this tax burden that
Speaker 2: they're trying to deal with.
Speaker 1: Yeah, that's really good. We're going to take another break
Speaker 1: and when we come back, I'm going to answer question
Speaker 1: from Sam and also take the opportunity to ask Dave
Speaker 1: about direction of interst rates. Back with you in a moment. Hello,
Speaker 1: and welcome back to The Australian's Money Puzzle podcast. I'm
Speaker 1: still we so I'm talking to David Bassanese, the chief
Speaker 1: economist at Beata Shares. Now, before before we get into
Speaker 1: our listener question, Dave, I wanted to ask you about
Speaker 1: I couldn't help asking you about the direction of interest
Speaker 1: rates and I was interested to see that both Kolabar
Speaker 1: Capital and Research Affiliates has done some work on what
Speaker 1: happens when inflation rises significantly, and they're both concluded that
Speaker 1: quite often, more than seventy percent of the time, inflation
Speaker 1: will initially come back and then it will reexalerate. And
Speaker 1: according to the RBA's own forecasts, inflation won't hit the
Speaker 1: middle of the two to three percent ban until the
Speaker 1: start of twenty twenty six. So if the risk that
Speaker 1: inflation becomes entrenched or the inflation re exalerates, why wouldn't
Speaker 1: the RBA hike interest rates now again to reduce that
Speaker 1: risk if its own forecasts tell us that it won't
Speaker 1: be in the middle point of the band for maybe
Speaker 1: fifteen or so months.
Speaker 3: Yeah.
Speaker 2: Look, firstly, just on the idea that inflation re accelerates,
Speaker 2: I mean, one of the examples many people use that
Speaker 2: they look at the nineteen seventies. You know, we had
Speaker 2: inflation go up in the early seventies, it did come back,
Speaker 2: and then it bounced back in the late seventies early eighties.
Speaker 2: Now we had two oil price shocks, we'd opeck one
Speaker 2: in the early seventies where aill prices you know, surged
Speaker 2: and then they came back, and then we'd hope, you know,
Speaker 2: the oil price shock number two, so that you know,
Speaker 2: I think that's one of the I'm not convinced that
Speaker 2: there's necessarily this cycle that high inflation comes down and
Speaker 2: then it bounces back. I mean, I'm not convinced that
Speaker 2: is a given. And certainly in today's world of you know,
Speaker 2: high globalization, a lot of tech technology disruption, I think
Speaker 2: inflation is just generally going to tend to be lower
Speaker 2: for longer. I think COVID was a special case where
Speaker 2: we had massive supply and demand disruptions which initially caused
Speaker 2: shortages and caused prices to go up to clear markets.
Speaker 2: But prices have been coming down and I think they
Speaker 2: will continue to come down now. Just in terms of
Speaker 2: the RBA, I mean, the RBA has got a balancing act.
Speaker 2: You are absolutely correct in that the longer the thing about,
Speaker 2: the longer inflation stays high, the greater the risk that
Speaker 2: it gets entrenched into wage and price stting behavior. We
Speaker 2: saw that in the nineteen seventies and then it did
Speaker 2: take wrenching recessions in the early eighties to actually, you know,
Speaker 2: finally break the back of that inflation. So that is
Speaker 2: the challenge. You can't wait forever for inflation to come
Speaker 2: back down again. But at the same time is you know,
Speaker 2: if you can get inflation into the target ban in
Speaker 2: the next six months, how do you do that smack
Speaker 2: raise rates and cause the recession. So you've got to
Speaker 2: find a middle ground somewhere there, and that's where central
Speaker 2: banks around the world, including the RBA, have been, you know,
Speaker 2: trying to find that middle ground. So the RBA's judgment
Speaker 2: at the moment is and I think correct inflation is
Speaker 2: coming down. I think various measures of underlying inflation now
Speaker 2: around about four percent. A year or so ago they
Speaker 2: are over six percent, So it's come down and I
Speaker 2: think continuing to come down back toward that percent. And
Speaker 2: if you look at surveys of long term inflation expectations,
Speaker 2: they are.
Speaker 3: Still relatively well contained.
Speaker 2: So provided the RBA thinks that inflation expectations are contained,
Speaker 2: provided it thinks that what we're seeing isn't beencoming embedded
Speaker 2: into wage and pricending behavior, then they can afford to
Speaker 2: wait a little bit and not smash the economy. Some
Speaker 2: people say, oh, we can't take that risk, Well, you know,
Speaker 2: it's worth taking the risk if it avoids a wrenching
Speaker 2: recession where hundreds of thousands of people lose their job
Speaker 2: in my mind, and that's the sort of judgment we're
Speaker 2: taking at the moment. And again I go back to
Speaker 2: I think that due to globalization, due to competition in
Speaker 2: markets being a lot tougher than it was ten twenty
Speaker 2: thirty years ago, the natural tendency is for inflation to ease,
Speaker 2: and I think we will see that over the next
Speaker 2: year or so.
Speaker 1: And money markets are pricing in about a one percent
Speaker 1: drop of the course of the twenty five calendar year.
Speaker 1: Do you think that seems reasonable? Do you think the
Speaker 1: money markets are right in terms of prising that.
Speaker 3: In yes, I do.
