Hard to argue with this maths…

It’s one of the things about economists – sometimes their job is to just point out the obvious.

Old ABC economic grey-beard Alan Kohler was dropping some truth-bombs the other day when he unpacked what’s going on with the housing crisis.

I’d love to say that this is some complex rocket-science kind of stuff. But it’s kindergarten-level math.

That doesn’t make it wrong though.

So first up, he looked at what’s happening to supply. As he rightly notes, “We know that dwelling approvals have been in trend decline for 10 years”.

Yep, and even that’s a pig with lipstick on it. That’s just the raw numbers. Given the population is trending upwards, that series should be trending upwards as well. But it’s not.

Which is what makes it such an abysmal result.

Anyway, that’s the supply side.

On the demand side – the old bedfellow of supply – Kohler notes things are trending the other way:

“We also know that population growth has been climbing for 20 years driven by a doubling and then tripling of migration”.

Yep, John Howard opened the gates, and every government since has enjoyed the sugar hit of stronger immigration.

So supply trending down, demand trending up. And that’s why the shortage gets worse every year.

If you’ve been following my work for a while none of this will be new to you.

But what Kohler did was look at it at the monthly level to try get a sense of just how quickly things are going to poop.

These back-of-the-envelope calculations are a little alarming.

On the demand side, Kohler estimates that net overseas migration, plus natural increase, created a population demand of 57,000. Divide this number by 2.5 – the average occupancy rate – and this gives demand for an additional 23,000 dwellings.

On the supply side, there were 10,903 dwellings approved for construction in January 2024, assuming it takes one year to build a home.

(That’s actually generous, since we know not all approvals go on to be completions, and some approvals are for knock down and rebuilds.)

Anyway, when you put these two together, Kohler estimates that there was a housing shortfall of around 12,000 dwellings in January 2025. “Demand was more than twice supply”, says Kohler.

That’s 12,000 homes short, in a single month!

If that’s a typical month, and I reckon it probably is, then the housing shortage in Australia is getting worse at a pace of 12,000 homes a month!

Every month.

In a year, that’s 144,000 homes.

This is supposed to be going the other way. We should be building more homes than we need each month if we want to make the housing shortage better.

But we’re not. We’re going the other way. At an alarming clip!

This is why prices go higher, year after year after year.

It’s not rocket science.

JG.

Every day its another reason to cut rates.

Ohhhh. I can feel those rate cuts. They’re coming.

The RBA is still playing coy, but cuts are coming. And with every new piece of data the case for rate cuts grows stronger.

CBA agrees. Their economics team has been well ahead of the game this cycle, and they currently reckon we’ll get another three rate cuts this year.

Because pretty much across the board, the hard data has come in softer than the RBA’s forecasts.

Like the monthly inflation data last week, which came in pretty floppy. On CBA’s estimates, the six-month-annualised rate of inflation should come in about 2.2% in the coming quarter.

If that comes to pass, at 2.2%, inflation is starting to threaten the BOTTOM of the RBA’s target band.

And can you imagine how embarrassing it would be for the RBA to be poo-poo’ing rate cuts, only to have inflation drop through the floor?

Awkward.

And it doesn’t look like there’s anything wrong with the ABS’s inflation data. All the secondary inflation measures are telling the same story. Like the NAB survey and the PMI survey. All trending lower.

The Melbourne Institute measure is singing from the same hymn sheet too. In fact, at 1.8%, that already looks like it’s broken through the bottom of the band.

CBA also note that there is zero threat to inflation coming from the wages data, which remains weak and getting weaker.

The employment data is also clearly softening, with the CBA’s own internal measure backing up the recent weakness we’ve seen in the official data.

… with the number of firms reporting difficulty recruiting labour continuing to fall.

And all this is going on at the same time as the consumer remains subdued. The consumer pulse “hasn’t picked up much”.

No kidding. Real per capita household consumption has declined for eight consecutive quarters.

So all in all, the case for rate cuts grows stronger every day.

Inflation is coming in softer than forecasts. The jobs market is clearly weakening. And households continue to bunker.

There is absolutely nothing here to hold up further rate cuts.

Bring it on.

JG.

Here’s what I thought mattered.

I thought I should write a quick note on the budget – mostly because people are asking me about it.

There’s nothing too crazy here, but let me jot out a few points I thought were interesting.

Headline is inline with averages

The budget deficit in 2024-25 is expected to be $27.6bn before widening to $42.1bn in 2025-26. This is all fairly ordinary, and on its own, shouldn’t have a big impact on economic growth, inflation or interest rates. Sometimes it’s the Treasurer’s job to be boring.

Tax cuts at the bottom of the ladder

The main surprise in the Budget came in the form of an income tax cut which lowers the marginal tax rate on the lowest tax threshold ($18,201-$45,000) from 16% to 15% in July 2026 and then again to 14% from July 2027. This will provide an average wage earner with an additional $268 a year in 2026-27 and $536 a year in 2027-28.

