Episode 152 | What does top economist say on the current economic environment | Saul Eslake

Saul Eslake gives his 2 cents on the current state and the future of the Australian economy
We are honoured to have renowned economist Saul Eslake on the podcast to discuss all things Australian economy. Saul Eslake has worked in Australian financial markets for over 25 years, including several chief economist roles in Mcintosh, ANZ and Bank of America Merrill Lynch, and has worked in an advisory capacity with the Federal government. Saul comes in with a wealth of knowledge and insight into the current state of affairs including how the various states have performed from one another, how net migration will change in the future and Australia’s need to shift from exporting raw materials to service based industries.

Here’s what we covered:

• What are some similarities between the economy post Spanish flu and Covid?

• What's most likely going to happen nationally and globally?

• Are we on the cusp of structural change?

• How are capital city housing prices going?

• How Sydney survived through Covid comparison to Melbourne?

• Why have fixed rates historically been higher than variable rates?

• How is the RBA trying to reduce the AUD?

• What is the state of the current banking system

• How will the US election impact the Australian economy?

• What ways can Australia grow its economy beyond the exporting of raw materials?

RELEVANT EPISODES:
Episode 143 | Martin North
Episode 132 | Mark McCrindle
Episode 117 | Shane Oliver

GUEST LINKS:
www.bettercallsaul.com.au
Saul Eslake - LinkedIn,
Saul Eslake - Facebook
Saul Eslake - Twitter
Saul Eslake - Youtube

HOST LINKS:
Looking for a Sydney Buyers Agent? www.gooddeeds.com.au
Work with Veronica: https://linktr.ee/veronicamorgan

Looking for a Mortgage Broker? www.wealthful.com.au
Work with Chris: hello@wealthful.com.au

Send in your questions to: questions@theelephantintheroom.com.au

EPISODE TRANSCRIPT: 
Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…
This episode was recorded in November, 2020.

Veronica Morgan: How can we invest with confidence when the sands are shifting COVID is riding second and third ways. Are we in a recession or aren't we America in terminal yet the share market or much of our property market has performed surprisingly well, amidst all the doom and gloom turns out governments can print money after all, but how long can the merry-go-round keep going around?

Veronica Morgan: Welcome to the elephant in the room. This is the podcast where we love to talk about the big things in property that never usually get talked about. I'm Veronica Morgan, real estate agent buyer's agent co-host of Foxtel's location, location, location, Australia, and author of auction ready.

Chris Bates: And I'm Chris Bates mortgage broker. Before we get started, I need to let you know that nothing we say on here can be taken as personal advice. We always recommend you engage in the services of a professional.

Veronica Morgan: Don't forget that you can access the transcript for this episode on the website, as well as download our free, full or report, which experts can you trust to get it right? The elephant in the room.com did I, you

Veronica Morgan: Today, are we going to tap into the brain of one of Australia's most experienced economists to get his take on quantitative easing the U S election, the coronavirus recession and how our banking system is coping under the strain amongst other things we'll talk about. Now we're honored to have Saul Eslake join us among other things. So is a former chief economist of Akins ed bank and of Merrill Lynch Australia, and has been a member of the international conference of commercial bank economists for the last 17 years. And since 2015, he's run his own independent economics consulting service has called Corrina economic advisory is a member of expert pedals, advising the ATO and the parliamentary budget office. And as a part-time gig at the university of Tasmania to top it all off. Thank you so much for joining us. So we're really looking forward to hearing your insights in these troubled times.

Saul Eslake: Thank you for having me, Veronica and Chris. It's a pleasure to be here looking forward to the conversation.

Chris Bates: Absolutely. So I'll say your name around many times, and it's a pleasure to have you on, I guess I'm. I used to always say odd unprecedented, unprecedented times. We haven't thought about this, but I guess everything's unprecedented, but I guess it's always like, how do you view where we are at Attica, I guess at a global level right now?

Saul Eslake: Well, it's interesting when you say unprecedented, one of the things I did was to go back to about a hundred years ago and remind myself what had happened during the Spanish flu outbreak came shortly after and see if there was anything that we could learn about what might happen From the history. And sadly, the economic data was so poor. Then there wasn't a great deal that you could learn. And I guess it's also the case that the world is just such a different place from what it was then in particular, the ease with which people up until LaVar is hit and governments closed international borders. The ease with which people could move from country to country. My grandfather, for example, who was it globally and on the Western front. And for some reason stayed in London until 1919 or thereabouts after the war ended, he probably brought it back with him. As many other Australian soldiers would have done coming back from the war, but it took them three months or more to get back from London to, to Australia. And of course there weren't hundreds of tens of thousands of Australians overseas in other countries you're trapped and couldn't get back.

Saul Eslake: So, you know, I certainly was aware that States closed their borders to each other during the Spanish outbreak flu outbreak, for example, but that was much easier to do because there were no planes. There wasn't a lot of shipping except between Tasmania and the mainland. And all you really had to do is close down the railways and they did. And again, there were examples of as they were even more so in the United States, different States and different cities, making different choices about how extensive legal lock down and how quickly to open up. And that had consequences for the experience or not second or third waves. And some of those episodes of being repeated. But apart from that, there's certainly nothing in my lifetime or my career as an economist, that gives you much additional insight into what might happen. And just as the medical profession have been learning about the virus and adapting how they treat people, who've caught it as time has gone along governments and economic policy makers and economic analysts and commentators like myself have sort of learned as we've gone along how this virus and the way governments respond to it can affect economic activity.

Saul Eslake: And we're learning about what sort of economic policy responses, whether it's from governments or central banks that are most effective in not only minimizing the damage caused by the virus and restrictions, but also now, particularly what might be most effective in underpinning a sustainable economic recovery.

Chris Bates: Yeah, done a lot of research around this space. And I think you've got like a weekly sort of newsletter that keeps everyone up to date on what's happening. And I guess your view has probably changed over time, but I guess at the start of November where we are now, what's your sort of view on what's most likely to happen? How are we going to get a vaccine? Are we, you know, are we going to just get continual, are we just going to give up on lockdowns? What are you do you think is going to play out I guess, here and globally?

Saul Eslake: Well, I think the first thing to get clear is that there will be no sustainable economic recovery until we have a vaccine or until we have found some other way to keep the virus at Bay. If we haven't got a vaccine and until we have a vaccine and I've got no reason to challenge the assumption that the government made in framing the federal budget, that a vaccine will become. Widely available in Australia towards the end of next year. I mean, that's an assumption. They had to make an assumption of that nature because if you don't, then you can't really make any other sense of all forecasts about economic activity or unemployment. You can't make a judgment about winnings. National borders will open. So yeah, I don't have any greater insight into that than the government, but I think the assumption the government's made reasonable and I'm certainly prepared to use it in the way I think about the economy as well. And if it turns out when we get to this time next year and a vaccine isn't available, then we, you know, we'll have to adjust their forecast and expectations accordingly. But I think we, we really are learning and Europe's going to learn again, the hard way that until you've got on top of this virus and can keep it a day, you're not going to have a sustainable economic recovery. So that's the first point. The second point I think experience is teaching us is that there isn't really a serious medium trade off between the economy and health that some politicians have said, well, you know, we, the virus is doing and restrictions are doing so much damage to the economy. So we need to open up, even though we haven't gone on top of the virus, that's the approach they took in the United States. That's the approach that they took, particularly in the United Kingdom.

