Part three in ‘Ten Reasons Why the Boom has Ten Years to Run’ is something I don’t see anyone else talking about – how property became the new gold.
I don’t know if you caught this article a couple of weeks ago. The new Governor of the RBA, Phil Lowe, was urging workers to rise up and seize the factors of production.
Well, not quite. But he was urging them to demand higher wages.
The governor of the Reserve Bank has called on workers to start demanding large pay rises from their bosses.
In a remarkable statement for a central bank chief, Philip Lowe said Australia’s economy was suffering a “crisis” in wage growth, and workers ought to realise the relatively low unemployment rate meant they could start asking for a larger share of the nation’s economic pie.
Lowe told a conference at the Australian National University on Monday the labour market was in better shape than some critics were suggesting.
“The crisis is really in real wage growth,” he said.
He said despite the relative strength in the labour market, too many workers were putting job security ahead of pay rises, partly because they were worried about competition from “robots” and “foreigners”.
I don’t know if all of my readers are old enough to understand what a seismic shift this is.
Not that long ago, when central bankers used to worry about inflation, they would warn us about the dangers of a “wage-price spiral”. Where higher wages pushed up costs, which pushed up prices, which saw workers demand even more pay, and on and on it would go.
It used to happen.
But the last time it did Phil Lowe was in grad school.
And these day, central bankers aren’t worried about inflation. They’re worried about deflation. A lot.
As Phil points out, wages growth is now the lowest on record (which isn’t entirely as bad as it sounds since inflation is also around record lows).
And it is really hard to believe that this is because workers just don’t have enough balls these days.
This really feels like wishful thinking on Lowe’s part. It’s a central banker hoping for something, anything, to save the country from the horrors of deflation.
But this isn’t about the mental state of Australia’s workers.
This is about seismic shifts in the structure of the modern economy.
The de-physicalisation of the economy – where we spend more on apps than we do on furniture – has given us true globalisation. Our app developers can be living in any country on earth.
And the labour pool with access to a device and an internet connection is staggeringly huge, and expanding rapidly.
The price of labour is falling simply because the effective supply of labour is exploding. Every graphic designer in Australia is now competing with millions of other designers from every corner on earth.
Two is that technology has slipped the chain. At some point in the past 10 years we went from labour-augmenting technology (where technology helps workers be more productive, e.g a book-keeper using a lap-top to manage the company’s books), to labour replacing technology (We don’t need a book-keeper any more. There’s an app for that.)
This dynamic is churning through jobs faster than they can be replaced.
Humans are being made redundant. And so the price of humans is falling.
Lowe is wrong to suggest that people are irrational for “fearing jobs and robots”. It’s happening.
And this, is big new for property. It means property prices will go up.
But hang on Giaan. The conventional wisdom is that when people have more money, they can spend more on houses, and so prices go up.
And that’s true. Normally. But these aren’t normal times.
There are intense downward pressures mounting on wages.
But wages are sticky. They very rarely fall. Labour contracts, no disadvantage tests, unions and the public sector all help put a floor under wages.
We very very rarely see wages fall, even an incy bit.
Even at current growth rates – the lowest on record – they’re still growing.
But the economic adjustment must happen somewhere. The price of labour must adjust. It has to.
Well, the thing to remember is that prices are a relative concept. Prices help us understand the worth of one thing relative to another. Prices are meaningless in isolation. They only make sense in relativity.
Say, what if I told you that a widget is worth 4 wodgets (a currency I just made up.) What does that tell you? Nothing.
What if I said, a widget is worth 4 wodgets, and an apple is worth 2 wodgets.
Now you understand, roughly, what a widget is worth.
So if we understand that prices are a relative concept, and we know that the price of labour needs to fall, then we understand the price of labour, relative to other things, needs to fall.
Now, we can see that this can happen two ways. The nominal price of labour can fall, OR the nominal price of other things can go up, relative to labour.
And since the nominal price of labour is not allowed to fall, that means the adjustment is forced on to the price of other things.
What other things?
Well, theoretically, everything. But since globalisation is suppressing prices in the digital economy, expect to see the adjustment in the price of real things.
What real things?
Did some one say real estate?
So far, no one has created an app that manifests land and builds houses on it. Property is untouched by the digital revolution.
And so in a world where everything else is being swamped by gluts, the relative price of property must increase.
If it doesn’t happen through falling nominal prices – ie. Deflation, which central bankers will spend billions avoiding, then it will happen in nominal gains in property value.
And this, is what we’re seeing right now.
And this is what we’re going to keep on seeing, until the robots overthrow us and make us their slaves.
No, I don’t know what the end game is. But this dynamic is in full-effect right now, and it could take decades to play out.
So you want the big, big picture? You want the long, long-term view?
Property is the new store of value. Property is the new gold.
The sellers of labour (workers) will get poorer. The owners of property will get richer.
Which side are you going to be on?
Is it that bad? Are wage earners doomed?