How interest rates, building costs, HECS debts and wage rises hit home

Younger generations and renters are most at risk under current political strategies that increase the cost of construction. Picture: NCA NewsWire / David Swift

Before the calendar year is over Michele Bullock and her Reserve Bank board will need to incorporate into their decision making the lower productivity and higher costs that have been inflicted on the Australian business community by Albanese/Burke industrial relations legislation.

And when they do, we will see central bank strategies and government actions (as opposed to words) heading in totally different directions. These are dangerous times for any nation

As was envisaged by the Prime Minister and his Employment minister, the first stage of the plan – the expected big rises in construction costs – is already starting to erupt in commercial, high rise towers and infrastructure.

The next stage is to explode home building costs.

From there we go to the sensitive areas of the public service with the big trigger date, August 26 when the 700-plus page government industrial relations blue print comes into full operation.

Let me show you the Albanese/Burke systems in action.

Commercial builders, recognising that the unions are totally supported by the government, are handing out 20 per cent-plus wage rises, over three years sometimes, accompanied by lower productivity.

The Master Builders Association estimates that overall building costs have risen over 40 per cent since pre-Covid years. But in the commercial and CFMEU-dominated areas of the industry the rises have been even greater.

The CFMEU are now working to migrate the much higher commercial building costs into the housing industry.

In the past, cottages and residential accommodation up to three storeys have been insulated from the higher commercial building costs by a network of small contractors who didn’t actually want to work under CFMEU rules.

Tony Burke during Question Time at Parliament House in Canberra. Picture: NCA NewsWire / Martin Ollman

But, the under the Albanese/Burke rules the combination of much greater union power via the appointment of CFMEU-trained union delegates to all contractors; the “same work same pay” rules; industry awards, and the uncertain status of independent contractors is enabling the unions to put pressure on housing contractors.

And in what is perhaps a surprise twist, the enormous failure rate among home builders has forced many workers into infrastructure and commercial areas.

They are now being paid far greater sums of money. To attract those people back to residential construction will require commercial rates of pay and high-cost work practices. The CFMEU is urging many small contractors to do a deal and “play the game”.

The home builders who survived the crunch can see much higher costs coming so are very wary of making fixed priced tenders for fear of being caught in another wave of bankruptcies.

Banks will rarely lend on flexible price contracts especially as they can also see construction costs rises exceeding 20 per cent in the next couple of years. The lending rules are imposing a credit squeeze on individuals trying to own their own home.

The sensitive government employees like ambulance and train drivers, childcare workers and medical people can see the enormous rises in the construction sector and have their hands up for similar pay rises. That will quickly spread to other sectors.

So long as the debt rating agencies continue to use Enron-style, dubious credit rating criteria the states, particularly Victoria, will hand out the money.

In due course, there will be a national wage increase where Fair Work will be under great pressure to keep up the momentum.

The view of the government and the unions is that these wage rises will not affect the rate of inflation.

As I pointed out last week, there are cost pressures already building up that have not been passed on. Significant wage rises will therefore boost inflation.

That makes it very difficult for interest rates to be reduced and there remains the possibility that they will be increased.

To some extent interest rates are a side issue. What we are looking at is a fundamental change in our society where the higher paid workers will be in the construction sector and, at least in some areas, government employment.

Young people who have large HECS debts – thankfully reduced by the current government but still high – are shaking their heads at their stupidity.

While they incurred HECS debts, their mates were paid during their apprenticeship and are now enjoying far higher levels of remuneration than many who paid big money for university degrees.

When you add in the fact that universities have become hot beds of racial hatred, life on building sites and even government bodies looks a lot more attractive.

Of course, the great danger for tradies is that eventually the rating agencies will do their job and curb the rampant state borrowing. Infrastructure will be slowed, and we are seeing a whiff of that in Queensland’s reduction in its Olympic plans and the Victorian budget.

If continued, these developments will slow down the rate of building and make nonsense of the crazy targets governments have set themselves to overcome the housing shortage.

The renters are the victims.

In classic economic terms that slowdown causes a surplus of labour which stops the big pay rises. But that is not the way it may happen because the industrial relations laws lock in the power of unions to prevent classic economic theory unfolding. That’s a recipe for stagnant inflation or stagflation.

We are going to need very innovative policies from the Coalition which would almost certainly be opposed by the ALP plus the Greens, and in some cases the Teals.

The irony is that the younger generation, who are the main sufferers from the strategies to lift construction costs and keep interest rates high, are the biggest supporters of the parties that embrace these strategies.

Democracy is not supposed to work that way.