Saul Eslake: And it hasn't worked. And in the same way, say to take Sweden as an example, which never went down the route of imposing restrictions that most other countries, and they haven't had a better economics experience and countries that impose tougher restrictions. And the reason is that people are scared of the virus, particularly older people for whom it's much more deadly. And whether governments tell them not to do things or not, they will refrain from doing things that they think make it more likely that they will catch the virus and potentially die of it. So while the virus is out there, even when governments have removed some of the most stringent restrictions, people are going to be wary of, as we can see getting on public transport, they're going to be wary of catching claims. They're going to worry that if they do catch a claim, whether it's to another state or to another country, that they could get trapped in the event, that there's an outbreak, either some other country that they happened to be visiting or back here in Australia, and that they won't be able to get home.

Saul Eslake: People are just going to be much more cautious about those sorts of things. And I think people are also going to be cautious for awhile. If, for example, they're in a job that they know is being supported by job keeper. And they know that that's going to expire on the 31st of March, that's going to make them more cautious about spending the tax cuts that the government has given them. For example, and similarly people we lose about 11% of people with mortgages. Who've taken up the option of deferring payments on those mortgages. They know that's going to come to an end at some point. And I think people in that position who are, who do have more money in their pockets as a result of the tax cuts that were in the budget, they're going to think maybe I should be putting that into my offset account or prepaying a bit of debt rather than going out and spending it, which is of course, what the government hopes that they will do.

Veronica Morgan: It's it, I find this all really fascinating because we're sort of trying to apply, like generally speaking, we're all trying to apply our knowledge of what's happened in the past and what we want to happen. And, you know, like you say that, you know, we've got evidence that there's no mediums or trade off between economy and health and it's slightly illusion of control, right? So, I mean, that's a behavioral bias. You know, we love behavioral biases on the elephant in the room here. And even if we get a vaccination for this or vaccine for this one, you know, epidemiologists are saying that there'll be another and another and another, it's just the nature of it. So we sort of need to grapple with a new reality rather than perhaps in economic recovery. Aren't we, aren't, we sort of on the cusp of the need for structural change.

Saul Eslake: Hey, Veronica. I think you're right about that. You know, when people talk about returning to normal I think some people get there, some people don't normally is not going to be in the future of what normal was in the past. You know, there are some things that we simply will not do with the same frequency or enthusiasm that we used to do, and there are going to be other consequences from that. And this is, I mean, to be fair to golfers, they have a real dilemma here between doing things that help support existing jobs and businesses, which has been the focus of measures. Like job has just been save jobs and to keep businesses afloat. So that quote, when this is over and people will have jobs to go back to because their employers will still be there. There's, you know, and that's understandable, particularly in the early phase of this crisis, when nobody really knew how long it was going to last, the emphasis was just on preserving things until such date as we could open up.

Saul Eslake: But as it's gone on, as we've realized, precisely as you say that, you know, it's still going to be with us in some form or another people are starting to recognize that the post COVID world is going to be different in various ways. And that means that at some point we've got to step away from measures that are primarily to save existing jobs and businesses towards measures that are going to underwrite the post COVID world, whatever it is. And we don't have to be completely passive about that. We can. And I think governments around the world are trying to make active choices that are designed to shape that world in some way. So sometimes the good choices, sometimes there may be not so good choices. For example, I'm really skeptical of the idea that we can in the post COVID world, go back to being some kind of manufacturing superpower as if we ever were.

Saul Eslake: There are good reasons why Australia's manufacturing sector is significantly smaller than the manufacturing sectors and most other advanced economies. And a big part of the reason is that Australia's mining sector is five times as big a share of our economy as it is of most other economies. And our agricultural sector is at least twice the size of the aggregate sectors of most other economies with the exception of New Zealand. And the simple fact that politicians really struggled get is that the sum of the different sectors shares of GDP company, more than a hundred percent. So if you're going to have a bigger mining sector than most other countries, and it would be crazy if we didn't given the factor endowment that Australia has, and we're going to have a bigger agricultural sector than most other countries. And again, it will be crazy if we didn't because agriculture is something that we good at, then something else has to be smaller as a percentage of GDP because the council under more than a hundred.

Saul Eslake: And again, given that the richer a country is, and its people are the more of their incomes. They want to spend on services rather than goods. And given that most services can't be traded, you know, you can't import haircuts and things like that. Most of the economy is going to be in the production of services in some sort of manufacturing as a sector that can be swollen. And Australia has only ever had a manufacturing sector. That's been close to the same size as a share of GDP is other Western countries. During that period, when we used to force Australians to pay inflated prices for what were usually bad goods simply so that we can say that they were made in Australia even often though, the companies that made them were foreign owned and the profits went back in the case of the car industry to Detroit or Nagoya.

Saul Eslake: But somehow we used to think that because we had people screwing that's on the wheels holdings or sewing buttons on shirts, that we were a sort of modern country with a manufacturing sector. And the idea that we can subsidize our way back to that, I think he was misleading. But on the other hand, I think for example, the idea that more people can work from home that maybe it's not such a good idea for, you know, two thirds of the population to spend an hour at the top and bottom of each day, commuting from the outer suburbs to the inner cities. And that maybe there's a serious opportunity here for regional cities and become places where people want to live and can work from. And, you know, if they do have to go into the CBD of Sydney or Melbourne or Brisbane for an afternoon or a day a week, then they can do that, but they can do it more comfortably than the morning or evening commute. And these sorts of that intern from temple has significant implications for the viability of all the little businesses in the same pillars of our cities. So coffee and clean shoes, and do haircuts and do dry cleaning for the people who work in those city offices. It has implications for whether or not there's still going to be the same demand for high rise apartments in a, in a sitting areas, which I've heard. Some people describe as vertical cruise ships. There were some quite profound implications for the property market but also for the whole structure and functioning of our economy.

Chris Bates: Yeah. I guess Melbourne's had it the worst. Right. So, Victoria I mean, how do you think that what they've gone through versus say Sydney, or versus say Perth or down where you are and Tasmania, how do you feel like that where you lived through this period is going to affect you more than others, do you believe, or,

Saul Eslake: Well, I suspect it may I mean, it probably won't in 10 years time, perhaps, but I think in the now, and then there will be some lasting implications of the different experiences that different States have had. And the one that stands out as being different is obviously Victoria. Now there's a tendency on the part of most Australians, I think, including those who live in other States to attribute Victoria's awful second wave to bad luck. And to think that, you know, there are, but for the grace of God, go, we enhance, haven't been too critical of Victoria. There's been a bit of that at the federal level, of course, and that's been partisan political, but, you know, as someone who lived in Melbourne for more than half my life during my career in the, in the financial sector, I like Melbourne. I care about what happens there.

Saul Eslake: But I, that experience has also made me look very carefully at what has happened in Victoria. And I have absolutely no doubt that Victoria's second wave was not a matter of bet, but was rather the result of a combination of incompetence on the part of the Victorian government and some of its administrative agencies and deliberate choices, which we Toria made, which were very different from the choices made by other States and in particular new South Wales. And what I mean by that is that, and again, I'm going to focus particularly on the comparisons between Victoria and new South Wales since during the first Victoria and new South Wales faced a very similar risk profile, given that Melbourne with principle points of entry into Australia, for returning Australians and visiting foreigners at a time when the main way the got spread was by people, bringing it with them from other parts of the world to Australia that would otherwise have been pretty isolated.