Speaker 2: I've got the RBA cutting rates in February of twenty five,
Speaker 2: and I think we're going to see we need to
Speaker 2: see inflation continuing to come down bottom l At the moment,
Speaker 2: inflation is still too high. So the underlying measure of
Speaker 2: inflation in Australia, it's called the trim mean. For example,
Speaker 2: the year on year rate is three point eight percent
Speaker 2: now by early next year, and that's the June quarter measure.
Speaker 2: We get two more quarterly CPI reports the September quarter,
Speaker 2: the December quarter, we get the December quarter one in
Speaker 2: late January of twenty five. If that annual rate is
Speaker 2: down to three and a half or even a bit
Speaker 2: below three and a half, I think that's enough of
Speaker 2: progress on inflation for the RBA to at least start
Speaker 2: to take the foot off the break. I mean, interest
Speaker 2: rates are restrictive levels in Australia, and so it's not
Speaker 2: about you know, stimulating the economy. It's just taking the
Speaker 2: foot off the break a little bit. And as inflation
Speaker 2: continues to progressively come down, I think they'll then be
Speaker 2: able to, you know, what we call RIP normalized rates
Speaker 2: is bring them back to a more normal level, which
Speaker 2: is closer to three percent than the four point three
Speaker 2: to five that we have at the moment.
Speaker 1: Yeah, excellent. We're going to take a listener question now
Speaker 1: from Cray. Craig Rights. My wife and my wife and
Speaker 1: I are in our early thirties, currently expats in the
Speaker 1: US with the intention to return to Australia in the
Speaker 1: coming years. I'm thinking it might be a good time
Speaker 1: in our lives to engage a financial planner for the
Speaker 1: first time to help setting things up in terms of
Speaker 1: asset allocation now as we have a host of new
Speaker 1: complexities to think about. My question is do people engage
Speaker 1: financial planners for this sort of one off piece of
Speaker 1: advice to set the strategy in the right place. Any
Speaker 1: other insights you may have on the topic for typical
Speaker 1: fees charged would be much appreciated. So Craig James had
Speaker 1: Jackie Clark on the show back in the start of September,
Speaker 1: the fifth of September, and they talked about how financial
Speaker 1: advisor numbers in Australia of half over the last five
Speaker 1: ish years, so there's a sort of shortage of supply
Speaker 1: of financial advisors if you like, and that most advisors
Speaker 1: only work with ongoing clients just because of resourcing issues really,
Speaker 1: and that the average fee starts based on their research
Speaker 1: they talked about in that podcast episode, around five thousand
Speaker 1: dollars a years. Look, I think it's probably worth while.
Speaker 1: There are some unique complexities to expats returning to Australia,
Speaker 1: and property is a big element as well. That is
Speaker 1: typically win to buy the family home if you don't
Speaker 1: already have it, and how much to spend and how
Speaker 1: to make that not only a good lifestyle decision, but
Speaker 1: also ultimately a good financial one as well, So I
Speaker 1: think there's probably value in making sure that you execute
Speaker 1: on those things correctly and not make any mistakes. What
Speaker 1: could be challenging, however, is to firstly find an advisor
Speaker 1: that has both that property and shares and super expertise,
Speaker 1: but then also most importantly, finding is that's going to
Speaker 1: give you that one off advice. Do you have anything
Speaker 1: to add, Dave.
Speaker 3: No, I think that's pretty pretty sensible.
Speaker 2: I mean, if you can afford the financial advice, you know,
Speaker 2: certainly it's always a good idea. I think financial advice,
Speaker 2: you know, really does pay for itself. If certainly, if
Speaker 2: you've got a lot of assets and you can afford
Speaker 2: to get the advice, it certainly makes sense. And as
Speaker 2: I said, I think it doesn't necessarily, and the idea
Speaker 2: of even just a one off you know, you get
Speaker 2: taking stock of the situation as you come back, is good.
Speaker 2: I mean, they might offer you a more ongoing service.
Speaker 2: It's really up to you whether you want to go
Speaker 2: down that path as well. But yeah, certainly, if you
Speaker 2: can afford advice, it's usually I think it's certainly well
Speaker 2: worth the investment.
Speaker 3: Yeah.
Speaker 1: One of my mentors have told has told me many
Speaker 1: times to it. Professional advice pays for itself, you know,
Speaker 1: whether it's legal advice, financial advice, whatever it might be. Dave,
Speaker 1: that's been a really interesting discussion. I'm sure our listeners
Speaker 1: have really enjoyed it as well. I mean, there is,
Speaker 1: as I said in the introduction, a lot of information
Speaker 1: for past some predictions and opinions out there with respect
Speaker 1: to economic settings and property price growth, and I think
Speaker 1: that helps our listeners really understand and put a bit
Speaker 1: of context around it. Just a reminder, folks, if you
Speaker 1: have any questions or feedback, would love to hear from you.
Speaker 1: The email is the Money Puzzle at the Australian dot
Speaker 1: com dot au. Please keep those questions coming. James Girard
Speaker 1: will be back with you on Thursday, and I'm sure
Speaker 1: you'll be relieved to know that James Kirby will be
Speaker 1: back in this seat this time next week. I really
Speaker 1: hope you've enjoyed today's episode. Thanks very much, Dave.
Speaker 3: Now always great to be with you all.
Speaker 1: Thanks for having us buffin out