This is welcome, but I would note that this still has income tax, as a percent of GDP, continuing to lift over the forward estimates, largely thanks to bracket creep. We could have maybe been a little more ambitious here. 

Electricity Subsidies

Electricity subsidies were supposed to have been wound up by now, but I’ve been saying for a while that that was never going to happen, and definitely not in an election year. Sure enough, the subsidies have been extended, albeit at a lower rate of $75/quarter.

This isn’t hugely material on its own, but what it does mean is that the RBA has to stop “looking through” the subsidies on their estimate of underlying inflation. This means that true inflation is lower than the RBA has been saying, which makes rate cuts more likely.

Housing

An additional $800m will go towards expanding the Help to Buy Scheme by increasing the income caps for eligibility to $100,000 (from $90,000) and $160,000 (from $120,000) for single and joint applicants, respectively. Under the help to buy scheme, the Government provides first home buyers with between 30-40% of the purchase cost of a property, with only a 2% deposit required from buyer. It is capped at 10,000 places per year.

I’m surprised that the government has relaxed the income caps, rather than increasing the number of spots. I don’t quite get the logic here.

Speaking of housing, the other important note here is the projected decline in the rate of net overseas migration.

But meh. I don’t think the government has control of this anyway. I’ll believe it when I see it.

Industrial relations

There was a surprising policy reform included in the Budget that limits non-compete clauses in the hope of boosting wages and mobility. The policy is limited to low-and middle-income workers and Treasury estimate this could increase wages by 4% or $2,500 per year for affected workers.

I don’t have a problem with this policy, but I don’t see it having that kind of impact on wages. Maybe I’m wrong.

Tabacco revenue collapsing

One final piece I thought was interesting was the collapse in tabacco revenue. Having tried to bleed all they could out of smokers for years, users have either been quitting or turning to the black market. As a result, tobacco excise revenue has fallen 57 per cent since 2019-20. That’s a huge drop in a very short time.

JG.

The death spiral has started

I’ve long been a happy passenger on the good ship Victoria, but I can’t help but notice that we’re taking on a bit of water.

Things are looking a bit grim.

Last week we learnt that Victoria now has the fastest growth in construction sector collapses (that’s not good growth).

I’ve been watching the shakeout in the construction industry for a while – it’s one of the things contributing to the ballooning housing shortage.

But things in Victoria are deteriorating quickly:

Victoria has overtaken Queensland as the big state with the fastest-growing total of construction industry wrecks, highlighting the precariousness of a sector in which contractor Roberts Co shut its Victorian doors and John Holland swung to a $55.5 million loss from two infrastructure projects.

New figures this week from the Australian Securities and Investments Commission show the pace of construction insolvency growth in the southern state overtook Queensland in December. In the months since, it has kept up the fastest pace of growth of the three largest states.

… Victoria led the large states, clocking a 46 per cent year-on-year gain in new insolvency appointments to 693 between July and the start of March – nearly double the national growth rate.

That’s a little alarming.

And it comes at a time where Victoria is leading the nation in all the red-light warning indicators (that’s not good leadership).

Like state debt, for example. Per capita debt is the highest in the country – by a fair way.

The forecast trajectory of debt growth is also the most concerning in the country, and it looks like breaking away from the peloton (that’s not good breaking away from the peloton):

And at the same time as companies are going bust at a record rate, Victoria is also posting the lowest level of new-company growth in the country:

None of this is good.

And states go bankrupt the same way people do: very slowly then all at once.

In the good times, the government starts splashing the money around, and they become everyone’s friend.

Then the good times end, but you can’t rein that spending in now without making enemies – and politicians don’t like to make enemies.

So now you have to fund these ongoing spending commitments through debt.

Initially, that’s ok, because interest rates are low, and you’ve been doing so well the ratings agencies give you a good rating, which means you get to pay low rates.

But then interest rates go up. (We’ve just had the quickest lift in interest rates ever).

Now you’re stuck in a death spiral. The cost of servicing your debt goes up, and as it increases as a multiple of your revenue base, that puts you into a different bracket.

The ratings agencies then re-rate you on the back of this, and you have to pay higher rates of interest when you refinance.

The only way out is to cut spending, which makes people unhappy, or increase the revenue base, which also makes people unhappy.

But if you try to increase the revenue base (i.e increase taxes), you end up killing off the exact economic recovery you’re trying to engineer!

And this is where Victoria is at in the death spiral.

And its why governments need to be disciplined, even in the good times, (which Victoria wasn’t) because once the debt-trap springs, it’s very hard to get out of.

We’re going to need all the help we can get.

JG.

Man this makes me angry.

Trump brings a lot of crazy to politics, but he’s right about one thing.