Saul Eslake: Now what's interesting is that consistent with the way Victorian governments have always done things. They took a very heavy handed policing approach to enforcing lockdown regulations. You know, I produced some research showing that in the five years to 2018, 19, that is before this crisis broke Victoria collected an average of $120 per head per annum from its citizens by way of findings, mostly for traffic offenses. And the average for the rest of the country was about $80 per head per annum and Victoria and new South Wales notes that in new South Wales, they tell you where the speed cameras are and that if you get booked by one, you really should be booked for driving without due care and attention as well. Because at least

Saul Eslake: Get caught for speeding or something else on a long weekend or a public holiday in new South Wales, you lose double points as well, Wales and Queensland, they want drivers to slow down and slow down. They want them off the road in Victoria, by contrast, where they don't call them speed cameras. They call them road safety cameras. It's almost Orwellian. There are a hell of a lot more of them. They don't take what they are and the fines are much bigger. The tolerance threshold is only three K's over the limit rather than seven 10 as it is in most other States. They don't do double points for breaches on long weekends because they want your money and they get, and they took the same approach to policing the first wave of lockdowns. So during that first wave between late March and the end of may Victoria collected $2.2 million more in fines than every other state put together an average of $90 in fines for 100,000 people in new South Wales by contrast collected about $35

Saul Eslake: Just loves to use the cops as a revenue raising force. And so the critical decision here was that Victoria, let security guards monitor hotel quarantine. Now, as someone who's long been a critic of the security theater that we've had to endure since nine 11, you know, stuff that is, it doesn't really make any safer when you get there. But each purpose really is to make you think that the risk of terrorism is much greater than it really is. So that when ACO comes along wanting the power to tap phones without warrants or raid journals homes without warrants, people think, well, I guess they've only got to do that because, Hey, there's a terrorist on every corner threatening to kill us.

Saul Eslake: Yeah. The reality is being that more people are more Australians are being killed by snakes and crocodiles and dogs or that more, you know, more people have drowned in their bus stops and have been killed by carers. The government doesn't want us to know that they want to think it's really serious. And you know, so in Victoria, they let security guards do this. And of course they were hopeless at it, which is what you would expect. If you assign this task and people will get a cake confiscating, shaving cream and nail Clippers and humiliating replacements. The reason that the cops refused to do it because they wanted to be out there finding people. I don't know why the Victorian government didn't take up the author of defense personnel to oversight hotel. Quarantine is new South Wales, but the results were obviously different. And then hopefully had these heavy handed policing regime, which has designed to collect revenue rather than to keep people safe.

Saul Eslake: When the first walked out, Victorians displayed what the premier of Victoria. So charmingly displayed complacency in neglecting social business. And I reckon that was because of the sense of relief that Victorians felt when they got out from under what had been the most policing regime in the country. And then of course, once the second wave started, Victoria had no alternative, but to lock down and you only have to look at what's happened in places like the us or Europe, which refused to lock what happens if you don't do that. So they did the right thing in locking debt, but again, the heavy handed policing associated with it, you know, the $10,000 fines, the drones in the air checking that people weren't having grand final time. Someone wants to find a Puritan and someone who's troubled by the thought that someone somewhere might be happy. And that was the approach that, that Victoria took to policing the police commission.

Saul Eslake: The was boasting about the fines they were going to collect, and that the police would not exercise discretion in the case of first offenses, minor inadvertent or trivial breaches as enforcement officers in every other state, the Victorian police think there's something shameful about exercising discretion, which probably explains why Victorian police should walk every year than policing that States and territories do. So, as I say, I think that the bad experience Victoria was not bad luck. It was a result of incompetence and bad choices by the Victorian government, but there will be lasting consequences. Victoria has done itself lasting damage as a destination of choice for overseas migrants and for people moving through other steps. So if you look at the figures, Victoria, which has a quarter of Australia's population had been attracting 73% of the overseas migrants to Australia in the five years before the pandemic.

Saul Eslake: And Victoria had also been one of only three States that were attracting on net migrants from other States, the other two Tasmania interests in the last four years. And we might come back to that, but now, and you know, the federal treasury put up the back of budget paper, number three in October's federal budget, where they talk about federal state financial relations, Victoria, the federal treasury forecast that Victoria will get virtually no interstate migrants for the next three or four years because people aren't going to want to go there. And more Victorians are going to want to think about moving out to somewhere else and for a state, which has been disproportionately depended on population growth as a driver of economic growth and a state rapid population growth fueled by interstate and overseas migration has been a major contributor to Melbourne prices becoming almost as expensive as Sydney presence.

Saul Eslake: Despite the fact that Melbourne is topographically a very different place from Sydney. That's gone. And so, you know, it's not surprising that Melbourne prices have fallen since April by close to 5%. Whereas in Sydney, they're down about two and then almost every other capital except for us and in regional areas, there are quite a lot, you know, I think that trend is going to continue. The property market, I think is to some extent artificial because people who might otherwise have been in difficultly haven't needed to service their mortgages. And because people who might've otherwise had been unemployed have Cathy Jones because of John keeper, neither of those things are going to last forever. We are at some point going to see some forced sales, hopefully not a lot, but some force sales. We're not going to have overseas migrants for another two years being at options or wanting to build new houses.

Saul Eslake: We're probably not going to have as much interstate migration. It's a great opportunity to get into the market. We're seeing evidence that the sort of schemes that the federal and state governments have been putting forward for first-time buyers this time are actually working, which they normally don't. But I think particularly in Victoria, where there aren't going to be the interstate and overseas migrants that across the system, as a whole have been crucial to supporting Melbourne prices, they're not going to be there. So I suspect the trajectory for the Melbourne property market is going to be rather different from that of most of Australia's other capitals you know, once the market completely opens up and, you know, hopefully stays that way until we get a vaccine.

Chris Bates: He said they were interested about the four sales and the sort of payment holidays. It's going to be interesting the next two to three months, how many actually roll over again? You know, there's, cause they've got six months in there potentially if you get another four months. And so we're already starting to them drop off a cliff in terms of the actual amount and number of people getting payment holidays. But CBA just announced this week that they're also trying to get an exception, I guess, where they can basically let more, what's the word moratorium that basically anyone who has been paying their loan prior to COVID and had no problems with paying their loan give them extra time basically. And if that happens at all, the banks can basically give everyone that if you're paying your mortgage well before COVID, you can have another year or you can have a two years, it's going to be interesting because those payment holidays are basically a pointless the bank and basically give you an indefinite payment holiday.

Chris Bates: And that will basically really fragment the market people who were having problems with their mortgage before. Well, they're going to have to sell. But if you were fine before, you could just keep on basically accruing debt until you get back into the workforce. And so that's a really interesting thing to watch over the coming months, what actually happens there. I mean, on a different tax Seoul, I mean the RBA it's good timing for this podcast has made some pretty crazy calls this week. What's your thoughts on what they've done and you know, if they've done, should they do more should that, unless what's your

Saul Eslake: Well, just before we get to the reserve, anxious to come back on a couple of the points you made there about the mortgage repayment holidays. Yes. Obviously the banks don't want to force people into a mortgagee sales, unless it's absolutely unavoidable because they're going to take losses as well as, as their customers in those fences usually, but there are limits to what the banks can do. I mean, in the first place, of course, you know that they are subject to regulatory or requirements and accounting standards to make provision, which reduces their profits and their capacity to pay dividends for loans that aren't being serviced beyond a point. And I mean, the regulators can exercise a bit of forbearance in that regard, but you know, we've already seen the banks that have reported thus far making increased provisions for potential bad debt. And you know, the people who lend money to banks, to wholesale funders, they pay attention to these sorts of things.

