“Houses and holes” go global

Thanks to Satyajit Das at Nikkei:

When Australians go to the polls on May 18, the choice for all intents and purposes is between the center-right (Liberal and National Party coalition) and the center-left (Australian Labour Party).

However, any new government’s ability to implement its policies will be determined by foreigners not on the ballot paper. The election, at least at one level, may be irrelevant as complex inter-dependencies mean that Australia’s economic prospects are substantially outside its control and at the mercy of global markets.

The centerpiece of both major contenders’ campaigns are large tax cuts and significant government spending on infrastructure and welfare. Both parties pay lip service to sound public finance. But the sustainability of policies based on outbidding political opponents and financing permanent expenditure with impermanent revenues is questionable.

The forecast improvements in the budget position, which the tax cuts and spending are premised upon, are driven by several factors.

Australian household tax payments have risen faster than income. The lack of inflation adjustment means that over time wage earners move into higher tax brackets known as bracket creep. This has added around 3% of gross domestic product to government revenues over the last decade. Australia’s budget is affected by commodity markets. Higher than budgeted export volumes and prices, especially for iron ore, have boosted government income. A strong housing market underpinned government revenue. But these factors may be ephemeral.

Proposed tax cuts will partially reverse bracket creep. Future growth in income tax is contingent on wages growth, which remains lackluster.

Higher commodity revenues are driven by developments in Brazil and China. The collapse of a tailings dam at one of Vale’s Brazilian mines led to a shutdown reducing output by over 40 million tons per annum, 10% of the company’s annual production. This supply disruption in a market which is closely balanced resulted in sharp price rises and increased volumes for Australian producers. Chinese actions to stimulate growth and employment supported demand for Australian exports. These are all outside Australia’s control.

The long housing boom is over. There is over-supply in some sectors, like inner city apartments. Demand has slowed due to lower immigration, restrictions on foreign, especially Chinese, property investment, housing unaffordability and constraints on the supply of credit. If the commodity sector weakens, then this will compound the slowdown because a buoyant mining sector helps maintain national income and buying power. Given Australia’s trade dependence, escalating trade wars would reduce income, affecting house prices.

This striking lack of control that Australia has over its economy is grounded in four factors.

First, Australia is increasingly dependent on housing and commodities, termed the “houses and holes” economy. As one economist put it, one half of the time Australian prosperity is based on digging things out of the ground and selling them to foreigners at good prices. The rest of the time Australians sell houses to each other at ever higher prices and increase consumption based on their theoretical property wealth, both funded by increasing borrowings.

Over time, Australia’s manufacturing industry has declined. Commodities as well as tourism, education and health care service exports have offset losses. However, they cannot fully replace the manufacturing sector, especially well-paid blue-collar work. For example, the mining sector accounts for around 10% of GDP but employs only around 2% of the workforce reflecting its capital-intensive nature.

Second, Australia relies on imported capital. Despite strong terms of trade and high export volumes, it continues to run a current-account deficit of around 3% of GDP. This must be financed overseas primarily by Australian banks borrowing to cover the shortfall between deposits and loans. Economic weaknesses, driven by a commodity or housing slowdown, can affect the cost and availability of foreign capital. Australia’s highly credit dependent economy, especially housing, is perennially vulnerable to the vagaries of international money markets.

Third, Australia is uncompetitive outside the natural bounty enjoyed by its primary industries. In international rankings, Australia regularly performs poorly in productivity, competitiveness and innovation. Labour productivity growth is currently weak. Taken over a longer period since 2010, it averages a more respectable 1.4% per year, but the outcome is distorted by stronger productivity in the mining sector. Over a similar period, measures of productivity that incorporate capital as well as labor have declined. Australia has comparatively high hourly compensation and unit labor costs. Australia’s ranking in the World Bank’s Ease of Doing Business Index has declined from 6th in 2006 to 18th in 2018, below Georgia, Estonia, Lithuania and Malaysia.

Fourth, Australia’s relationship with its major Asian trading partners is complicated by political affinities with the West. Currently, the nation is involved in a political dispute with China over restrictions on coal imports, coyly termed “quality checks.” The measures are retaliation for Australia siding with the U.S. to preserve its “Five Eyes” intelligence membership by excluding the participation of Huawei, the Chinese supplier, in Australia’s 5G network and intemperate comments about Chinese influence in Australian politics. The dispute is unhelpful given that over 30% of all Australian export income derives from China, the highest level of any developed nation.

Sadly, no party’s manifesto addresses these fundamental challenges. Tax cuts will not reform a system which needs to be overhauled. Infrastructure spending provides a short-term increase in demand. Bad choice of projects and poor delivery, evidenced by the disappointing National Broadband Network which is over-budget and slow by the best international standards, may not enhance longer-term efficiency and productivity.

