Most of the 70 per cent majority of the population are either prospering or not being severely impacted. In combination with rampant state and federal government spending, the prosperity of this 70 per cent intensifies the required attack on the 30 per cent minority to beat inflation.
Unless we wake up to what we are doing to our nation the sharp divisions created in society will move from political issues to the fundamental structure. The inevitable turmoil will create scars that will rank with the two world wars and the depression.
And the long-term damage created by the attack by the majority on the minority will be made worse because victims are dominated by people in the 20 to 35 year-old age bracket. They will never forget the artificially imposed cost of living crisis that was imposed on them.
Former ANZ director and now major supplier to the building industry, John Dahlsen and I are deeply concerned at what is taking place and the ignorance in governments of the damage they are creating.
We decided to come together to first describe the brutality of what is taking place and then, in a second commentary tomorrow, look at some of the strategies available to spread the burden of reducing inflation and lowering the cost of living.
We concluded that those of us who are coping well with the cost-of-living crisis should think very deeply and care for low-income earners and those under mortgage and rent stress by forcing state and federal governments to recognise the damage their strategies cause.
We need to recognise first that Reserve Bank interest rate increases are a very blunt instrument in dealing with government boosted inflation. It concentrates the burden on a small group.
Those forced into crisis are not responsible for that crisis and there is little they can do to solve the crisis except continuing to tighten their belts. Some move below the poverty line. This has little effect on inflation and the imbalance of supply and demand. They are not lifting prices.
Secondly, governments, bank regulators and banks have all played a big part in boosting housing costs, making it impossible for younger people on ordinary incomes to buy a dwelling.
To reverse this tragedy first requires understanding of its seriousness and the multitude of factors that have brought it about.
John Dahlsen knows most aspects of the building industry and sees that at the core of the rent and the home purchase crisis is the fact that state and local governments add about 40 per cent to the cost of each dwelling in most Australian capital cities — particularly Sydney and Melbourne.
Taxes like stamp duty are a big contributor but so are the massive local and state government bureaucracies who devote their lives to delaying permits and approvals and adding costly building regulations with very little regard to costs.
It is particularly bad in fire-ravaged communities that are prevented from recovery by bureaucracies.
The rent crisis in many states, and particularly Victoria and Queensland, has been made worse by state politicians who introduced rules to protect tenants with no regard to the practicalities of family landlords implementing them. Stunningly, state governments put extra taxes on investment property.
Families dominate rental accommodation supply and many naturally sold their rental properties.
Accordingly, politicians’ actions slashed the supply at a time when demand was boosted by migration and the fact young people were being prevented from buying houses by interest rates and bank rules.
The popular media is dominated by stories about those being impacted by the crisis. But the media conveniently ignores the elected culprits who created it.
APRA, the Federal Government agency that regulates banks, “risk weights” housing loans far more favourably than business loans so the banks gain better returns on equity by funding housing, fuelling house inflation to the detriment of business and productivity.
As a result, to different degrees, the four big trading banks have become virtual building societies pushing funds into housing at the expense of the business.
Early in 2021, Reserve Bank governor Philip Lowe conveyed to home borrowers that low interest rates were likely to remain until 2024 and what followed was an unprecedented mortgage lending boom dominated by either flexible rates or short term fixed rates.
That mortgage lending boom is now at the core of mortgage stress in 2023. No one was prepared for the 13 rate rises.
The inflation which gathered momentum soon after the Reserve Bank interest rate forecast was in part caused by overseas cost rises, But it was also fanned by massive state and federal government spending, particularly on infrastructure.
The 70 per cent who were not severely impacted by the rate increases went through a period of restraint but in the main kept spending. Their spending ability created an environment where enterprises, particularly larger corporations, could raise prices.
The economic activity created by the big spending governments and the 70 per cent of the population created a large number of work opportunities via casual employment or contracts.
A large number of those under mortgage and rent stress added these work opportunities to their base income which enabled them to meet bank mortgage payments, lessening the impact of the mortgage suffering of banks.
But parts of the 784-page new industrial relations bill include nasty restrictions on contract work and casual employment. If the legislation passes in its present form it will compound the suffering of those under mortgage and rent stress but unions will join others in the community who are benefiting from the current environment.
The federal government’s latest reduction in infrastructure spending is an important first step but there are still large numbers of projects partly completed. The real infrastructure need is additional dwellings including build-for-rent complexes.
Meanwhile the current unrestrained infrastructure spending is sending the price of steel and concrete through the roof, further increasing the cost of home building and boosting inflation, therefore upping the pressure on the Reserve Bank to raise rates.
Most of the home building taking place currently represents people in the 70 per cent prosperity bracket upgrading their residential accommodation. Rich migrants may change the game but currently demand for new dwellings at the lower end of the scale is very low.
Normally interest rate hikes create unemployment but this time the crisis is created by employed workers not being able to cover their living costs because their real income has slumped. As more workers demand pay rises to mitigate against the cost of living these pay rises must be passed on in prices because business productivity is lagging, partly driven by banks diverting loan capital to housing; low investment created by shareholders’ desire for franked dividends, and the working from home revolution, particularly in the public service and some service sectors.
If the industrial relations bill passes and forces out of business some 50,000 independent truck drivers, strips the powers of the ACCC and fosters a union-company cartel then transport costs will explode, further underwriting inflation.
Plus, Australia has not embraced the energy strategies being used in the rest of the world which supplements solar and wind with nuclear and cleverly uses gas and coal to smooth the changeover.
Tomorrow: The solutions.
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