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Bears go bananas. Must be a good sign for the market.

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The property-doomsayers are getting hysterical. That’s always an interesting signal.

I’m actually ready to call the bottom on this market.

The declines are coming to an end. The market is about to turn.

And what data am I basing this bold prediction on? None. I don’t actually have any evidence.

But it does appear to me that we have hit peak crazy, and that’s got to be a market signal for something.

I’m talking about ‘news’ headlines like this one: Property ‘Armageddon’: House prices could fall by 50 per cent.

Yup. They’re going all in with this one.

With Sydney and Melbourne’s falling house prices infecting other capitals such as Brisbane, Darwin and Perth, some doomsayers say property prices could slump by as much as 50 per cent by 2022.

Digital Finance Analytics chief Martin North says Sydney and Melbourne houses will suffer price falls of 20 to 30 per cent, while high-rise units could slide by up to 50 per cent from their peak prices in 2017.

North says prices in Melbourne, parts of Brisbane, Perth and Sydney will fall the most between now and 2022, but it is outer suburbs that will be hit with the largest price falls.

“Prices will unwind in Sydney and Melbourne for at least another three years,” he says. “The problem is a lot of the high level data is averaged and averaging tells you nothing at all. Prices are not dropping by the same rates everywhere.

“In some places, for example western Sydney, prices are 23 to 25 per cent down or more, but areas closer into the city, particularly houses, are probably only 3 to 5 per cent down.

“If you look at Newcastle or the Illawarra, it’s 7.5 per cent down but there are other areas out in those regions where prices that have hardly moved at all.

“Perth is down 15 to 18 per cent on average. And if you look at Darwin, it could be 25 to 28 per cent. So these are big movements, they really are.”

Economist former government adviser John Adams — who once worked for Liberal senator Arthur Sinodinos — believes economic armageddon is coming.

Adams says Melbourne’s falling house prices are in a devastating slide that will go beyond Moody’s forecasts and could reach more than 40 per cent from peak to trough.

Meh.

I’ve heard all this before. North has been trotting the same numbers out for about six months now.

And I think the bears are getting more excited and shrill because the data does seem to be turning.

The pace of declines in the big capitals is getting slower, not faster.

And that’s because, despite the headline falls, most things have been running in the property market’s favour in recent months.

  • The Hayne Royal Commission wound up and was a lot better for banks than a lot of people were expecting. Financial sector funding costs had blown out to 60bps above the cash rate in anticipation of the worst, but are now back down to a 24bps premium.
  • At the same time, some banks are cutting their retail rates, so funding costs are down overall.
  • The APRA restrictions caused a bit of logjam in the mortgage market as everyone tried to get themselves up to speed. That seems to be clearing now, and the market has found its feet.
  • The RBA has clearly moved to an easing bias, and rate cuts seem likely in 2H2019.
  • And the election should give things a bit of certainty, and the market a bit of a bump, as it normally does.

Add to that some property bears screaming at their coming irrelevance, and I think you have the making of a bottom.

Too soon?

No BS Friday: 5 reasons you’re banging your head against a wall

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We’ve all got to work with people. But some relationships just aren’t’ worth it.

Looking forward to the long weekend? I know I am.

But I hope you’re not looking forward to it just because it gives you a chance to get away from all the bozos at work. (I heard someone say that the other day!)

Making productive relationships work is hard. Really hard. But it’s something we’ve all go to do.

And as we transition away from working for others and start running our own games, it becomes all the more important.

So today, I wanted to talk a bit about how manage conflict in your productive relationships?

The short answer? Don’t.

No seriously. Don’t bother. I’m going to show you why it’s not worth it. And then I’m going to give you five reasons why we all find it hard to just ‘walk away’.

Quick to Fire

One of my early business mentors used to have a saying: “Slow to hire, quick to fire.”

The idea was simple enough. Put a lot of time into your hiring decisions. Take the time to find the right person for the job – someone who fits with the culture of your organisation and has the skills you need.

Take your time.

But if things aren’t working out, cut and run. Just cut your losses and let them go. Don’t try to patch things up. Don’t try to find a way to make it work. Don’t go into mediation or dispute resolution or performance management programs. It’s just not worth the effort. Let them go so you both can move on.

Slow to hire, quick to fire.

I really like this. It’s something I still run my business by.

And I know I’m going against the grain here. This isn’t the touchy-feely ideology the world seems to be embracing these days.

A lot of people really like to think that the whole world can be brought into harmony if we just love each other and use the right gender-appropriate pro-nouns.

