Australia is in the midst of another of its grand macroeconomic experiments. We pretend to be conservative economic managers but in reality we are like mad scientists concocting economic potions in bubbling test tubes. The alchemy is always directed at one thing only, keeping house prices high, but it throws everything from sulfuric acid to frogs legs into the mix to make it happen.
Our latest experiment is to run out-of-control immigration into an economy with massive oversupply. The theory, if there is one, is to support demand. But it’s having all kinds of side effects that basically wipe that outcome out. Wages are falling. House prices and unproductive debt are rising. Infrastructure is crush-loaded and productivity is being destroyed.
Rather than advocate for change or hold anyone to account this morning, let’s just extrapolate these trends forward and see where they lead.
Wages are not going to rebound in any trend sense. When the increase in labour supply is also the core driver of economic growth then the two basically cancel each other out. Worse, given the labour market has formerly been regulated and is now adjusting to an informal flood of cheap foreign labour via the backdoor, it’s quite possible that wage falls will get worse. This becomes even more likely when we add that national income is going to fall a long way yet as the terms of trade continue their long term reversion to mean.
The major economic impact of this wages stagnation will be ongoing big misses in Budget revenues over forward estimates. The major political fallout will be rising anger in the polity as bastard politicians pretend and fail to fix it. The Coalition will lose the next election in a landslide and Labor take power. The One Nation vote will keep rising.
House prices have today slowedor stopped rising in the immigration stuffed eastern cities. Prices are’t going to fall much under pressure from this migration tsunami. Sydney and Melbourne rents are going to start rising pretty fast soon despite no income growth. That will help back-fill absurdly stretched valuations. Prices might even rise a touch more in Melbourne.
Other little cities will see rising internal migration flows as the foreign immigrants that only settle into Sydney and Melbourne social ghettoes (some of which are very wealthy indeed) price out many locals. Brisbane seems likely to receive the lion’s share of the spillover. Nobody wants to go to Adelaide and Perth is going to keep dying with iron ore. Given the state of housing oversupply, the good news is that the little cities will not see house price appreciation nor falls.
But then comes Labor’s landslide win in early 2o19 and negative gearing reform mid-year. Prices everywhere will fall, perhaps 5%. I’d say 10% but immigration will prevent that much. Labor’s post-Australia loons may even increase immigration to offset the price downdraft. I can’t see any great rush into another big dwelling construction boom but I can see urban infill exploding as specufestors seek to keep their negative gearing rorts by bidding up anything on enough land to demolish and subdivide into multiple new properties.
Perhaps there’ll be enough activity to eventually push the RBA to tighten rates a little but the endless wages crush and productivity malaise will keep households getting steadily poorer per capita so inflation will remain weak.
In opposition, the Coalition will now face an existential crisis. The rage building in the polity at Labor’s post-Australia policies will seek an outlet. One Nation is the obvious place for it to go. The Coalition will either have to absorb its policies or be fatally wedged. Obviously it will have little choice but to become an anti-immigration party and it will immediately take the lead in the polls (incidentally, if it does this before the election we might see the same result).
In the mean time the external environment has turned hostile. Later in 2019 the US economy succumbs to the Fed tightening cycle. Markets crash and a recession ensues. China stimulates for a bit. Australia uses up its last rate cuts and fiscal scope as households bunker. The Budget is downgraded, probably more than once. Immigration finally slows as the world does. House prices rebound out of their negative gearing slump supported in the short term by various fiscal giveaways. But only modestly as abused FHBs pile in. Nonetheless, recession overtakes the economy.
As the world grinds its way through the new accident, China stimulates some but not like it used to. This despite the US now engaging in outright helicopter money which sinks the US dollar. The AUD rebounds from shock lows near 50 cents to being too high. As well, Chinese student numbers stop growing as it builds out better unis at home. Automation makes a step change in its advances into the labour market. It begins in transport but spreads swiftly into services. This combines with a rebounding mass immigration rate into Australia to destroy wages even faster. House prices begin to fall again. External interest rates have remained stubbornly high ever since the recession and with the Budget disintegrating it is forced into austerity.
Australia enters its great housing bust in a double-dip recession. The banks are bailed out via nationalised LMIs. The RBA launches QE to keep interest rates from climbing too high. The AUD heads for 40 cents and, finally, the hard slog of real recovery in tradable sectors begins.
By 2022 the economy has rebounded to low growth rates but Labor is trailing in the polls badly as it wears the blame for the recession and the housing bust is blamed on negative gearing reform. The Coalition wins the election and re-installs negative gearing tax breaks even as it halves immigration.
But house prices do not rebound. Chastened banks no longer lend like they used to and conservative consumers don’t want any more debt anyway. With immigration back to historic levels, we settle into a long and difficult economic reconstruction. House prices don’t grow again for thirty years.
There really is no getting around it. The great Australian adjustment will have its way, mass immigration or not. There just ain’t enough debt headroom for anything else.
The only real choice we have is who we want to torture and for how long on the way down.