Saul Eslake: The rating agencies pay attention to these sorts of things. There are limits to the extent to which banks can forego ongoing interest income in these circumstances without damaging their own credit ratings. The other thing is, of course, is that the banks are foregoing this income forever. The interest that isn't being paid is being added to the outstanding principal. People exercising these options. And there will come a time if these go on indefinitely, where they're going to breach loan coffins and exceed the debt to equity ratios that the banks regard as providing them with the margin of safety they require in the event of default situation. And so at some point, these do have to come to an end. And as I say, depending on what the rest of the economy is doing, and you know, what first home buyers in particular are doing, or whether they can extend the repayment holidays for long enough until overseas migrants are allowed back into the country and become an important source of demand for real estate.

Saul Eslake: Again, you know, I don't know, but there is a limit to that process. So to get, to come back to the question about the reserve bank, the reserve banks obviously been thinking about this for a while. And they had flagged for, you know, four or five weeks that they were not so much thinking about whether they could do more because they'd come to that conclusion already. But what exactly more that they could do. And, you know, they done what the low the governor said, maybe afterwards, as much as they can possibly do on the interest rate front in reducing the official cash rate to 10 basis points. And probably knowing that just as while the cash rate was officially in 25, it was in practice 13, the cash rate will probably settle it, maybe 0.05% or something like that. And not all of that's going to be passed on the variable loan or package customers.

Saul Eslake: Cause the banks also have to think about their deposit customers as well. And you know, the more deposits they don't pay any interest on, the more likely it may be that people don't put their money in banks and banks don't have money to lend and you don't want to be in that position. So yeah, the governor of the reserve bank said, no, we don't want to go negative. We don't want negative interest rates. And unless the federal reserve adopts negative interest rates, they don't want to do either. Then the RBA isn't going to copy the European central bank or the bank of Japan or possibly the reserve bank of New Zealand that go down that path, it'll do damage to the banking system. The reserve bank in New Zealand doesn't care if negative interest rates do damage the new Zealand's banking system because new Zealand's banking system is a subsidiary of the Australian banking system.

Saul Eslake: You know, it doesn't cost them anything. Whereas the Australian reserve bank does have to think about, you know, what a period of negative interest rates would mean for the profitability of the Australian banking system and its capacity to lend. And there's no evidence from the places that have had negative interest rates like Japan and continental Europe, that it does any good. And the best piece of evidence for that is that Japan and Europe had negative interest rates for some years before the pandemic hit. And yet, despite the fact that both of these countries like Australia and the U S found themselves confronting the worst recession that they'd had in 80 years did either of them do the obvious thing if negative interest rates worked, which was to make them more negative. And the answer is no, they didn't. I think that's pretty clear from the experience of countries that have actually had negative rates, that negative rights don't really any do any good.

Saul Eslake: So there's not much more, there's nothing more that the reserve bank can do on the interest front, but as they have been at pains to point out that doesn't mean to say there's nothing at all, they can do two very important things. And I'm talking particularly here from the perspective of the economy that they did. One is that they gave a guarantee that they're not going to raise interest rates for at least three years. Now that's important for property buyers, because one of the things that buyers think about when they're taking out a mortgage or deciding how big a mortgage they can afford to take out is they think, well, okay, the interest rates are pretty good now, but how am I going to cope when rates go up at some point? Absolutely. And the banks, of course, yeah. Now particularly post Royal commission, I'm pretty diligent in asking that question of customers themselves.

Saul Eslake: They might say, well, yeah, the mortgage rates three and a half, but can you afford to service a mortgage of this size? If mortgage rates go up to five in three years time and they then take the answer to that question into account and deciding how much they're going to lend, or the customer takes into account deciding how much they want to borrow it. And now the reserve bank saying, look, you've got at least three years before rates are going to go up. And in that time, of course, people will take out a mortgage and they can pay down more than they have to. Or if they happen to come in to, you know, they make a killing on the stock back and then they can pay that down and be much more confident about the first three or more years of that mortgage. And I think that will be a positive factor for them.

Saul Eslake: And in fact, the reserve, bank's really saying that unlike the past practice, which has been to start raising interest rates when they think inflation is about to go up rather than waiting until it actually has, well, now they're saying they're going to wait until they see the whites of inflation's eyes before they start firing before raising interest rates. And instead they're saying, you know, what we really focused on now is not inflation, but unemployment. We want to get unemployment down to levels that are going to generate faster wages growth. And if the us experiences in God, that means looking for an unemployment rate with a three handle, not five. So it could be a long time before rates start to go up. And so that's one key message that the reserve bank is another thing that the reserve banks doing this, they're going to buy a hundred billion dollars worth of government bonds over the next six months.

Saul Eslake: And part of the aim of doing that is to drive longer term rates down, because if they're out there buying bonds, they're going to be pushing the price of those bonds up, which means the yields on them are going to come down. Now, one of the consequences of that is that it should put down with pressure on longer term interest rates, that price of longer term bond rates. So we're talking here about five and 10 year mortgages, for example, and they haven't historically been very popular in Australia. Unlike the United States, we mostly will borrow for most people. The mortgage rate that matters is the 30 year fixed rate mortgage. That's not out of the Australian borrowing ethos. And one of the reasons of course is historically fixed rates have been higher than variable rates. And also in Australia, unlike the United States, fixed rates means what the words is it's fixed.

Saul Eslake: And if subsequently fixed rates go down, then getting out of your fixed rate mortgage in order to take advantage of a lower right to refinance at a lower rate is very expensive. You know, the break points that the banks charge you are very expensive. Unlike the us where that's a comparatively simple transaction to refinance at lower rates. But while I don't think that's going to change, banks are still going to charge you. If you want to get out of a fixed rate contract, it may be that people have opportunities to borrow for five or 10 years fixed at unprecedentedly low rates. And that could be another positive for the property market as well in the face of what are otherwise headwinds in the absence of a large number of overseas migrants.

Chris Bates: Yeah, so that happened just today. So we you know, CBA was the first, but all the other banks kind of critically followed, which they all seem to be doing. This year just basically matching each other rather than having different prices. So you can get four years now at basically 1.9, nine or 1.98, which is, is that forward guidance? That's what the customer or the borrower was thinking when they're taking out the loan today, at least for the next four years, I'm not worried about rates going up. But you're right, that there's no reason why that can't be for five years or it can't be for 10 years. And you know, we, you know, more than five years doesn't really exist out there. No bank offers great rates more than five years, but who's to say that they won't, you know, and keeping customers for 10 years could be one of the things that does pop out of this

Saul Eslake: That's right. And although this isn't as relevant to the property market, the other thing there was a bank's trying to achieve by this very quantitative eating as they call it by buying a hundred billion of bonds, is that they want to bring the exchange rate down as well, the Australian dollar down. And one of the reasons why the Australian dollar has been above 70 cents for most of the past three months, having initially crashed the 56 during the more than it did during the global financial crisis. But it's gone back to over 70, partly because the iron ore price has been so strong, but also because although our long-term rates have been at record lows for us, they've nonetheless been materially higher than bond deals in other countries. So in Germany and France and Japan, a 10 year bond yield rates are slightly negative. In the U S the 10 year bond rate has been about 0.6 of a percent here. It's been poured eight to one, that's been attractive to international bond investors. It's why the federal government has had no trouble financially, each humongous budget deficit, that every dollar that the Australian government has wanted to borrow by selling bolts in the last seven months.