The narrowness of the economic base is ignored. No political party is willing to address over-investment in housing, the total value of which is around $6 trillion or around 4 times gross domestic product and constitutes a large proportion of household wealth. Encouraged by complex subsidies, capital is locked up in property, unavailable for more productive activities such as new industries. Leaders are reluctant to champion forceful structural reforms to improve education and skill levels as well as streamline regulation. Instead, all contenders seem happy to rely on windfalls to finance the nation’s living standards through ever shorter electoral cycles.

These failures dictate that any new Australian government will be captive to external events. Chinese President Xi Jinping ‘s decisions on domestic growth and Australian imports, U.S. President Donald Trump’s tweets on trade and Brazilian President Jair Bolsanaro’s attitude to miner Vale’s conduct may play a bigger role in Australia’s trajectory than the election.

And that, as they say, is a wrap.

Houses and Holes


  1. the “houses and holes” economy

    ha ha ha! Hats off!

    Australia has comparatively high hourly compensation


    Factory workers in Holland have a $2000/year advantage over factory workers in AUS. Most people in Holland get around on bicycles and pay no petrol tax at all. No rego either. That is effectively $2000/year into the pocket of every voter in Holland while people shout “too much money is put into the pockets of Aussie voters”.

    Alaska bothers to put an export tax on oil and uses the money to give a U$2000 cheque to every voter in Alaska. That is literally U$2000 into the pocket of every voter in Alaska!

    Qatar takes it to the next level. Qatar bothers to put an export tax on LNG and gives every Qatari a house when they turn 18!


    When is someone going to shout, “too much money is put into the pocket of Qataris”?

    • I’ll add that a family in Holland pays the same amount monthly to put a roof over their heads as Australians need to fork out weekly or fortnightly.

      • Yeah. The phat salaries that those in employment enjoy in Australia are all smoke and mirrors because the price of everything is astronomical due to the cost of housing which drives everything else through high labour costs. Not to mention being gouged by retailers, the tax man and every other damn scumbag.

        Just go on Amazon and look at the prices of things like clothes and shoes in USD. It’s amazing. So many people think they’re wealthy because their rat infested fibro dump in Sydney is “worth” a million dollars. They’re deluded.

      • @Jacob. Social housing or mortgage. Interest rates on the latter being tax deductible.

    • slatteryMEMBER

      Let’s not get carried away by the wisdom of the Qataris. Try googling ‘migrant worker exploitation in Qatar.’ Here’s a guess: the workers who built the houses in Qatar aren’t being given a house whatever their age.

    • Interesting.
      When Mr Das writes on the Australian media he’s a lot more circumspect.

      A great article that should be reprinted in Fairfax/nine, News Corpse and ABC news…and everywhere nonsense is regularly passed off as ‘Australian exceptionalism’

  2. “Australia relies on imported capital. Despite strong terms of trade and high export volumes, it continues to run a current-account deficit of around 3% of GDP.”

    If this doesn’t strike you as insanity then I don’t know what will.

    • No it’s not Insanity because Insanity suggests that the outcome is not within anyone’s control.
      Make no mistake about it: Australian will is being subjugated to international will, Australian profits are being Internationalized and Australian Taxes are being “off-shored”. Optimal Australian control of it’s resources is secondary to our need to meet Capital repayments, we have tied the knot and willingly stuffed our head through (just to see if it fits) now we’re stuck.
      We’ve become someone’s little bitc4 to be F’ed at will, there are no consequences because we can’t afford to complain…..and yet you see Insanity….All I see is the deliberate subjugation of a nation albeit it a nation of fools.

      • Nailed it fisho. It’s why nobody should get excited about some political party policy X that promises to turn things around. If any attempt is made to implement policy X, the international strings are pulled and we become the next Venezuela. The outcome of neoliberalism is international neofeudalism.

    • Yes and many here have been banging their heads about it for years, decades in Flawse’s case, but the question is when does the Ferrari hit the brick wall?

    • SupernovaMEMBER

      Yeah that was the Das’s best….convenient that continuing to run a current account deficit of 3%……….has to be funded by foreigners (primarily US). Why would foreigners bother when the US rates are higher than ours between 2-2.5% and likely to remain so until 2020. Das is known for giving us a convenient dose of economic-reality at precisely the right time.

  3. seanraceMEMBER

    Congrats Team – Well deserved plug. I also love the title of the article “Australia’s irrelevant election”

  4. Pfh007MEMBER

    Kouk will be upset Das did not mention his invention of per capita recession.

