December Economic Update – 2018

December Economic Update – 2018

In this instalment of the monthly Economic Update courtesy of Kaplan Professional, Industry Super Australia chief economist Stephen Anthony gives us his view about Australia’s national shortage of affordable housing, the ‘infrastructure’ of social cohesion and the provision of an efficient mechanism to deliver equity capital to affordable housing providers.

Question 1

You wrote in September that Australia stands on the precipice of a major social crisis due to the national affordable housing shortage. How has this arisen?

This has arisen because of about 25 years of policy failure. What we’re seeing now is that there’s a national shortfall of affordable housing, of about 350,000. Now, government can’t even give you that number. We’ve had to estimate that ourselves, and there is no planning process that will identify the shortage and will put in place a process to reduce that shortage. So, we say that’s a national problem.

When you think about affordable housing and how important it is as an infrastructure issue, it’s probably the most pressing social issue the nation faces, and clearly dealing with it is a major economic priority. All you have to do is wander the streets of any major capital city during the evening and you’ll see the problem close at hand and how it feeds other issues, such as drug abuse, domestic violence, and onwards it goes. We think that this is such a serious issue that all leaders of government need to coordinate to fix it.

Question 2

You went on to say that housing stress is a mainstream economic problem that wastes human resources and destroys productivity, yet none of these social and productivity impasses have been measured. What are some of the knock-on effects and how do you see the situation being improved or remedied?

The costs of this problem are relatively straightforward. Whenever a human being cannot make a positive contribution to society or is not in a position to do their best, then their potential economic contribution is lost as well, so that’s a tragedy. What we want to do is address the problem head-on, and the problem is really one of planning.

Firstly, we need governments to design a process whereby the shortage is identified clearly by local government area. Once the shortage is identified — the areas where more housing is needed — governments should then seek to tender out that effort to, we think, community housing organisations. It should say, “Community housing organisations, put your hands up and tell us which of you are in a position to build more affordable housing”.

Once that’s done, the question is who will fund this building? Will it be government directly or will it be the institutional sector or will it be mums and dads, you know, the way we do negative gearing?

I would suspect that it has to be big institutions because this is a large-scale problem, and really you need the expertise of the financial experts to get involved, to roll their sleeves up and to fund this problem. But, that said, when you’re looking at some of the potential customers, these people are not in any sort of position to provide a commercial rate of return.

So it may be that government has to offer a tax credit to get institutions involved and, once they have offered that tax credit, perhaps tying the successful delivery of housing outcomes to those tax credits and then allowing institutions to walk away from their effort; in other words, write off their investments. To me, that makes imminent sense.

But what it also means is you’ve built up scale in the community housing sector. At the moment, there just isn’t enough equity investment to build the houses that are needed to deal with the shortfall. One way to get equity investment quickly in the sector is to provide a tax credit or some sort of write-off process.

The Rudd-Gillard government introduced something called the NRAS Scheme or the National Rental Assistance Scheme, and basically offered a fixed subsidy for each affordable housing place per year provided by a community housing organisation. I would just write off the full amount of building that particular place, thus incentivising institutions to get involved. You might find that you’d get a massive inflow of foreign capital to do this building as well because it may just suit various taxpayers in different positions to grab hold of that write-off.

Question 3

Australia is again at the end of the year with a new Prime Minister and a new Treasurer. Can you take us through your report card for 2018 in terms of the Federal Government’s economic successes and failures?

On the plus side, we have a very strong labour market, very strong employment. We have benign wages environment, which from the perspective of business is a good thing. We have a very reasonable measured growth rate. Financial markets are still ahead compared to where we were [at] say 30 June 2017, so that’s all very promising. On the other hand, we do face a number of significant structural challenges.

Firstly, there’s just the issue of the continuity of government. We’ve had a series of Federal Governments that really haven’t been able to stay the course, and that certainly would be undermining confidence from the perspective of decision-makers in business. That’s not good. The second thing is we’ve really gone through a decade of short-termism in policy. You’d think that property developers have been running the Australian economy.

We’ve been really flooding our major cities with immigrants. What we haven’t been doing is being systematic about generating productivity gains which will drive up wages and create a virtuous circle of growth. What we’ve been doing is creating arithmetic growth by bringing more heads to the table, but not necessarily growing per capita living standards.

So, we’ve got to get back to basics. We’ve got to get back to productivity drivers. Unfortunately, this sort of property development approach to economic policy has led to a situation where we’ve basically created a property boom, especially in Melbourne, Sydney and Brisbane. And now that circumstances aren’t as fortuitous, we are seeing prices falling and we may see, before too long, a full-on property bust. That is something that government needs to get ahead of the curve on in terms of managing.