And those people have never been in management positions.

The truth is that in a business setting, some people are just problematic. Maybe they’re hopeless. Maybe they’re aggressive. Maybe they’re anti-social. Maybe they have trouble respecting other people’s personal space.

Maybe they’re just living by a different moral code to you.

And the reasons why people express problematic behaviours are always complex. It is very rarely because they are not being shown enough love or that they are not getting enough cuddles in the work environment.

The reasons are complex. And unless you’re willing to dive into that complexity, then you’re not going to be able to engineer fundamental change. 

I mean, if someone is exhibiting problematic behaviour, there’s a good chance it’s coming from some deep and ancient wound. Maybe their father never offered enough praise. Maybe their mother was unavailable when they were an infant.

Unless you’re willing and able to take things to this sort of level – to open up the Pandora’s box of all their past hurt and anguish – then there’s no guarantee that any sort of process is going to bring you into alignment.

And really, is it even your place to try and do that? Is it even appropriate to make that a condition of employment – You must have a willingness to explore old wounds and rewrite your old patterning.

That’s not for everyone.

And are you really going to try and take that work on anyway?

I mean, if someone starts working for me and it becomes clear that their computing skills need to be brought up to speed, I’m totally willing to do that. I’m totally willing to send them on some sort of course.

However, if someone starts working for me and it becomes clear that their passive-aggressive tendencies are due to abandonment issues cemented in early childhood by a distant mother and the early death of their father, what am I going to do with that?

Provide mandatory psycho-therapy?

And the truth is we all have issues. I don’t want to pretend that my work-life is just a string of messed-up losers coming to work for perfected Saint Jon.

I have as many issues as the next person.

And most of the time conflict arises when the coping strategies one person has developed come into conflict with another person’s strategies.

So to do this kind of work honestly, you have to be willing to look at your own wounds and your own problematic coping mechanisms.

Yeah… So what? Now you’re doing mandatory psycho-therapy too?

Seriously, who has time for all that?

What business has the capacity to invest in a long and expensive personal development agenda when there is no guarantee of success?

It’s one thing when someone doesn’t have the skills for the job, but when you realise that what you’re talking about is someone’s fundamental nature – when you find yourself saying things like, “You know what his problem is? He just gets triggered by authoritarian female figures” – you’re into territory where it is just not worth it.

Just walk away. Cut your losses.

Slow to hire. Quick to fire.

And I think this keenly applies to people running a business, but we all have productive relationships. We all have tradies we use, or joint-venture partners, or accountants and mortgage brokers we engage with.

The same rule should apply to all our productive relationships.

Slow to hire. Quick to fire.

But, many of us find it difficult to do this. Many of us want to hang on to the grim end. We find it difficult to walk away, even though the writing is clearly on the wall.

I had a sit and think about it, and I reckon there are five key reasons why we stick it out in toxic work-relationships much longer than we should. Let me give them to you.

Reason #1 – The need to be right

We all want to know that we’re making good decisions – that we have a clear and accurate assessment of the situation and a good strategy for response.

We all have that desire. But for some of us, it’s something our ego gets caught up in. It’s something we need, just to feel ok.

So a toxic work-relationship challenges us in two ways. First, the prospect of having to let someone go forces us to admit we made a bad decision when we got into bed with them. That can be hard to swallow.

Second, if we find ourselves in conflict, a ‘need to be right’ can have us fighting the same battles, over and over. We keep the toxic relationship alive because we hope that it is a theatre where we will ultimately be proved to be ‘correct’.

Don’t bother. Suck the fart. Take the ego hit. Move on.

Reason #2 – The need to be heard

Sometimes a toxic work-relationship might leave you feeling stomped on and abused. You may then feel a need to be heard – a need to be witnessed and understood.

Nothing wrong with that. But save it for your wife/husband/therapist. Don’t’ push out a toxic-relationship in the hope that there’s some process that will ultimately validate your feelings.

Save it for the people who love you, not the people you work with.

Reason #3 – The need for resolution

There’s a personality type in psychology called ‘conflict avoider’. These people hate having conflict in their lives because it taps into a deep sense of insecurity.

When these people find themselves in a toxic relationship, that have a deep biological need to ‘fix it’ – to make everything peaceful and harmonious again.

This will make you stick out a toxic relationship much longer than you should, and what’s worse, it puts you in a terrible negotiating position. If you can only tolerate one outcome, then you’ve got no leverage.

