Thursday, October 20, 2011

Is industrial strife a sign of housing stress?

Industrial disputes are becoming once again a frequent feature of the daily media. Unions are pushing for wage rises in the face of the falling buying power of the fixed wage (as costs of living rise). Those wage push pressures are being resisted by businesses which are trying to stay afloat in a very ordinary domestic economy and in the face of rising global competition.  But as unions push for more wages, is it not possible to consider lower living costs as a solution which benefits fixed wage workers and which also benefits business? And if lower living costs are part of a solution, then housing – one of our highest living costs of all – ought to take centre stage.

It’s ironic that the rapid and undeniable escalation of housing costs relative to average wages has taken place largely due to policies introduced during the terms of State Labor Governments. The introduction of artificial growth boundaries that limited land supply, the introduction of upfront taxes on new development, and the spawning of myriad and complex planning and development regulation, whether it’s been in Queensland, NSW or Victoria, have all occurred generally with Labor Governments in power.

The reason it’s ironic is that the adverse impacts of those policies have been most felt by the very constituency which Labor traditionally sought to represent: working people, in largely fixed wage environments. In the very early days of the Australian Labor Party, these were symbolised by shearers in their Jackie Howe’s.  Later in the 20th century, they expanded to include the unionised ‘white collar’ workforce of teachers, nurses, police and other para-professional groups. Today though, wage pressures by unions of teachers, police or other groups (especially those on public payrolls) are assiduously resisted by Labor Governments, as they defend their budgets. And this is the irony – having presided over and championed policy mechanisms which have had a large impact on the cost of living of these groups of workers, these same governments then resist attempts to recover that standard of living through wage growth.

Now before you think I’ve gone all militant on you all (trust me, I haven’t), here’s an example of what I’m driving at.

Much has been said about housing affordability, and what it will mean to lock an entire generation out of the housing market.  Even as late as this week, this story documents yet another report attesting to falling home ownership and the rise of a renting class.  Most of what is said and written about affordability though works on averages – average incomes, and average house prices. These are convenient measures, so it makes sense to do so.

Consider for a moment though the people who are trying to enter the housing market and buy a home in which to raise a family. They could typically be around their mid to late 20s, and biologically in their prime for having and raising children. At this stage of life, you are probably below the average income for your career or profession as you’re really only starting out. But it’s at this stage of life that the reality of the affordability problem is most acute.

In Queensland, this might be a teacher in their mid 20s, with two or three years of training, who will earn around $50,000 per annum gross and pay roughly $9,000 per annum in income tax. He (or she) may be married to a police constable, of the same age, who will earn roughly $58,000 per annum gross including their operational shift allowance, and pay around $11,500 in tax. Their combined after tax income could be around $87,500 per annum. (This combined income would be much less of course if, for example, one of our young couple was a child care or retail worker).

Now, take a modest new family home in an outer suburb like North Lakes or Springfield. Let’s assume they’ve saved a small deposit, and with a loan of $400,000, they buy something for around $450,000. That’s hardly McMansion territory. But that loan, over 30 years at 7.8%, will cost them close to $35,000 per annum in repayments, or 40% of their combined after tax incomes.
This, of course, is before they even think about children, and the prospect (despite generous maternity and paternity pay and leave provisions) of enduring a significant household income reduction while one of them isn’t working. Even on returning to work, there would then be child care fees, which quickly erode their pre-child household budget.

The basic sums are not horrendous but neither are they full of promise. Buying a home and starting a family have become a huge financial consideration, instead of a fairly normal and unremarkable pattern of generational and social growth. And it is now absolutely dependent on a dual income family, with both of them preferably good incomes.

This is a profound change, and it’s happened just in the last decade. As a result, fewer people are buying homes, people are postponing children (until they can afford them) and when they do, they’re having fewer children. A countless stream of statistical and demographic reports are now underlining this change on an all too frequent basis. All of which is very bad news for the economy, for society and the community as a whole. 

But returning to my original theme – is it any wonder we’re seeing wage push pressures from people such as those in this example?