Saul Eslake: Yeah, because Australian bond yields are so attractive to fixed income managers from around the world. And that demand from foreign bond fund managers is one of the main reasons that push the dollar up. So the reserve bank hopes that by pushing bond heels down at the long end, there won't be as much demand from foreigners to buy Australian government bonds. And therefore there'll be less upward pressure on the currency. And at the margin at the margin, a lower exchange rate is better and better for companies that keep compete with imports, and that might also help them to achieve their inflation and employment goals, which would be a good thing.

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Veronica Morgan: One of the things that you talked about earlier was that, you know, if we thought that our way out of COVID was to become a manufacturing powerhouse, that's not really our strength, our strong suit in this country. But I guess what we are seeing in this conversation, you just talking about now is reminding us how important the globe is and what happens in the globe and how our place in it. Now we're recording this two days after the RBA drop, those did drop the cash rate. And it also, you know, the day after the, the U S election, we still don't quite know what's happening, but at this point it looks like Biden might come in ahead. What do you think the outcome of this election will be for the Australian economy? Well, I think if Biden wins the election, which I agree with you, that's what seems the most likely outcome at the moment and provided that Trump doesn't succeed in having the election decided not by the American people, or at least not in America, but by the nine people on the Supreme court, three of whom he's appointed he's gerrymandered.

Saul Eslake: So that he's got a 63 majority. And the consequences of that for the American democracy might be just horrendous. I'm not sure that the American people would accept another Bush V Gore outcome as readily as they did, then not at least because Gore accepted it in 2000. You know, he said to his people look each over, don't contest it. I'm not sure. I don't know whether Joe Biden would say that particularly given the way that the Supreme court in the U S has been staffed by the Republicans since then or whether or not irrespective of what Biden says, whether, you know, people who voted for Biden would accept that. But it also seems as though at the moment, the Democrats are not guaranteed of getting control of the Senate. So it may be that while Biden's the president, he can't get through the legislative measures that were part of these platforms, or, you know, it could be that Kamala Harris as the vice-president.

Saul Eslake: And just about the only thing the vice-president does of any significance is to preside over the Senate. And if there's a deadlock 50 50, then she gets a casting vote. She gets to decide what happens. So she might get an awful lot of time in the Senate rather than in Blair house or the vice-president lives, or, you know, sitting next to Joe Biden, helping him run the country, which is what I think she would prefer to do anyway. So I think under those circumstances, if, if Biden's the president, but he doesn't have full capacity to get his legislative program through Congress, then there's going to be a degree of frustration. But there were still things that Biden as president can do using his executive authority. And ironically, of course, many of the things that Trump has done has been not legislation, but through exercising executive authority.

Saul Eslake: It's just that the difference would be that this would be an exercise and in a way that makes the U S and the world a better place rather than a worst place as Trump and stuff. So, you know, we have, for example, more cooperation back climate change, which will, you know, make some interesting dynamics for the Morrison government. That will be something of an outlier. And something that we have to think about email is taking us back into the Paris Accords on climate change. And the democratic platform also commits the U S to imposing what sometimes get called carbon tariffs on imports from countries that aren't doing anything to reduce their emissions, or haven't signed up to zero emissions targets. And the EU has been wanting to do that for a long time, but couldn't do it unless the U S does Japan and Korea have posted in the past week, committed themselves to that.

Saul Eslake: And so this makes Australia even more of an outlier on climate change than it has been for the last 10 years. So there's an interesting dynamic for us there, but it's also, I think that you know, one of the things Trump has tried to do out of his misguided campaign to make America great, again, has been to novel or undermine all of the important international institutions that have helped to uphold the post-war order. That is the post-World war two order that has been so crucial to the prosperity of so many other countries, especially in the last 30 years. And Trump has tried to trash that for example, he's prayed organization, which is meant to be resolving trade dispute by refusing to allow appointments, to be made to the judicial tribunals. The world trade organization is that countries who are aggrieved by the discriminatory actions of other countries can take and get some enforcement.

Saul Eslake: And this is important to Australia because we're now being targeted even more strongly by China with discriminant trade nations. And there's not much we can do about it because we can't appeal to the WTO because the WTO hasn't gotten any people who can hear our appeals because the Trump administration is novels because they don't like the WTO that is there to uphold the rules of international trade. And Trump wanted to break the rules of international trade out of his perverted campaign to so-called make America great again. And, you know, they missed the tariff and all that sort of stuff. So Biden understands that he's probably not going to reduce America's tariffs on China, but he's not going to add to them. And he's probably going to put the United States back into a leadership role in the sort of international institutions that American more than any other country helped to establish in the years after the second world war and which have been so crucial to middling powers like Australia, who don't have the money to impose their own will on other countries.

Saul Eslake: So I think that's the thing that's important to us. The other thing that's obviously terribly important to us is our economic relationship with China, which is a very unusual one by Western countries, statements, you know, most, most Western or advanced countries are export as a matter of fact, goods and importers of commodities. And that means that for them, China's emerging says the biggest exporter of manufactured goods and the biggest importer of commodities in the world has been a bad thing because China has competed away their exports. And it's also pushed up the price of the things that they like China imports. And we're the opposite of that. You know, we are not, never have been a big exporter of manufactured goods. So China conquering those markets wiped out a few Australian companies that probably should never have been in there in the first place, but it hasn't heard our exports all that much.

Saul Eslake: And it's been an absolute Bonanza for the prices of the things that we sell, like iron ore and coal and gas, and even so, you know, beef and wool prices are higher than they otherwise would have been because buying a lot of it. So we become quite rich on the back of what China's been doing. But the downside is now that we're more dependent on China as an export market than any other country in the Western and more dependent than most other developing countries as well, dependent on China as an export market than we have been on any single country since the 1950s, when most of our stuff went to the UK, which of course we used to think I was the mother country and we never really had any budget political disputes, but now we are very dependent, not only as an export market, but as a source of input on a country that sees the world very differently from us and has now decided to make an example of us you know, to demonstrate to other countries, particularly in the region of what might happen to them.

Saul Eslake: For example, I protest against the imposition of draconian security rules on Hong Kong, or if they have teamed with the Dalai Lama or if they won't get their Taiwanese counterparts, or if they kind of ask your, is what China doing in shin, Jang, walking up millions of people in so-called re-education camps, is that really kind of good practice for wants to be middle-income. The Chinese are going to punish us to make sure that other countries in the region getting the message that what will happen to them. If they have the temerity to view the world in ways other than the way Beijing thinks ought to be viewed. And although the Chinese can't do anything about their dependence on our iron ore, which makes up more than 50% of what we sell to them, they hate it, but Brazil can't supply them with the iron ore that we want.