I think Trump said something like, “If you can’t walk away from the table, you’re a price-taker.”

Same story if you’re in some sort of conflict resolution process. If you’re not happy with any outcome where the conflict isn’t fully resolved, you’re in trouble.

Reason #4 – The need to heal wounds

Some of us are real Florence Nightingales. We need to save the world. When we see people hurting and acting out of their hurt, we feel triggered. We become uncomfortable, and we need to save them from their pain so they stop reminding us of ours.

So you might find yourself thinking, “If only he stopped being so insecure and dishonest… He’d be so much happier.”

Stop it. If you want to save people, go to Africa. Your productive life isn’t an operating theatre. It’s not a place where you can ‘save’ people.

Reason #5 – The need for a collaborative reputation

Some people take great pride in their ability to collaborate and work well with others. And they are judging of others who are not able to build productive working relationships, through whatever wounds they’re carrying.

For these people an unresolved conflict freaks them out. They worry that it portrays them as a person who can’t work well with others – and they worry that it signals to others that there are some serious wounds beneath the surface that they’re trying to hide.

(Which is probably the truth).

So don’t worry about it. If you could have a productive working relationship with every person on earth, you’d be a freak. It’s just not possible. It’s an impossibly high standard to set for yourself.

Where there’s people, there’s going to be conflict. Don’t take it personally.

Just walk away

All of this comes down to just checking your motivations for trying to make a toxic relationship work.

I’m here to say that most times, it’s just not worth it, and there’s a good chance your need to fix things comes from something going on for you – not because it’s what you or the project actually need.

Slow to hire, quick to fire.

Just manage your time well. Be careful where you’re investing it. It’s the most important resource you have.

If Trump pulls the trigger, you’ll want to own this.

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MMT has given politicians the intellectual cover they need to embrace print and spend. Where do you want to be investing when it happens?

Alright, wakey, wakey hands off snakey.

It is going down right now. The whole flipping financial landscape is being flipped on its head.

Rivers of cash are coming.

This might all sound a little mad unless you’ve read what I’ve been writing about over the past couple of weeks (see here, here and here).

But governments in the developed world are going to start printing cash. They’re going to be throwing it away.

As I said, that sounds like economic heresy, but that’s what I mean. The tables are being turned on their heads. Up is down, left is right. Printing money is good for the economy.

Don’t believe where this is heading? Check out Trump’s two suggested picks for the US Fed. Stephen Moore, and former Godfather’s Pizza CEO Herman Cain. They used to be inflation hawks. Now, they’re all about the easy money. That’s what Trump wants to hear.

Why? Because that’s what sells. He knows that if he can give away free money, without consequences, he’ll be the most popular president, ever.

(He already thinks that, but we’ll be able to fact check it this time.)

And for a global population already angry that our economic bail out plans almost always start and end with pumping the financial sector full of cash, a system where cash is mainlined straight to mum and dads will be like a sweet revolution.

Both the left (e.g Bernie Sanders), and the right (Trump) are jostling to get on board.

They can’t afford not to.

So what does it mean? How are we going to make money out of this seismic shift?

Well, it does depends on how the government decides to do it.

It could print money and spend it on infrastructure projects – it’s not hard to come up with a list of stuff that needs doing.

In that case, owning stocks connected to infrastructure spending – road and transport companies, shipping, civil engineering, that sort of thing – that would be a winner.

The government could also give money straight to the people. This might be in the form of grants like the First Home Owners Grant, but would more likely come through tax cuts – probably temporary tax relief.

Given this would likely have a progressive element (lower income earners would receive more benefit) and that lower income earners have a higher propensity to consume, this could be good news for companies whose fortunes swing with the consumer – furniture, electronics, department stores etc.

Real estate is a clear winner here too. As disposable income goes up, so does serviceability. When that goes up, so do prices.

And in tight rental markets more cash-in-hand means higher rental prices. Higher rental prices means higher yields, which of course means higher property prices.

This is not likely to be a one-way street though. One of the advantages of MMT that its proponents point to is that it frees up interest rate policy to fight inflation.

So interest rates do a much better job of putting a brake on economic activity, than they do of speeding things up. “Pushing on a string” is the expression.

So we could see super-loose fiscal policy going hand in hand with tighter monetary policy (i.e higher interest rates).

Where that lands will be an interesting question, and the most likely outcome is that we see a mix of cash-handouts, government spending and interest rate tinkering.

But the point I would make is that consumer price inflation and asset inflation tend to go hand in hand.