Question 4

What do you see as the new Treasurer’s key challenges in 2019 and how do you see these perhaps being reflected in the next Federal Budget?

Treasurer Frydenberg needs to address the structural issues in the tax system which incentivise speculation, which incentivise investment in existing property, for example, and which don’t incentivise a long-term investment focus, especially for Australian businesses.

If you think about the case of property, there was once a time when we thought about the Australian family first, and first home owners and owner occupiers and all property settings, in terms of tax policy, were set so that they were advantaged. But now we’d prefer investors, usually mums and dads, and we incentivise them to borrow as much as they possibly can, generally through a self-managed super fund, and to write off that investment in the existing property using their tax liabilities.

Now it seems to me that that is not a sustainable basis for economic policy. What we should do with the tax code is to prefer investing in new property, but also we should provide incentives to business to invest in new plant and equipment, especially lump investment. That will be the way that we fund a virtuous circle of productivity infrastructure and investment around business that will drive the next 10 years of growth in this economy.

Whether it be investment allowances or just addressing things like negative gearing or the capital gains tax discount, there are some fundamental structural issues there that can be addressed by the Treasurer.

Question 5

Would you like to comment on the Royal Commission into Banking Misconduct Interim report and is there anything specifically in that that you’re hopeful for or fearful of seeing come the final recommendations in early February 2019?

We very much support what Commissioner Hayne is doing with the Royal Commission. We certainly think it’s in the long-term interests of our members and of the Australian economy more broadly. So, we completely support what he is doing and we very much look forward to seeing his final report and acting on it.

Question 6

Moving to global markets, the sharemarket correction continued in late October with sharemarkets falling around 9% globally and Australian shares at around 11%. What are some of the geopolitical trends you’re seeing underpinning this correction?

It was interesting if you follow financial media over the last half a decade, the general observation — especially since the election of the Trump government — has been that perhaps the US equity market was a little overpriced, and perhaps we’ve seen a little bit of a reversal of that in the last few months. Unfortunately, Australia has been carried along into that as well, and it’s possibly a little harder to see the overvaluation in our market that you might be able to calculate for the US. Basically, I think that you would expect that over the next few months, markets may settle a little.

The point being that the structural issues that are probably driving that short-term volatility. They won’t go away, but they’re well known. And so perhaps aside from what will occur with the US-China trade issues [there are other] pressures on the market. For example, valuation re: long-term interest rates, what the US decides to do in terms of its domestic investments and infrastructure investment, how the US manages its budget policy.

Most of these things are reasonably predictable, even, for example, the outcome of the midterm elections in the US. People have a reasonable handle on what’s likely to occur there. I think Australia is being dragged along there, and I guess to the extent that a worse trade outcome may slow China. That may have a much more negative impact on the Australian economy.

Question 7

October is known for sharemarket volatility with the US market often seeing a share fall and then a rebound, and it traditionally strengthens through to the end of the year. Do you see factors like the midterm elections and the Mueller Investigation changing that traditional strengthening?

I think it would be unwise for anyone to make any firm prediction about what’s likely to occur in November and December this year. I think these events and what is likely to occur are completely uncorrelated with the past. It is possible to argue that there are technical factors around the market that can lead to some downward pressure, you know, each year at this time for the US. But I do believe that the issues that are headwinds for the market this year are specific to this year. To that extent, if there are any unexpected surprises, that may [place a] lead weight in the saddle bags.

Question 8

Finally, the trade conflict between the US and China is continuing to intensify and spilling over into other areas. What are some of the implications for Australia in 2019?

Well, as you know, China is our major trading partner. It’s 30% of our merchandise trade. So, a marked slowdown in China — you know, China gets a cold, we’ll catch the flu — and that could occur at exactly the wrong moment in terms of our residential housing adjustment.

So, we could actually see that that exacerbates a slowdown in our measured activity, our incomes growth, feeds into our labour market at exactly a time when many people are struggling to service home loans. You really create a vicious spiral there. If something like that were to occur, governments should move swiftly to identify those home owners struggling the most to service their loans, and act.

And potentially look to rolling out more infrastructure projects, especially where you have state governments that have outlined high priorities and have plans, stage 1, stage 2, to develop various networks. You would assist them move further down the curve in terms of getting them rolling out.

 

Sacha Loutkovsky
sacha.l@orionfg.com.au
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