No serious country off-shores the entirety of its manufacturing industry, and especially not to its geo-political rivals.

But that is the path that Australia is tearing down at hundred miles an hour.

This week, administrators were appointed for the last glass manufacturer in Australia. From now on, every window in the country will be made in China.

Oceania Glass has gone bust. This was a good company. They’d been making glass in Australia for 169 years!

But they just can’t make the numbers stack up.

From CEO Corné Kritzinger:

Australia has lost another critical manufacturing capability—architectural float glass.

The closure of the country’s last remaining float glass plant was a quiet event, attended only by employees. This stood in stark contrast to its grand opening 51 years ago, when political and business leaders gathered to celebrate a milestone in Australian manufacturing.

There was no media coverage, no public acknowledgment—most Australians remain unaware that an entire industry has disappeared from their own backyard.

Float glass production is both an art and a science. It requires precisely blending seven raw materials and melting them in a furnace at a staggering 1600°C—comparable to the belly of a dragon.

Natural gas fuels this intense heat, triggering complex chemical reactions that transform raw ingredients into perfectly smooth, crystal-clear glass.

But now, that dragon’s fire has been extinguished—permanently.

There are probably a number of factors at play, but a big one has to be the explosion in gas prices. Glass manufacturing is gas intensive, but gas prices have tripled since the we started selling gas to China and the rest of the world.

And the gas industry will tell you we need to drill more gas, but we doubled production in recent years, and it entirely went offshore.

And this is while NSW, Victoria and SA are creating import terminals, effectively locking us into the global price.

Australia was blessed with natural resource abundance, but we have pissed it all away. We have let the gas cartel charge domestic manufactures a king’s ransom for our own gas, while selling the remainder to China and Japan…

… who will sell it back to us through import terminals.

We could have had cheap gas. Even a tiny domestic gas reservation (like they have in WA) could have meant that Oceania could have had access to economically priced gas (they were making profits before gas prices tripled).

Instead, we sell gas to China, and then buy back the glass we used to manufacture.

And what happens if global trade tensions turn hot? What if China decides to not sell us glass anymore?

They can find alternatives to Aussie gas. It’s just gas after all.

But we won’t be able to find alternatives to Chinese glass, because the last company who knew how to make it – and who had the machinery and facilities to do it – has gone bust.

Just stupid.

And this is where Trump is right. No serious country completely guts its own manufacturing sector, just so some largely foreign-owned companies can make a quick buck.

We are not a serious country.

JG.

Nothing is going to change until the whole market adjusts.

There’s only one way to fix the housing crisis, but no one wants to mention it.

The answer?

Higher prices.

That’s the only way we can make the current pipeline of projects viable.

Industry leaders were dancing around it the other day, with Metricon CEO calling on the government to do more. He reckons housing needs a ‘wartime response’:

Metricon Homes CEO Brad Duggan warns that Australia cannot house its growing population, and believes the federal government must adopt a “wartime response” to the housing crisis.

Based on current construction rates, Duggan adds that the government’s target of building 1.2 million homes in the five years from mid-2024 will likely fall about 300,000 short.

“The future of our country in terms of our economics is based upon whether we can house a growing population and we can’t”, he said.

“I think we need a wartime response. When we look back over the last three years of this government we’ve not had a wartime response”.

“The customer needs to have confidence on their financing costs, confidence in the build journey and they need the tax environment that inspires them to invest and build rather than destroy that confidence”.

So there’s the favourite bug-bear of developers, taxes.

But is anyone talking about red or green tape? Oh yes, Frasers Property Australia CEO Cameron Leggatt:

“If we are going to call it a crisis, we must treat it like one. This includes addressing the solutions which are immediately available, such as blockages in the planning process”, he said.

“Increasing supply means addressing deficits in market capacity, labour and planning systems – the red tape and green tape”, Leggatt argued.

Sure. But the fundamental issue here is a mismatch between the cost of bringing new supply to the market, and the price that new supply currently receives.

You can help fix that a little by reducing costs – lowering taxes, speeding up planning etc.

And it would help at the margin.

But it’s probably not going to make a massive difference. Most large-scale developers I speak to reckon that prices have to go up 15-20% to make projects viable.

But right now, prices seem to be going in the wrong direction, at least for standalone homes.

While apartment construction is limply drifting higher, standalone construction has weakened in recent months, with evidence that builders are offering discounts:

“It would be more helpful if house approvals were also recovering,” said CreditorWatch chief economist Ivan Colhoun.

“These have softened a little in recent months, likely reflecting some overhang of stock, which has seen builders discounting project homes.”

It was unusual to have apartment approvals strengthening while house approvals were weaker, Colhoun said.

“The [official inflation data] has been revealing discounting by builders for new home builds, which may well be part of the reason, while larger apartment projects may be benefiting from some recent easing in construction material prices….”