When you flood the system with money – regardless of whether you’re doing it through a financial sector channel ala QE, or through the public sector and the consumer ala MMT – that money goes looking for a home.

And the home it is looking for is wherever it earns the most. So just as we saw a massive bid on financial assets during QE, we’re going to see another massive bid with MMT.

And remember, the massive property boom we’re just on the tail of now, between 2010 and 2017 – that was largely due to the flood of easy money QE unleashed on the world.

I’m not sure if that’s the received wisdom yet, but it seems pretty obvious to me.

And so another boom, exactly like the one we just saw, could easily be on the cards again. Another seven year boom, another tripling of prices.

In my mind, it could easily happen. Mark my words. It’s coming.

Is this wages boom too late to change the election?

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In six months, Morrison could have crushed it in. Shame the election is now.

So the election has been called. What’s going to be the deciding factor?

We like to think it’s about big-picture vision and value positions. It’s about the issues.

But it’s not. It’s the economy, stupid.

I don’t think Bill Clinton ever expected that that little quip would be one of the most lasting contributions of his “legacy”, but it is exactly right. People need to feel secure first and foremost. The economy has to be delivering real jobs and a decent standard of living.

If it’s not, everything else is a side-show.

And on that front, you’d have to think the economic tides are with Morrison.

And they are to a degree. The economy continues to perform reasonable well, especially on the most important metric that matters – employment.

Employment growth is easing, but it remains decent. And most importantly, the number of jobs is growing faster than out labour force population, and the unemployment rate continues to fall. 

At 5%, it’s a pretty decent outcome, all things considered. By itself, it’s certainly not a ‘turf them out’ type number.

But there are problems for Morrison that are hidden behind this headline number.

The first is that employment growth is uneven. Some sectors, especially the public sectors, are doing well. Others, particularly mining and construction, less so.

That patchiness can create ‘pockets of pain’ in the economy. It can create segments were unemployment is concentrated, and political venom starts to pool. Think the mining communities of Far North Queensland, for example. It’s not possible for a miner who’s lost his job in Townsville to just go and become and community care worker in inner-city Melbourne, for example.

The other headache for Morrison is that while people have jobs, wages growth has been… what’s the economic term? Piss poor.

Wages growth has been hobbling around 2%, which means that people probably feel they’re going backwards in real terms. Technically, it’s still outpacing inflation, but I think that’s probably only a technicality. Ask around and I don’t think people will tell you that they’re keeping pace with the cost of living – especially with energy prices becoming a real pain point.

So that’s a headache for Morrison. It’s something that can shift the electoral dial.

The real irony here though is that wages are actually starting to pick up. Take a look at the chart and you can see that yes, wages growth is relatively low by historical standards, but it has definitely ticked up in recent months.

And the NAB survey is showing that more and more firms are reporting difficulty finding suitable labour.

So wages pressures are building. We’re still six months to a year away from this feeling like things are really on the up and up for everybody, but it’s coming.

So Morrison must be spewing. If only the election could have been called six months later. He probably could have ridden a growing sense of optimism to victory.

But instead, people are still grumbly, There’s not a lot of gratitude in the community.

And if Morrison loses and Labor wins, they’ll enjoy a very sweet honey-moon period as wages continue to pick up and households enjoy the boost in confidence. Even though they’ll have done nothing to deserve it.

That’s just how the cards have landed. Tough break, ScoMo.

No BS Friday: how to use entropy to deliver results

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I learnt something this week about how the physical universe works. And now I think about success differently.

I was thinking about entropy the other day.

Ah! Listen to me. Like I just sit around pondering the rules of thermodynamics, puffing on a pipe.

I don’t. I heard someone talking about it on the radio. I understood a fraction of what they were saying, but it was enough to send my mind off on some misguided folly, like some drunken rabbit barrelling into the woods.

But still, I think it ended up somewhere interesting. So take these reflections on human nature and the principles for success for what they are. But for my understanding of the physical universe, give it as much weight as you’d give the babbling of a baboon, puffing on a pipe.

Anyway, thinking about entropy, I really like what this person was saying about it.

I always understood entropy as the idea that things naturally tend to maximum disorder. Systems collapse, structures dissolves, heat dissipates, things slow down and stop.

We have order and structure in the universe now, but that is a temporary state of affairs. In time (in a really long, long time), all of that structure will break down and disappear.

Nothing lasts forever. Like, literally. There will be nothing, and it will last forever.

Anyway, I’m probably not expressing that right, but I think that is the basic idea.