Saul Eslake: They're trying to get mines up in West Africa. That's going to take them at least five years. So they're still going to be dependent on, but everything else that they import from us, you know, both types of coal will barley wine, seafood milk, they will going to be in trouble. And, you know, that's another of the headwinds that Australia is going to have to contend with as we chart the post COVID world, is that a lot of our prosperity, that's been driven by a combination of selling stuff to China at high prices and a high rate of population growth driven by immigration. Now they've been two of the pillars of our, up until March 30 years, almost of uninterrupted economic growth, those pills aren't going to be there.

Veronica Morgan: Well, we also have a bit of a weakness don't we too, because the banking sector is, is so dominant in our share market. And yet the banking system will have the four majors anyway, have really sent to a borne, the brunt of supporting the government in a stimulus measures, you know, for the economy. So, and then it's all interwoven with the property market of course, and construction. But we're a bit vulnerable there aren't we?

Saul Eslake: Yes, that's right. And in fact, what you've touched on for Monica is the third pillar of our very strong economic growth over the last almost three decades, without a recession, as conventionally defined, the three underpinnings of that have been, you know, population growth. That's been a percentage point per annum, faster than the average for other Western nations. If we hadn't had that, that, that one and a half percent per annum population growth, we wouldn't have gone 30 years without a recession as conventionally defined. We have had at least one and possibly two during that period. So that's one, China is the second one which we've talked about. And the third one has been a housing boom, both in the sense that, you know, we've had this enormous increase in house prices over the last 30 years from which most Australians have benefited, at least on paper it's been, I think more of a disadvantage than most are willing to acknowledge for people in their twenties and thirties.

Saul Eslake: Who've not been able to achieve home ownership at the same rate that their parents and grandparents did in the fifties, sixties and seventies, the home ownership rates in Australia at the last census in 2016 was the lowest that it had been since the census of money. And for people aged under 35, the home ownership rate was the lowest. It had been since 1947, that doesn't get as much attention as it should, but for most property prices had made them feel wealthier and that has in turn encouraged them to spend more, which had created more jobs. That's not going to happen again. So that's the third underpinning. This is why I think post COVID normal is not going to be why the pre COVID normal was. We're going to have to find new avenues for economic growth. And you know, I'm not, I'm not going to pretend that I know where all of those are, but to go back to the point that Veronica made it better stock market stock market is basically dominated by miners and backs and mining companies have had it very good, but nobody seriously believes that commodity prices are going to go up from here over time.

Saul Eslake: They're going to go down and that's going to impact the fortunes of our mining sector. And likewise, as you said, Veronica, the banks have borne the brunt of providing support to households and businesses adversely affected by the virus or by restrictions. The government doesn't like banks, you know, the revolts to be heading bashing banks. And that's why the banks have been explicitly excluded from job keeper, for example, and why the government imposed this special tax on banks in 2018, the major bank levy remember that that's expressed as a percentage of their deposits, right? If you express it as a percentage of their profits, bearing in mind that their profits will have gone down a lot this year, banks are probably going to be paying tax. If you add company texts and express the major bank levy as a percentage, not of deposits, but of profits, the tax rate that the banks are going to be paying is probably only going to be over 50% in the current financial year.

Saul Eslake: Nobody looks at it in that way, but if it did, I think people would think that's quite striking, but of course, you know, because the public hates banks because of the things that were exposed in the world commission. And although the coalition in particular is very happy to accept donations from banks and other big companies. You know, they, they know that the robots out there and beating the bends up around the head you know, again, from a shareholders point of view, this doesn't look so good. And the reason the Australian market is underperformed so many, we don't, we don't really have a tech sector. You've got Afterpay and see yourself, I suppose, but that's about it as far as the tech is concerned. And so what we really need to be thinking about is what are the areas of economic activity, whether it's tech, whether there are things we can do in food processing and minerals we could do a lot more in those areas. If we could actually get a sensible and sustainable energy, that would last more than the life of a single parliament. And then we want to be doing energy intensive things based on sustainable, renewable energy that might underpin some areas of competitive manufacturing, and then might also create some corporate entities that Australians can invest in, but we're a long way away from doing that.

Chris Bates: So you mentioned there around migration, I think it's a, it's one of those things that we've always sort of encouraged around the world. We're a desirable place to live and raise a family. For many reasons, I just wonder whether yes, there's going to be a short-term reduction to migration, but does Australia become more desirable post COVID when you look at other countries around the world and does the government, and then just, you know, fall to that temptation of, I guess, relaxing migration rules and encouraging more. And so we get, we quickly go back to more than that couple of hundred thousand and we're growing even faster over the next decade. Then we, you know, to make up for lost time. Do you think that's going to happen or do you think long-term, we're going to have a big reduction to migration?

Saul Eslake: That's a great unknown, Chris, but I mean, what were you gonna say obviously in that, for the next two years, based on the budget forecast until the 20 2223 financial year, we're going to have net negative net migration, and then it's going to come back slowly in 2022, 23 and 2023, 24. And that may well be right. I think you're right to say that Australia will be viewed overseas as a more desirable place in which to live because of the comparative success that we in New Zealand have had in managing and containing the virus. And by comparison with other countries, seemingly literally economic costs and neither Australia, New Zealand is going to have public debt of over a hundred percent of GDP as the U S and many European countries in Japan are going to have not another Japan as a migration country anyway, but you know, people are going to think in those countries that at some point they're going to be smacked with taxing crisis to pay down that enormous level of debt.

Saul Eslake: Whereas if you look at Australia and New Zealand, you know, we're going to have public data of 35, 45% of GDP. That's manageable, especially at very low interest rates, no need for switching tax increases or catch in spending to get that level of debt down and climate. There are some parts of Australia probably become less habitable as a result of climate change, but other places in Columbia here in Tasmania will be less cold South Island of New Zealand. Likewise, more people will want to come here. The question which you then ask very appropriately is, well, will the government let them give them that? You know, we, unlike Europe and the United States are able to exercise some control over who comes here. And Allen famously said the circumstances in which they could. And my guess is that if we still have high unemployment, which is what the reserve bank is worried about, if we do still have, you know, five or 6% unemployment, then the government isn't going to let the migration intake go back to where it once was.

Saul Eslake: Another fact that might be foreign students, you know, foreign students make up a significant proportion of them. And it looks as though the Chinese government is going to actively discourage if not outrightly, prevent Chinese from coming here as students, because they're going to, I mean, it will be a lie of course, but communist dictatorships and others, you know, they're saying it's not such crudely, but if they say to their citizens, don't go to Australia. Then their students won't come here and that will affect, you know, we might take more from a year or, you know, in these other countries like that, but it wouldn't make after the numbers that we're getting from China. So it may be that we've got high unemployment and that's a constraint. The other thing is of course, that if the government works to, let's say the employment situation allowed the government to contemplate having a migration intake, at least as big as the one we had pre COVID that might then revive the debates that we were having in the three or four years prior to the on sentence, write a bit about what impact migration was having on house prices, on a congestion, in our trains and on our roads.

Saul Eslake: And, you know, with this, I don't think this was ever true, but there are always, some people argue that migrants are taking Australian jobs. You know, I think in this country overwhelmingly the evidence is that migrants create more jobs than they take. That's less true in the U S or Europe where a lot of the migration goes to the bottom end of the labor market. And it does have a depressing impact on the wages of lower income people. I mean, this is one of the reasons why Trump has been popular with people who you might've fought for Democrats because Trump's restrictions on immigration have helped boost the wages of the lowest income American gentlemen. One of the few things that Trump says, which is true is that wages of low-income workers in America during his term in office have increased at their fastest rates since the 1960s.