Consider the cost of the $450,000 modest home they’ve bought. Within that price is roughly a $50,000 up-front ‘developer levy’ (better called a new home buyer tax). There’s probably close to the same in inflated land costs, brought on by artificial land supply constraints in a country of unbelievably abundant land. There’d also be a raft of minor additional building costs introduced under the guise of ‘green’ or ‘sustainable’ building guidelines, in order to prevent the sky from falling. (Sorry, I meant to say ‘to prevent the sea from rising’. I always get those two confused for some reason).  Plus there’s a hard-to-quantify compliance cost because getting the approval to develop the land for homes for the likes of our young couple now takes 10 years instead of a few months, and involves teams of town planners, lawyers, and other hangers on. Plus of course, there’s a 10% GST – the money from which was supposed to have allowed State Governments to abolish stamp duty, which they didn’t. If our hypothetical couple above weren’t first home buyers, they’d be up for stamp duty also.

The total cost of all this that’s been added to the price paid by our young couple could easily be well over $100,000. If you don’t believe me, check out this old report, prepared back when I used to get paid to do this sort of thing.
A quick bit of math’s now follows. That extra $100,000 (conservatively) has been funded via our young couple’s mortgage. That’s an extra hundred large they’ve borrowed, to cover the costs of additional taxes, fees and compliance – introduced under the watch of a State Labor Government. That $100,000 is worth an extra $720 a month on their repayments, or an extra $8,640 per annum out of their pockets. If their repayments fell by that amount, their mortgage costs would be around $26,000 per annum in total, or just under 30% of their combined household income – not 40% of it.

There you have it. At 30% of household income, not only the home becomes more affordable, but so do children.  But at 40%, it’s proving to be touch and go.

The point of all this is that there are two ways, simply put, to improve the cost of living equation faced by younger workers on largely fixed incomes. You can increase their wages (which the unions want and which businesses – and governments – resist). Or you can reduce their costs of living.

This is about as simple as economics can get but is has somehow eluded people working in State Treasuries and Planning Departments. I haven’t even commented in this on the impact of rising motor vehicle registration costs and the cost of fuel (our young couple in this example both have jobs which are dependent on the private car and hence the cost of running them – both of them).  I haven’t touched on the impact of rising utility costs – especially electricity – on their household budget. And I dare not mention the insanity of the carbon tax, which is only going to exacerbate things (our young couple have a combined gross income of $108,000 and for housing and children to be more affordable it would need to be closer to $150,000 – the very point at which, our Prime Minister has declared, people are ‘too rich’ to warrant compensation for the carbon tax. Go figure!).

The simple economics of what we’re talking about was summed up beautifully over 160 years ago, in Charles Dickens’ novel David Copperfield, when Mr Micawber lectured the young Copperfield on the perils of exceeding budgets:
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Mr Micawber, you’ll note, wasn’t implying the need for more income... he was highlighting the important role played by expenses.

In the Australia (and Queensland) of 2011, the same still applies. Rather than push for more income, unions could do better to lobby their Labor Parties to reduce living costs. Reduce the housing infrastructure levies, relax the rigidity and ideology of urban growth boundaries, reduce compliance costs, cut green taxes and simply the provision of our single greatest cost – housing.  When done with that, take on the militant green agenda and lobby for reduced retail energy costs and car registration fees, and don’t let congestion charging even get a look in.

Fighting pitched industrial battles with employers for a few extra dollars a week in income seems futile compared to the lack of battles ever fought with governments over the introduction of tens and even hundreds of thousands of dollars in extra taxes and costs associated with the provision of one of life’s essentials – a family home you can afford, the children you want to raise in it, the energy to power it, and the vehicles to get you to and from it.

Tuesday, October 4, 2011

This time it’s no different.

The current obsession with all things negative makes for some pretty depressing times. The media have been scouring the globe for experts prepared to predict the end of the world (or at least the end of Europe and the USA, and some are even predicting a China fizzle) and global equity markets are showing the sorts of gyrations normally only seen on a seismometer reading of a major earthquake. Housing prices have been sliding, and consumer and business sentiment falling. Politically, we hate our national government (according to the polls) and the whole country is basically in a big downer. What good can come of this? Possibly, plenty.

‘This time it’s different’ is the sort of fallacy that collectively we can all be fooled into believing from time to time. In the same way we were promised there couldn’t be a world downturn (because ‘this time it’s different’) the same could be said of those who deny the prospects of recovery (because, they say, ‘this time it’s different’).