But I never thought about ‘how’ entropy did that.

I found it really interesting to start thinking about why everything naturally breaks down.

Why can’t my iphone exist, for all eternity, in it’s current form?

(I should probably delete some photos…)

The way this guy described it, it was a question of probability.

So take the arrangement of atoms in a pen for example. There are billions of billions of atoms there, each one in exactly the right place to collectively make a shape we call pen.

That’s another way of saying that the pen is a one in a billion, billion configuration of atoms.

Statistically, it is incredibly unlikely.

It is, theoretically possible, that in the great soup of the cosmos, those atoms might spontaneously take the shape of a pen on their own accord, but it is incredibly unlikely.

Or watch what happens when you pour milk into tea. It mixes through completely. Always.

But that’s not the only possible result. It is possible the atoms of milk stay together and don’t mix through.

However, that’s just one arrangement of atoms. There are billions and billions and billions of other possible arrangements that all just present as mixed milk and tea.

So the reason why things tend to disorder is because disorder is just a far more probable state of affairs. For every arrangement that gives us something of structure and interest, there are a gazillion different arrangements that are totally unstructured and uninteresting.

So entropy is probability in action.

At this point you can probably tell I failed high-school science. But still I love this idea of entropy as probability in action.

Because I like how it makes me think of my creative work in a probabilistic sense.

To create stuff, to give our lives particular structures and to fill them with a particular order, is to bet against entropy.

And to do that we have to flip the rules of probability in our favour.

Our job, is to maximise the chances for our success.

That is, it is not to create success directly, but to maximise the chances of success.

So if we do the work, if we invest in ourselves, if we take action and keep on keeping on, then we increase the odds of success.

We can’t control the outcome. There’s too many factors at play. But we can increase our chances.

And the road to success is simply making victory more likely than not.

I like this. It makes me feel more relaxed about things. I can let go of the need to control everything. I’ve only got to influence the odds, not the result itself. And against entropy, the great destroyer of the universe, maybe that’s as much as we can do.

Revealed: taxes are actually rising

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RBA data shows that taxes are actually rising right now… that is not what this economy needs. 

There was a fair bit of chatter last week about tax cuts. Most of it focused on how big the tax cuts would be and who was going to get them. 

But today, I want to explain why we actually need tax cuts right now – at this stage in the cycle. 

I’m not talking ideology here. I’m not here to say that tax cuts are always a good thing. (I’ll save that for another day.) 

I just want to make the point that given where we are at in the cycle, and how things have evolved, we’re actually taking more tax than we intended, and we probably want to rein that in a bit. 

To make this point I’m going to draw on some interesting work RBA Deputy Governor Luci Ellis did a few weeks ago – work that was largely ignored. 

The short version is that for a few reasons, the tax burden on households has been growing faster than household income, effectively meaning that households have experience a net tax increase in recent years. 

… which was never the plan. 

She makes the point that right now, taxes are growing about twice as fast as household income.  

In the past year, taxes paid by households increased by around 8 per cent, more than double the rate of growth in gross household income of 3½ per cent. 

So the ratio is more like a bit over two-to-one at the moment, rather than 1.4 to one. 

That is at the high end of the range this ratio reaches, but as this graph shows, it is not unprecedented (Graph 12). But this effect has cumulated over time, so that the share of income that is paid in tax has been rising (Graph 12, bottom panel).

The key picture in all this is that bottom panel. It shows the tax-to-income ratio is steadily increasing, and is approaching record highs. 

What that means households are getting less, and the government is getting more – a bigger slice of the pie. 

And maybe that’s ok, but it seems to have happened by accident. I don’t remember the Coalition going to the last two elections with a policy of increasing the tax take of government…

More to the point, is this what we need right now? 

Economistscould have a field day talking about that one, but given everyone is feeling a bit gloomy about the outlook, given the GDP numbers continue to come in under forecasts, given wages growth remains sluggish, and given most economists now expect the RBA will be forced to cut rates, possibly some time this year… arguably it’s not a great time to be covertly increasing taxes. 

In fact, I’d even venture so far to say that even Blind Freddy can see that now is not the time to be increasing the tax burden on households. 

Ellis puts this shift down to a few factors – lower interest rates have mean lower negative gearing deductions, and the ATO has made a good fist of increasing the tax take through enforcement and compliance. 

So it just worked out that way. It wasn’t been a deliberate decision. 

But that doesn’t mean the impact on the economy isn’t real. 