  5. This in yesterday’s (Queensland) Courier-Mail:
    Base metal exports from Port of Townsville halve over six years
    THE new-age resources precinct touted as the next big thing for the Queensland economy has suffered a dramatic fall in fortunes over the past six years.
    Despite 12 years of talk about how Queensland minerals would power technologies such as iPhones and electric vehicles, key exports from the North West Minerals Province have plummeted by as much as 70 per cent.
    While some of the decline was caused by the collapse of mining magnate turned politician Clive Palmer’s nickel refinery, miners and refineries in the region are struggling under some of the highest power prices in the world.
    “It’s one thing to get excited about commodities, electric vehicles etc,” one key industry insider said.
    “It’s another to deliver economic prosperity on the back of that … opportunity.”
    The figures show movements through the port fell from 12.9 million tonnes in 2011/12 to 6.7 million tonnes in 2017-18.
    From 2013-14 mineral concentrates fell from 5.3 million tonnes to 1.7 million tonnes while refined mineral products dropped from 382,096 tonnes to 166,219 tonnes.
    The decline comes despite a significant decline in the Australian dollar over the same period, however wholesale power prices have more than doubled.
    … The Mount Isa region is not connected to the national grid and relies on high-priced gas power stations.
    https://www.couriermail.com.au/news/queensland/queensland-government/base-metal-xxports-from-port-of-townsville-halve-over-six-years/news-story/33ba3171ace06f3e382ba54aace485b3 (paywall)

  6. DingwallMEMBER

    Great stuff …. could have also focussed on the stupidly high immigration levels that are also used to pad all the useless economic indicators …. amongst other things.
    “Demand has slowed due to lower immigration …….. is an overstatement really …… marginally lower at best

    • FiftiesFibroShack

      But immigration puts a dampener on wages, which would be seen as a positive from the perspective of the Dass article. We either get competitive through a p!ssweak dollar (essentially a tax on imports to fund the high wages of exporters) or we see wages fall. But we can’t see wages fall because our cost of living is too high, largely because the cost of housing is too high.

      • While I like a lot what of what Das writes, given his ethnic background he will never be honest about how detrimental the Big Oz program is for everyday Australians. I have never seen him write anything negative about our massive immigration/population replacement program which is at the centre of the extreme level of foreign indebtedness, and growing over time as a proportion of GDP.

        For instance, he notes that our productivity growth is poor but fails to mention the negative impact that high immigration has on productivity.

  7. FiftiesFibroShack

    No political party is willing to address over-investment in housing, the total value of which is around $6 trillion or around 4 times gross domestic product and constitutes a large proportion of household wealth. Encouraged by complex subsidies, capital is locked up in property, unavailable for more productive activities such as new industries

    But the ALP is basically running on a couple of large tax reforms, one of which is an attempt to address a couple of the subsidies that encourage over-investment in housing.

  8. Satyajit’s article deserves to be stapled onto the face of every politician, PR propaganda peddler, traitor, conspirator, political commentator, “journalist”, charlatan, and everything is awesome-sayer from coast to coast until the end of the election.

  9. Das says that “Encouraged by complex subsidies, capital is locked up in property, unavailable for more productive activities such as new industries”.

    I think the term locked up capital may imply to some that there is a honey pot there in that $6 trillion of housing capital that could be used elsewhere, if one just found the right key to unlock that capital. In actual fact its just a sunk cost due to the ponzi population and can not be used for any other purpose. It would be best to just write it down to a level that would make our living expenses competitive with other western countries, thereby assisting our tradeables sector by lower input cost (ie labour) and assist family formation that drives real long term economic growth. Of course the financial sector issues from such a massive asset write down would have to dealt with.

    Perhaps this is just a short article and Das understands the issues (at least I believe he does given what he has written about the housing boom) but he has failed to explain what the solutions are and has a tendency to just implicitly laugh at the Oz stupidity.

    From his writing I get the sense that he sees whites Ozzies as plain stupid. Sort of white trash who deserve the outcomes we are getting. In fact many of the factors that are holding us back also apply to most other countries, and let us not forget about the biggest housing boom ever that the clever Japanese created.

    Our problems are due to the complexity of society and the ability of interest groups to use wealth and power to direct governments to do their bidding even when it is not in the interest of most citizens. I am sure similar things occur in Chindia etc. Its the outcome of the concentrated power of special interest groups verses the relatively powerless atomistic citizen who is too distracted with day to day living to provide a counterweight.

    • BubbleyMEMBER

      Das at no point mentions colour, any depictions that Aussies are white trash are all your own.

      Are Australians stupid? If you read Das’s book “Extreme Money” about how the GFC happened, you too would think that the intelligence of Australians was up for debate. We dodged the bullet with the GFC – and then copied exactly what it takes to create one. We had poor lending standards,110% loans and Interest only loans etc etc.

      We learned NOTHING from the GFC except how to make one and now we are reaping the results.