It’s kind of pointless to look at this in isolation.

Given the explosion in construction costs post-Covid, the only way to make projects viable is for prices to go up.

But that can’t be just for new builds, since new and old are fairly substitutable. The whole market has to correct.

There’s just no way around this.

Prices have to go up.

And they will.

JG.

Is it too late? Or are you too lazy?

“It’s too late to get into property. All the opportunities are gone.”

I wish I had a dollar for every time I heard this. I’d have enough for a deposit on a cashflow positive townhouse in one of the smaller capitals.

But I get how people think this. They see all the money that’s been made in property over the past ten to twenty years, and they feel like they missed the boat.

And they feel that if they missed that boat, then there are no more boats to be had. The moment has passed. The opportunity to make money has gone.

But think about this logic for a second.

Imagine you’re digging a hole in your garden. A few feet down, you strike something hard, and you realise that it’s buried treasure.

Then you dig down a few more feet and the same thing happens. Another treasure chest.

At this point you stop digging. You say, well, I’ve dug up a lot of money here. There can’t possibly be any more money to be had. All the opportunities are gone.

The logic is broken, right? You’d be mad to stop digging at that point.

But this is what people say about the property market all the time. It’s made a lot of millionaires already. Therefore, it can’t possibly make any more millionaires.

Just nuts.

Just because you missed a boat 20 years ago, doesn’t mean there are no more boats to be had. There are plenty of boats in the sea.

I mean, sure, some investment strategies that worked in the past aren’t going to work again. The opportunity to buy a farm on the gold coast for $50,000 and build 6 sky-scrapers is gone. That opportunity has passed.

But where is the next Gold Coast? Or what is the next ‘golden’ strategy?

And what I find really wild is that the people who tell me that all the opportunities are gone haven’t done anything to check whether this is true or not.

They haven’t explored all the strategies in the game right now. (The market evolves. Strategies that wouldn’t have worked 15 years ago are now coming into their own.)

And they haven’t explored the properties on offer in their own back-yard, let alone in neighbouring suburbs, or other cities, or in regional areas.

To know conclusively if there are “no opportunities out there” would take a huge amount of work. It would take a massive amount of research. It would take years.

But still, people who haven’t done anything but watch other people walking away with the money are confident enough to conclude that “all the opportunities are gone.”

Just nuts.

The property market is constantly evolving. New strategies emerge all the time. New markets. New opportunities.

It’s nothing but a comforting lie to justify doing nothing.

JG.

Phew. Buyers breathe a sigh of relief.

I told readers last week that they shouldn’t believe the RBA jawboning on rates.

Governor Michelle Bullock wanted us to believe that the RBA might be one and done – that more rate cuts might not necessarily be coming.

The key reason for this was wages – or the fear that a tight labour market might cause a wages breakout.

I thought this was rubbish. Yes, the labour market was tight, but it wasn’t translating into wages growth.

Remember, the only reason why a tight labour market is a problem is because, in theory, it leads to higher wages, which translates into cost-pressures, which creates higher inflation.

That’s the theory. But it hasn’t been happening.

It didn’t happen back when the unemployment rate was 3.5%. It’s not going to happen now that it’s 4.1%.

And just to underscore the point, we got wages data a few days ago, which showed that wages growth was surprisingly soft.

The Wage Price Index (WPI) increased by 0.65%qoq in the December quarter, well below market expectations for a lift of 0.8%.

Year-ended growth eased 30bps to 3.2%. The trend is very clearly downwards now:

So it’s all pretty soft. Remember, the RBA reckons that wages growth of 3-4% is consistent with an inflation target of 2-3%, so on that logic, this is bottom of the band stuff.

Cut away, Michelle. Cut away.

The RBA itself actually told the story in their statement on monetary policy (SMP).

Unpacking recent strength in the labour market, the RBA noted that over half of the employment growth in the year to September 2024 came from a single sector: Health. Think NDIS and so on.

And the surging growth in Health Care employment was pulling people from the ranks of the unemployed, and from other industries:

And this is why, when we zoom out a little, we can see that almost all the jobs in the past two year has come from the public sector (up 624,000), while the market economy is barely posting any jobs growth at all (up 91,000).

So yes, the labour market is tight.

But it’s all about health care.

Which is why wages are going nowhere. Healthcare wages are set by the government, so even though the sector is tight, it’s not creating strong wages growth.

There’s no wages growth in the market sector because the market sector is weak.

Which then is all why wages growth is going nowhere right now.

Which in turn is why the RBA can be relaxed about it. There is nothing in the jobs or wages data holding back further rate cuts.

And again, this is all why I’m saying that we shouldn’t believe the RBA right now.

The idea that we shouldn’t cut rates because the labour market is too tight is just silly.

Last week’s wages data proves it.

JG.