And I would argue that at the very least, we need to cut taxes just to bring this back into balance – to lower the tax-to-income ratio back to normal levels.

And this is why we need tax cuts. 

The budget is a lie!

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This economic revolution is playing out in real time. Today, they attack the budget.

The budget is built on a lie. Everything we know about the budget is wrong. Every number Josh Frydenburg laid out for us on Tuesday misses the point.

That’s the word from MMT – modern monetary theory.

Ok, so we’re picking up from last week and the week before. I’ve been explaining that the ideological dam has broken. People now realise that the tools we have for managing the economy just don’t work the way we expected them to work.

Quantitative Easing (QE aka printing crap-cans of money) should have created inflation. It didn’t.

So we need a new theory for understanding the economy, and with any new theory comes a new set of tools.

And as I said last week, Munters (my name for MMT proponents) believe that:

  • Capacity constraints, not money, create inflation;
  • Interest rates are a useless policy tool if there’s no demand (looking at you RBA); and
  • Governments are not constrained in the way we thought they were.

The second point there potentially kills off monetary policy and the RBA’s agenda completely, but point three could be a complete game changer.

And budget night will never be the same again.

The key point the Munters make is that the way we’ve been trained to think about the government budget is wrong. It’s the wrong metaphor.

The metaphor we’ve been trained to use is to think of governments as a household. Households can’t live beyond their means, so neither can governments. Households have to balance their budgets, and so do governments. If households are saving money (earning more than they spend) that’s a sign of good money management. The same is true for governments.

All of this is simplistic in the extreme, but Munters are also keen to point out that it’s actually wrong too.

It’s wrong for two reasons:

1. Governments can print money

If a nation is ‘monetarily sovereign’ (it has a flexible exchange rate and issues debts in its own currency), then are no hard constraints on how much money it can print. It might create inflation that way, or it might devalue the currency, but both of these things can be managed, and depend a lot on what else is happening in the local and global economy.

As Munters argue, inflation only comes from capacity constraints, not automatically out of money creation – as QE has proved.

A household obviously cannot print money to pay its debts. If I tried to pay my creditors in JonCoins, I’d probably end up in jail.

Munters argue that given this important difference, it makes almost no sense to compare governments to households.

2. Governments are not in the business of making money

Munters also argue that it’s not helpful to have a government that is motivated like a household (maximising its own wealth) or a business (maximising profits.)

Here the idea of ‘sectoral balances’ comes in. This is just the accounting identity that if the government sector is in surplus then it is lending money to the other sectors in the economy. That necessarily means that the other sectors must be a net borrower, and must be in debt.

So a government that forces itself into surplus, forces households and business into debt.

Is that a great outcome?

And if point one above is true, it’s much worse for households and businesses to be in debt since they can’t print money to pay off their debts.

So while it might be nice at the individual level for governments to be running a surplus, taking the economy as a whole, it’s not clear that a wealth-maximising government is that great a thing.

Not a Free-for-all

This is not to say that Munters think it is a free-for-all and that governments can do whatever they want. It is only to say that governments are not constrained in the way we thought they were – in the way that the ridiculous governments-as-a-household metaphor would have us believe.

And that means that there is a much greater role for governments to print money and support demand than we previously believed.

This idea runs totally against the prevailing economic wisdom.

But the prevailing economic wisdom has failed.

And MMT is an idea who’s time has come.

I’m not arguing it one way or the other. I don’t have a horse in this race. But I can see the writing on the wall. Momentum is with the Munters.

And the implications are going to be huge.

More on that next week.

Negative Gearing Reckoning: who will it hurt?

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If Labor wins, negative gearing reform is go. But who is it going to hurt?

Labor has announced that their negative gearing and capital gains tax reforms will come into effect on January 1, 2020.

Like most people, I was expecting them to go for the end of the 19/20 financial year, so this means two things:

  1. there’s going to be a rip-the-bandage off approach, and I think that’s probably a good thing.
  2. Labor knows it’s onto a vote-winner and is happy to double-down.

But like all things in politics, there must be winners and losers, so who is going to be worse off under the new policy settings?

Well, literally everyone, according to the Real Estate Institute of Australia:

“The REIA has always been concerned with the impact the policy would have on housing markets, buyers, renters and economic activity,” REIA President Adrian Kelly said.

“This concern is magnified in the current market.

“There is almost truck loads of analysis and reports showing the adverse impacts of the policy on mum and dad investors, home owners, renters, the construction industry, state governments and the economy.

Investors, home-owners AND renters?

