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.
That’s one.
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.
But where?
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?
ron goddard says
hi jonno,
the basic tenet here is: are we gonna be better off with wages growth and higher real estate prices?
sure the governments are gonna be happy because the rake off from stamp duties and other goodies to do with exponential government income will be a bonanza for them. so they will spend even more irrationally then they already do.
but little joeblow who is the oz battler will be unhappy. and there is multitudinously more joeblows than there are rich buggers. its an ever upward spiral that king canute cannot stop. that is, in ‘normal’ times.
so is the ‘gap’ gonna get wider and wider? you betcha. so we will return eventually to the feudal era of the 14th, 15th and 16th centuries, a sort of full circle. and you will own half ivanhoe(like king arthur) and the rest of the morons in ivanhoe will be subvervient to you. hmm nice thought i could try that with attadale.
all in all i don’t give a rats arse about owning too many properties. i would get a headache looking after them. anyway if the global debt is around US$217 trillion and the rothchilds own US$500 trillion who is gonna be the winner there? they will swallow us up in one gulp. anyway its a good discussion point. if we were in ancient greece we could be recorded as visionaries. i wanna read more jonno so keep it coming.
cheers, ron from west oz.
sow says
Um, no. I disagree.
Nothing is worth anything unless someone is willing to pay that price for it.
If robo’s take jobs, the economy collapses and will leave only a small few with untold riches. However, majority of middle class will be out of work. When there is no money flowing and therefore no one willing to buy property from sellers. Desperate sellers will sell cheaper. If for any reason prices remain stubbornly high for an extended period then a revolution among the middle and lower classes will happen.
Simple supply / demand and history repeating itself.
Until we change our concept of what is money.
Andrew says
Hi Jon…,
It sounds as though you are trying to convince your employees (who would all read your blog no doubt) that asking the boss for a raise isn’t going to work…. Hopefully you don’t cause them all to abandon you..!!!
Jon Giaan says
ha!
Andrew says
“Memo to all staff… DON’T ASK”….!!
ron goddard says
hi again jonno,
one thing keeps niggling at me. its about crypto currencies. i read a lot about how they are a gonna re shape the world ‘money’. now if one is going to get cryptocurrency as a means of spending, it is still measured against the dollar u.s. or oz or anyone else. so it could get rather confusing with all of these hundreds of cryptos hanging around, and believe me there is a ‘babyboom’ of them though most of them are in the embryo stage. i have been personally warned about the little, newer ones but bitcoin and emereuer or whatever it is seems to be leading the pack. and the strange thing is that the experts still relate it to the yankee dollar as valued, so how can it be a separate ‘money’. money is a manmade ‘thing’ to make transactions take place and is denoted in many ways throughout the known world. gold is a store of wealth but now some dills are saying that gold is gone ..out the back door. dismissed! talk about stupid!
so in the near future a world with robots, cryptocurrencies. crazy collingwood supporters and other nutcases there is some thinking to do. to buy or not buy? will i get my next payrise in au $ or bitcoin?
will houseprices readily be contained in a duel dollar/cryptocurrency world, where the bitcoin can lose or gain value at superluminous speed? who will be the genius to assess any value anywhere?
are wage earners doomed you ask? of course they will need a rhodes scholarship to work it all out and you wil be up allnight working out the wages bill! oh dear jonno, what a tangled web we weave when at first we practice to ‘interfere with the natural order of things’ (deceive).
ron from across the nullabor.
Rick Eason says
Jon, your clever analysis reveals that you have too many neo-classical economists in your circle. Keynes refuted the classical economists’ idea of ‘sticky’ wages by proving mathematically that it is essential to ensure effective demand (purchasing power) in the hands those who have a very high marginal propensity to consume (essentially low to middle wage earners).
Unless we find a way of putting purchasing power into their hands as the robots take over, the whole economic system will go down as it did in the last depression. Debt-free owners of rental property (a tiny group) will benefit, but certainly NOT the average property investor who is up to his/her ears in debt and will experience foreclosure and bankruptcy.
Kiwi says
Yeah, Nah!
Don’t know how it is in Oz compared to NZ, but over here, as people increasingly can’t afford to pay the rent, the state increasingly has to cough up. We have more people living out of their cars, or simply sleeping in shop doorways, squatting in abandoned buildings and so on, than ever before (except maybe during the “Great Depression”). I don’t know, as I wasn’t around then, and haven’t studied it, but I think it might be time to.
What’s happening here is that in effect, as people can’t afford their own places to live, they just “take over” public areas, or the government has to pay to house them. Sure, the police sometimes move them on, but it’s only rearranging the deckchairs… And they have more important things to do.
I’m sure you can see where that is headed. As the burden of housing costs increasingly falls on the limited public purse, the government will cut the price it will pay landlords for state sponsored housing… How’s that going to boost property values?
A massive trend already happening here is increasing occupancy densities. People are getting together to rent a house, then cramming twice as many people in. We have that possible problem in one of our properties. Tenancy Agreement says four people. The problem is policing it. Tenants get cunning. Here, landlords have to give notice before turning up, so guess what happens? The extras go out for the day, the bedding on the couch gets packed away. It all looks normal when you turn up.
Anyway, this is going to push rents down, because more people per house will leave vacant properties. Over here, the rental return is already rubbish. Capital gains have stalled. So who wants to own rental property? Actually, NZ is in a far better position than Oz, because too many people want to move here, holding house prices up.
But as I understand it, land / house prices in Japan have been falling for the past 30+ years.
The Oz economy is tanking anyway. How are property prices going to stay up?
Kiwi says
Hi again Jon,
Do you follow these guys / did you read this? Sounds pretty interesting.
http://cecaust.com.au/releases/2017_07_25_Empty_Houses.html