Beware of the unintended economic consequences

Property Insiders video regarding some unintended consequences of Labor’s policy on minimum wage increases.

Video transcript

MICHAEL YARDNEY: Well, the results of the 2022 federal election are in, and Anthony Albanese will be Australia's 31st prime minister. In his victory speech, he said he wanted to bring Australians together. And together, we can work in the common interest with business and unions to drive productivity, lift wages, and increase profits. He said he wants an economy that's going to work for the people, not the other way around. But these are interesting and challenging economic times.

So in this week's "Property Insider" video for Yahoo Finance, Dr. Andrew Wilson, chief economist with My Housing Market, and I are going to discuss some of the concerns we have that may lead to higher inflation and higher interest rates. Hi, Andrew.

ANDREW WILSON: Yes, hello. Michael. Is it not deja vu all over again with those acceptance speeches about bringing everybody together? There are very challenging times ahead. There are commitments by the new government with particular policy stances. And given that we are in a unique but very concerning inflationary period that we haven't seen for quite some time, it will be quite interesting to see how this now pans out.

MICHAEL YARDNEY: And we know the Labor Party's backed down from its previous proposed changes to negative gearing, promising to maintain the existing regimes for negative gearing and capital gains tax, if it came into power. And we know it also promised first home buyers an ability to get into the market with its shared equity scheme. It pledged to build 30,000 new social housing and affordable housing properties in the next five years. So how do you see things playing out in our property markets under the new government, Andrew?

ANDREW WILSON: Well, the big picture is interest rates, is it not? The real question mark is that if we start to pursue policies of artificially increasing wages, then will that not fuel more inflation, and therefore, activate the Reserve Bank to increase interest rates more to try to slow down that inflation price and wages spiral?

Maybe you and I are the only ones that remember the '70s. It is deja vu all over again. We had governments try to control inflation by pushing up wages to cover increased prices. And of course, that ended in the recession of the early '80s, when there was a significant downturn following the inflationary outbreak of the '70s and the early '80s. And quite interestingly, that cost the then liberal government its position. I think--

MICHAEL YARDNEY: Andrew, let's discuss that just a little bit further because the election promise from the Labor Party was to deliver a minimum wage rise to match inflation. Now, while we're still dependent on Fair Work Australia endorsing this, I think the outcome is very likely. But it's also, as you say, going to deliver some challenges. Now we know a great many Australians actually enjoyed higher wages in the last couple of years, but they were more the skilled workers. And the average Australian, they're still struggling to make ends meet, the cost of living swamping them.

Now, normally, labor shortages boost wages, but it didn't seem to happen this time around. But, Andrew, what I can see is that if more money is in Australians' pockets, this will mean they'll spend more. It'll grease the wheels of the economy. But many enterprises, they're going to benefit from extra consumer spending. But others, I guess they're just going to raise their prices to be able to pay the extra wages. Isn't this just an inflationary spiral?

ANDREW WILSON: Absolutely, and that's the classic outcome, Michael. There is really no way to place the inflation genie back into the bottle, other than to let it run its course. And unfortunately, that course means to reduce demand. And that's why the Reserve Bank is pushing interest rates up is to try to cool an economy. But unfortunately, the circumstances are different this time, to some degree, as that we have these outside forces that are driving inflation, outside of demand-driven inflation.

However, we are seeing signs that local demand is now moving into inflation. That's what's activated that flip-flop from the RBA to increase rates sooner than they'd been predicted. Unfortunately, Michael, we've just got to really wait for it to evolve. And it is, as usual in economics, it's something that is different from previous cycles that we just can't flip open the economics textbooks and look to answers there or answers what happened in previous cycles. All bets are off. This is a new world of economics. That is the concern that we have other factors such as the Ukraine war and the potential for another COVID outbreak that might interfere with all those theoretical stances.

MICHAEL YARDNEY: Well, I remember the '70s well. I bought my first investment property. I took a 30-year loan, went half with my parents to buy a property at $18,000. And the labor government came in, the Whitlam government came in, inflation was rampant. The property increased so much in value and the rents went up so much, I could buy another one a couple of years later.

Those inflationary times were very good for people who owned real assets, particularly real estate. But it eventually meant interest rates rising. Interest rates were around 10%. Remember when we were happy if your mortgage was less than 10%? You thought things were good. But inflation was higher than that. As the real interest rates were still low, great time for property, until it all came to an end with the recession. Most people don't even remember the recession of the early '80s, but that was the first one I experienced. And I learned, hey, property values don't always go up in a straight line, do they?

ANDREW WILSON: No, but I guess in a way we have, again, some similarities, Michael, because, if anything, our housing markets are in a generally stronger position, notwithstanding the potential for higher interest rates, which, of course, are coming from a very low base. And there are a number of offsets to higher rates in the shorter term, such as still wages growing. We have the buffer, of course, high savings levels. That will offset higher mortgage costs. And higher mortgage costs only really affect a small proportion of households anyway, with half of all owner-occupiers actually owning their properties outright without even a mortgage. So what do they care about interest rates? They're more worried, I guess, about inflation.

And of course, in terms of the actual situation in our housing markets, we still have demand ahead of supply, Michael. And demand will continue to push ahead of supply. We know supply is low. We just have to look at our rental markets, which basically have run out of rental properties. Rents are increasing by more than 10% per annum at the moment in most capital cities. And of course, we have demand drivers coming through. Borders are opened again. Migration is up and running. We have student numbers set to come back into Australia. That's demand for property from both ends of those, from open borders or opening borders.

And of course, we have a raft of policies designed to encourage first home buyers into the market in high numbers. So that, again, increases demand for property. With a shortage of rental properties and rents ballooning strongly at the moment, there's a lot of investors that want a piece of that cake as well. So we've seen the doubling in investor numbers over the past year. So plenty of demand, not enough supply will keep upward pressure on prices and rents, in my opinion, in the housing market. But it certainly won't be anything like what we've witnessed over the last couple of years.

MICHAEL YARDNEY: OK, we'll look forward to having a chat again next week.

ANDREW WILSON: Thank you, Michael.

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