How does that even work? I actually struggle to think of a scenario where all three are made worse off under ANY policy proposal – maybe something like “All housing will be nationalised and turned into jumping castles for Swedish tourists.”

Or are we using a definition of “worse-off” that I’m not aware of?

I want to pick this apart a bit, not to be cruel to REIA, but to make a point about how the housing market actually fits together. I think it will be useful.

Anyway, if we’re saying everyone in the market is going to be worse off, then I assume we’re saying that house prices are going to fall (bad for investors and owner-occupiers) and rents are going to rise (bad for renters).

That’s the only scenario that makes sense. If rents fell, that’d be bad for investors, but you’d have to chalk that up as a win for renters.

Likewise, if houses became more expensive that would be bad for renters looking to buy, but would be a win for owner-occupiers and investors.

So we’re talking about falling house prices (though I know a café full of millenials cheering that on), and rising rents. But how would negatively gearing actually make rents go up?

They might go up if the reforms exacerbated our housing shortage, but since negative gearing will remain in place for new stock, it’s hard to see how removing it for existing homes will have any affect on construction rates…

But, just for arguments sake, let’s imagine that somehow negative gearing reform does increase rents.

What happens then?

The point to remember here is that since housing is an asset, like all financial assets, the return is linked to the price.

The link between the rental return and property prices is captured by “yield”.

Now the thing to note about property yields is that they’re affected by structural conditions in the market – interest rates, risk appetites etc. Yields are not determined by rents and prices themselves.

That may sound counter-intuitive, given that yields are a calculation of prices and rents, but the causation actually runs the other way. Yields determine prices.

If you track yields over recent years, you’ll see that they’ve been very stable.

For 15 years, they’ve barely deviated from 4%. Even though rents and prices have been all over the shop, yields have barely changed.

So if rents go up, what happens to yields?

Well, you’d think yields would go up as well. But that doesn’t happen, because prices are set by people buying property, and the people buying property are happy with yields of 4%, on average.

So if rents go up, yields stay constant, and the adjustment is forced on to prices. Prices go up and yields remain at 4%.

Statistically, that’s been true for as long as we have data for.

But if prices go up, isn’t that a win for owner-occupiers and investors?

Yes.

Personally, I think the reforms will have no impact on rents, and push prices down at the margin, but not by a huge amount. Yields will adjust a little because the ‘cost of carry’ appetite will have changed (I’ll talk more about that another time).

But all this ‘everyone is worse off’ is just BS.

But remember this. If you want to know what’s happening to prices, look to rents and yields first.

No BS Friday: Ardern’s Effect on Aussie Politics

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There’s a subtle shift at play in Australian politics – but when its done it could transform the country.

Is anyone else picking up on a subtle change in the political winds?

It got a sense of it last week with the results of the NSW State Election.

That might sound found funny since the ruling party was returned, barely a handful of seats changed hands, and it was pretty much business as usual.

But something is shifting.

Partly it struck me with Gladys Berejiklian’s victory speech, where she said it was a victory that showed that “someone with a long last name, and a woman, could be elected Premier.”

As someone who had a long last name and copped his fair share of ribbing when he was younger for a name the anglo kids had trouble getting their tongues around, I had a bit of a giggle at this.

And it’s true. When I was a kid, I would never have imagined that a woman with an Armenian background would be one day be Premier of any state in Australia. It was a different world back then.

And then it was followed up by comments from her Treasurer Dominic Perrottet, who went to lengths to say how monumental it was that someone who ‘couldn’t even speak English when she started school’ was now Premier, and what an inspiration that was to his four young daughters.

It was gushing.

And look, that’s all great. It definitely is an important victory in that regard.

But what’s going on here? The Liberal party is now the party for gender equality and immigrant opportunity?

Both the Premier and the Treasurer seemed very keen to impress the public with their progressive credentials.

What next? Are they going to be the party to stand up for panda bears and orang-utans?

That’s exhibit A. Hold that thought.

Exhibit B is the tough time that Bill Shorten’s been coping in recent weeks for not being Jacinda Ardern enough.

In the wake of the Christchurch massacre, Shorten got taken to task for this comment:

“Not all rightwing extremist hate speech ends in rightwing extremist violence”.

“Shame Shorten, you coward! How can you suggest that hatespeech doesn’t lead to evil?”

But that was the thing. What he actually said was:

“Not all rightwing extremist hate speech ends in rightwing extremist violence… but all rightwing extremist violence begins with rightwing extremist hate speech.”

Pretty clear what he’s trying to say there.