Saul Eslake: Now, a lot of that's probably not due to him, but rather as a continuation of things that happened under the Obama administration, or were driven by the federal reserve by monetary policy rather than Trump, but certainly Trump's restrictions on immigration of low income people, low skilled people have, have made a contribution, whereas in Australia you generally don't get into the country unless you have high skills, high income, or a prospect of winning a gold medal for Australia at the Olympics. And you know, so but nonetheless, I mean, even people who come here with lots of money or who immediately walking a job, you know, they're driving on our roads and they're bidding up the price of their houses. And there was a sort of growing discontent among parts of the Australian electorate within talking about the people who voted for Pauline for entirely different reasons. But in our city, there was some growing discontent about the impact that migration was having just sort of on, on, on the ease of living and all the cost of living

Veronica Morgan: On that. I mean, it was totally the opposite to pull in Hanson voters, but greens voters. There was a lot of, a lot of billboards around the last state election in new South Wales around about that, talking about, you know, do we need, you know, this you're paying the price, et cetera, et cetera, congestion, how long do you want to sit in this traffic jam

Saul Eslake: Greens are funny like that because they would let every refugee who wants to come into the country. And, you know, they, they sort of completely open borders for people who want to get on a boat and come here, but you know, people with skills and money you know, the greens want to keep them out. And I'm not saying I'm anti green or anything like that when I'm alert to these hypocrisy on the part of politicians and political spectrum, give me plenty of material to work with on that. But I think he, I think that he's a bit hypocritical too, on the one hand say, you know, we should let every refugee or asylum seeker who wants to come here and be here, but on the other hand, we should pull the Drawbridge up for migrants and can actually from the day they get here and make a significant positive contribution to Erika.

Veronica Morgan: Now on that, because you, you mentioned earlier about, you know, we've got to look for other ways in which to grow the economy and, and sort of going back to that sort of, you know, when we first started talking about, well, are we looking at an economic recovery and the back to normal or a new reality, do we have to re look at our attitude towards growth? You know, I've heard it quite often lately that the an unchecked growth in, in nature is cancer. And so, you know, do we have to change our relationship and our expectation around growth because is it really feasible that we can continue to grow forever?

Saul Eslake: I suspect the answer to that very profound question, Veronica in the long run is probably no might not Keynes famously said in the long run, we're all dead. And so between now, and then I think the idea that we can just give up on economic growth is runs into conflict with the fundamental human desire that our children have better lives than we did. You know, and I mean, I, I don't mean to sound tracking saying this, but something that has driven almost every brunch of humanity from the time we sort of stopped dragging their knuckles on the ground is the desire that our children will have better lives than we do. And then ultimately you have indigenous descent in some way, and I'm certainly not the reason we're all here is because somewhere in our family tree, someone thought that they and their descendants would have a better life if they came from Europe or America or China.

Saul Eslake: And of course they would acknowledge their descendants would acknowledge that they've had a better life here as a result of their ancestors being sent out in chains. And of course, you know, there are some people who deliberately committed crimes, and this has been well-documented in Ireland, in particular women who committed minor crimes, which they knew would not give them hand, but which would get them transported to new South Wales or van Diemen's land, because they seriously believe that they'd, hadn't been done these seven years, enough stories. We'll get back to that. I mean, for, for all the attention and what a dreadful place that was, but you only ever went to port Arthur, if you committed another crime, once you were here. And most of the convicts who came to Tasmania, like most of the conflicts you came from new South Wales, you know, they weren't breaking up rocks in chain gangs.

Saul Eslake: Most of them were, if I were mean they were working on farms. And if they were women who were domestic servants and I, I, I don't want to pretend that license Clover for them. You know, some of them were sexually abused or otherwise mistreated by nasty employees, but nearly all of them will have known that their kids would have been better off than if they'd stayed Bulger Irish, or, you know, lived in some of the salons in England. And but even apart from Australia, you know, all the people who migrate to the United States for wherever they do, you know, and all the people who are now migrating from, or trying to migrate from the middle East and Africa to Europe, what they're all motivated by is the same thing that brought our ancestors to Australia, which is the belief that the desire to provide a better life for their kids and grandkids and the one they've had their own.

Saul Eslake: And you can't do that without economic growth. Now, what I think is that it's absolutely true. I wouldn't argue this remote is that there are environmental and other natural constraints on the right, at which we can explore the world's natural resources and pump crap into the atmosphere on the water. You know, whether it's CO2 or other types of pollution, there are real constraints think constraints on, you know, I'm not necessarily sign up for people who think it's a climate emergency, that's an emotional term, but I'm absolutely one of those who think that there is an urgent need for countries like Australia to do things that our emissions of CO2 and methane and all that sort of stuff. And in other ways to reduce the toll we take on our environment. To me, what that means is that, you know, we look at why is that are less resource intensive of making goods, you know, and that includes making as rapid a transition as we can to renewable energy.

Saul Eslake: And it also means that we attach value to services. There tends to be this view, and it's not confined to the conservative side of politics. It's on the labor side as well. People seem to think there's something inherently more noble about making something that you can drop on your foot about making goods, as opposed to services, which people tend to derive. The services are just taken in each other's washing and flipping and books. And the hypocrisy of that becomes apparent. When you ask people, what do you want your children to do? Do you want your kids to be screwing nuts on the wheels of holdings or sewing buttons on shirts? Yeah, that is to say manufacturing jobs. Now, most people want their kids to be, you know, white collar workers. And I want them, especially if they're smart to be doctors and lawyers and things like that.

Saul Eslake: And yet the same people will often say, Oh, we don't want to be a service economy because there's no value added in that. That's just flipping hamburgers and taking in each other's washing. I mean, that's a seriously misguided view. And so, you know, there is going to be an enormous demand for services in areas like aged and disability care. For example, in the two Royal commissions are going to have a lot to say about that when those reports come out. So, you know, w what we need to do is to think about how can we grow the services side of our economy in ways that not only provide well-paid jobs for people who want professional careers, but we also need to think about services, jobs for the same sort of people who in years gone by. Would've been screwing nuts on Holdens. And t-shirts because, you know, there is a spectrum of human capabilities, and there are always going to be people who through no fault of their own, don't have the skills and talents to be earning the equivalent of $150,000 a year.

Saul Eslake: And we're going to be in minimum or low wage jobs. And they're entitled to the same sort of dignity of a regular income as you know, people doing highly paid white collar jobs, but we shouldn't assume that all of those jobs have to be in manufacturing or mining or construction. Some of them are going to be in aged care, for example. And, you know, w what we need to do is to create a world in which people recognize that looking after all people is a worthwhile thing to do and should be properly paid. And, you know, shouldn't be insecure, casual employment, but should be something that, you know, regardless is a legitimate worthwhile, an admirable thing to do, even if the pay is a bit like the way we currently think about teaching and nursing, which most people who do teaching and nursing run the page, but no one really looks down on teachers or nurses. And, you know, so part of the world that is post COVID, but the world, which also takes account of the kind of points you make Veronica about the environmental ecological and other natural constraints on our ability to deplete or poison the world's resources and our habitat, part of it is looking at forms of economic growth that don't pollute that don't the world's limited natural resources. And I think we can do that, but we have to change our mindset in order to do it sense of

Chris Bates: So, so much then from a philosophical point of view and, you know, ways that the economy could move in that direction. I just have a little bit of a won't hold my breath that the government's that smart to do those changes.