But are the signs of recovery, in Australia at least, already there? One certain sign has been the clear evidence that Australian consumers have read the tea leaves and flicked the switch from being consummate consumers to avid savers.  Official ABS data released mid year showed that the household savings ratio rose to 11.5% - the highest rate of household saving in 24 years.  In other words, you have to go back to 1987 to find a more conservative bunch of savers than we are today.

That news was followed in September by reports that cash deposits are growing as businesses and consumers put money into safe haven accounts. In August alone, $27 billion was pumped into bank deposits, and between Westpac and the Commonwealth Bank, consumers pumped a combined $4billion into deposit accounts in one month.

It’s been a trend noted by the Reserve Bank, and one felt acutely by Australian retailers from Myer to David Jones to Harvey Norman and JB Hi Fi. While it may be bad for shareholders of retail businesses, it’s encouraging to know that consumers and business are winding down debt and increasing their savings.

Another sign is the evidence that the economy is still growing. Australian GDP rose 1.2% in the June Quarter, and this week, Australia’s trade surplus recorded its second largest number ever, largely on the back of the resources economy but also with strong performance in the traded goods and services sector, and even dwelling approvals recorded a strong rebound (albeit from dismal levels).

Sure, there’s a two speed economy at work, possibly three and even four speeds. But you could have said the same prior to the GFC, when urban markets were going well but regional and resource markets weren’t exactly glamorous.

Searching the tea leaves for more signs for positives are the continued reports of strong company profits. Amidst all the talk of earnings downgrades, most company profits during the reporting season have been positive, and ahead of expectations. According to the AFR, two thirds of companies reported increased profits this year, while 37% were better than expected.

And when companies are making profits, people keep their jobs. The unemployment rate, as recorded by the ABS,  crept up slightly to 5.3% in August. Hardly a calamity. Since 1978, our unemployment rate has averaged 7.11% and peaked at over 10% in 1992 – and we recovered from that.  

The equities markets aren’t providing many grounds for positive thinking but even here, there’s a clear view that markets are oversold and trading at heavy discounts. The fundamentals, my economic friends tell me, are generally all pretty good.  The markets though have been rewarding good profit reports with falling prices, and the Greek/Euro position has provided the latest excuse for pessimism. Markets, as Adam Smith observed, are driven by ‘animal spirits’ and right now the animals have broken out of the zoo and are on the loose.  But they will return to their cages at some point.

Summarising the global equities funk was this comment by a trader with ING:

‘‘We’re really oversold,’’ Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $US550 billion.

 ‘‘The US data has not been bad. The Fed has indicated that it’s not out of bullets. There’s no sign of recession in the US and yet the market is pricing for one.’’

So what’s happening here? Markets are oversold, trading well below their true worth. (I’ve heard some highly respected economists suggest the true value of the All Ords should be around 5500 points, not sub 4000 where it’s been trading lately). Plus, employment remains good – at historically low levels even – and household savings are rising. Bank deposits are growing, and the economy generally remains in positive – though patchy - territory.

To my way of thinking, consumers (far smarter than the politicians they elect) have decided to wait. Purchases are being postponed until the general economic outlook – along with the media headlines – starts to look a bit more certain.

And all this means is that more pre load is being added to the economic spring. The more preload that is added, the more the spring will bounce back as all those postponed consumption decisions will catch up. (This need not mean a return to asset price inflation, as we saw with housing, but it should ideally mean a return to more normal volumes of activity – and money flowing through an economy is as important as blood flowing through your veins).

So what’s the hold up?

Confidence it seems is everything, and we don’t have much right now. Little wonder, given the economic and political management of our Federal Government. The people – and business – know intuitively that this government is a mess and this isn’t a good time for carbon taxes, congestion taxes, taxes of high cholesterol foods, new tax systems, huge expenditures on broadband with uncertain benefits – it’s a long list.

But with confidence sapped, and until there’s a climate of more stability and certainty in our political leadership, along with signs that the global economy isn’t about to fall off the edge of the earth, we aren’t likely to see much change. But when it does, the change I suspect will be rapid and positive.

Remember, this time, it’s no different to last time.