But nobody was listening.

Same story a few weeks earlier. He got slammed for suggesting that kids striking for climate should “protest after school hours.”

But again, that wasn’t actually what he said. The full quote was

“In an ideal world, they would protest after school hours and on weekends, but it’s a bit rich for the government to lecture school kids. This government’s been on strike about climate policy for the last five-and-a-half years”.

So why is Shorten getting such rough treatment? … from the very people who should be welcoming him as their hero?

If you ask me, to the progressive movement, he’s just not Jacinda Ardern enough. At a time when Jacinda was being the poster-child for progressives everywhere, Shorten was still flying a flag for the politics of middle-aged white men… because that’s just what he is.

No matter what Shorten does, he will never be the leader progressives are crying out for because he is just not Jacinda Ardern enough.

And that’s exhibit B.

So what’s the root cause here?

I reckon it’s a tilt in the collective psyche towards more progressive values. It’s a tilt that is forcing the Liberal party to sell their own progressive achievements, and it’s a tilt that means that Shorten can never be progressive enough as far as his base is concerned.

The major parties aren’t idiots. They know what sells. They know what polls well.

And so I think this shift is real.

And if that’s true, it’s very interesting. Because this is where real change happens.

Where the people lead, the leaders will follow.

So is this where we’re going?

Wages caught in a ‘pincer movement’ will push property higher

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Wages have been slow to rise… but that could be about to change.

There are two forces converging on the outlook for wages, both set to push Aussie earnings higher.

This has been one of the puzzles of recent years. The economy has been strong, unemployment has been low… so why haven’t wages been growing more quickly?

Actually, why haven’t they been growing at all? On the whole, wages have been flat for a few years now.

This is important for the property outlook. It’s income that determines serviceability, and it’s serviceability that determines house prices.

And personally, I’ve been waiting for this piston to fire for a while now.

Anyway, there’s two big trends forming that might finally put the spark in the chamber.

The first is that you can only keep pressure on a pressure cooker for so long. My guess is that workers have been made timid buy the increasing casualization of the workforce (record numbers of people are holding down two jobs), and high levels of immigration, which adds a lot of people to the labour pool, many of whom are coming from a relatively weak bargaining position.

These factors have made workers on the whole less aggressive than they might otherwise have been.

But there’s a sense that workers might be waking up to the economic reality.

That’s the RBA’s sense of it. They reckon the market is totally ignoring the risk of a break out of wage inflation. From the AFR:

Reserve Bank assistant governor Chris Kent says bond markets are underestimating the risk of wages growth stoking higher inflation, as long-term Australian bond rates fall towards historically low levels.

Dr Kent said low bond rates that did not compensate investors for the risk of inflation were not only an “Australian phenomenon”.

“What we have had here is a gradual pick-up in inflation while unemployment rates have moved to quite low levels in NSW and Victoria,” he said.

It may be true that the RBA is just ‘jawboning’ the market here – trying to talk up the prospect of inflation – but even if that is true, having such a prominent institution saying that workers should go harder is probably going to have some effect.

“Rise up Comrades!”

The other force here is the prospect of a Federal Labor Government.

Credit Suisse were warning last week that a Shorten government could result in ‘cascading’ wage increases. From The Canberra Times:

“We believe the ALP’s package of employment and industrial relations policy reform would represent a transformative shift in the bargaining power of labour in Australia with cascading implications across the whole of the listed market”…

“Our assessment of ALP’s policies indicates a potentially transformative shift in the bargaining power of labour, leading to a rise in the labour share of GDP over and above cyclical dynamics and cascading impacts across corporate Australia”…

The policy changes will lead to wages growth that will particularly impact on construction support services, hospitality, healthcare, agriculture and retail…

Federal Labor has pledged to restore penalty rates for some workers, crack down on sham contracting and labour hire regulation to ensure those workers are paid the same as directly employed staff doing the same job…

I mean, you could probably put that in the folder of “Well, duh” economic analysis, since Shorten and co. are being pretty explicitly about increasing the lot of workers. But still, it’s not to be ignored.

And put these two together, with workers being cheered on by both the RBA and by the Federal Government, then you’ve have something close to a perfect storm.

And that’s the thing about a wages break out – it can happen pretty quickly. Once one industry scores some big wage gains, neighbouring sectors in the economy will pretty quickly start to want their share too.

And as the wage pulse spreads through the economy, house prices will drive higher as a result.

Not now, and not this year given the lags on these things. But by 2020… maybe.