Saul Eslake: Yeah.

Chris Bates: Have you got any, a property Dumbo for us?

Saul Eslake: Well, I thought about that since we initially talked about this conversation and not having been directly in the property business myself and observing people do, I can only reflect that my only, I think very lucky with the purchases I've made of my own homes, you know, done very well out of those in some ways, one of the smartest property investment decisions I ever made was the third home. I bought a second home for me and my wife that we bought in molded East in Melbourne in 1995 and sold in 2015. So we were there, I suppose, for about 20 years, which helped me now in Tasmania. And so that was smart, but I did earlier than that, make the mistake of buying a one bedroom flat in Eastern Kilda next door to the house that we were living in at the time. And it was just opportunistic that flat next door came up for sale.

Saul Eslake: I bid for it, bought it ended up selling it three years later for about $20,000, less than I paid for it. That wasn't such a smart investment decision. Maybe the second investment decision was selling it 1992, rather than hanging on for it, for hanging onto it for another 10 years. I probably would have doubled my money. So maybe they weren't too badly timed investment decisions that I've made. Although one of the reasons why we sold the investment property was so that we didn't have to borrow so much to buy the house. That ended up being one of the smartest decisions we ever made.

Chris Bates: Yeah. There's a quite a bit there actually.

Veronica Morgan: Yeah. There's home bias. There's also that I do. And a lot of people we've seen certainly from 2016, when a SX sort of tightened up a lot of investment lending, a lot of our clients in particular that wanted to upgrade their family home or even renovate their family home were unable to, because of some of those investment purchases that they've made, where was free and easy. So it sounds like a, you sort of got caught a little bit in the same way there.

Saul Eslake: Well, it's also, I mean the other fundamental lesson, I don't think this is a mistake I've made again, but a mistake, a lot of people make is selling at the bottom and we've seen this happen so often in the share market, particularly during the global financial crisis that people are doing quite well in the markets, whether it's property or shares, and then a crash happens and mean, obviously share prices are much more volatile in property prices, but, you know, during the financial crisis, I think Australia, Australian share market dropped more than 40%.

Saul Eslake: And the number of people who thought I'd better sell out. And then of course they not only crystallized that great big loss, but they then miss out on the recovery. And the same thing happened in 1987 as well, too. You know, I remember that very well when it dropped 25% and, you know, the number of people who sold off at the bottom, of course, there were some people who are incredibly smart and are able to anticipate big movements in markets and get out before they happen. You know, so they, they sell this before the peak and then they start buying just before the bottom. And they're the ones who end up spending the last 30 years of their life playing golf or fishing or whatever they want to do with their spare time. But most of us, including most of us can't do that. And yet many of us make the mistake that I did.

Veronica Morgan: And that's not a, that's not a good way to make money. No, absolutely true. So those laggards leg is getting a bit late and then they panic and, you know, we do see, or we saw it at the beginning of lockdowns in, in certainly in Sydney. And I've heard anecdotally elsewhere as well, your, these panic panic sell you know, this property is a long game and buying it if you bought with the fundamentals in place with good long-term goals and you could stay the course, if you do that. But if you buy, because you're trying to jump on the bandwagon, everybody else's on, and then you think , I've got to get off this band that everyone else is getting off. Then you know, you're going to be tossed around you know, the vagaries of the market look. So that's been such an interesting conversation today.

Veronica Morgan: Thank you so much for your time and your, your analysis and your insights. We really appreciate that. Now. That's been an absolute pleasure. I've really enjoyed it too. Thank you. So really appreciate it. We want to make you a better elephant rider and this week's elephant rider training is following on from Saul's Dumbo. And I always love it when the guests come in with their own Dumbo, which is great, but he also, he talked about a good decision that he made was the house in Malden East. I think he said that they sold after 20 years and it allowed them to buy and move to Tasmania and buy the sort of home that he could ease back in. I would imagine. And it's still working, but sounds like he's got a very different life. So, and that sort of leads me to think, okay, well, how do we measure how well we've done in property?

Veronica Morgan: I mean, I've said it many times on this podcast, I get a lot of people say to me, Oh, I've done really well in property. And I always ask them, how have you measured that now I will. I made them. And have you counted the costs out of that? Have you taken out the acquisition costs, the holding costs, have you looked at opportunity costs, have you really compared, you know, what you could have spent your money on back when you bought that property and, and, and you know, what it's worth now compared to other opportunities that you may or may not have had. And also how have you actually determined whether you made money when you haven't actually sold it? So, you know, there's, there's a very, a lack of rigor. Shall we say around a lot of people on their claims that they've done well in property, but I guess the one thing we saw, I wasn't going to cuisine too much.

Veronica Morgan: Well, you know, what was your growth over those 20 years? And how could you, how did you compare that to growth and other assets you could have bought and sold, blah, blah, blah. You know, one of the reasons that we look to property as something to invest in, and certainly in our homes as well, where you've got that lovely tax advantages around that is because as you get older you know, the power of compounding the, the, the benefit of time. And if you have made good decisions, obviously you are going to get an asset that goes up in value, but it's about the freedom that, that brings the opportunities and the options that are afforded to you. You know, as you get sort of in your fifties and sixties and decide that you want to ease back and working, and you might want to relocate, particularly at the moment with COVID and, and people taking advantage of the opportunity to actually get out of the city, if that's what they want to do, if you've made good decisions in property, your measurement, you know, I like to look at a measurement and say, well, my, my dollar, my percentage is better, worse than average compared to other options.

Veronica Morgan: And I think that you do need to look at that, but I also think that, you know, getting the satisfaction of being able to achieve what your longterm dreams are, that's also a really good tick. And you don't necessarily have to compare with what else you could have done if you've managed to achieve what you are after and what your goal was in the first place.

Chris Bates: Yeah, man. Well, it sounds like in his scenario, he's bought a house in Marvin and I imagine he would have bought pretty decent house there knowing these sort of work history what he probably was early in the, in the nineties. And yeah, and that's, that has probably done, you know, you know, three, four, five times where we've already paid. So and then he's got moved to Tasmania. So downsizing downsizings been, you know, what did you get for his money there versus what he was getting involved in? These would be dramatically different and probably freed up capital to Deliv off as well and things like that. So yeah, if that, if that's what you want, for example, to downsize out of a capital city and free up money to live on in retirement, then that's what you should measure your success on. And whereas if you wanted to stay in C in Melbourne, maybe, and you wanted to upsize into else in retirement, maybe he wouldn't be feeling as it's done so well for him because he's having to buy within the same market.

Chris Bates: So it's, it's a good point. And especially with the investors, I think you're right. I think most investors have no idea of measuring. And they'll just say that it's gone up and then built equity in those portfolios. Nothing. The biggest frustration I see is a lot of the time they build equities, they've actually just paid the mortgage off. They've actually paid principal off and that saving, it's not growth you making, it's actually just building equity by saving which isn't doesn't mean the properties worked for you. It means you've just saved, which the property hasn't done, the heavy lifting your savings has. So yeah, it's a very good one to chat about. Yeah. Right. Well, that's it for this episode, it's a long one, but there's been such amazing content. So it's been a fabulous chat. Hope you enjoyed it.