Episode 158 | Top economist puts Australia in the world picture | Warren Hogan

When the dust settles what will Australia be left with in the next year?
The primary issue of 2020 is Covid, but what about questions surrounding China’s geopolitical expansion, Covid-19 vaccination, the changes to government stimulus and whether or not APRA will intervene to slow the property Market? Welcoming back Warren Hogan from episode 75. Warren is the former Chief Economist of ANZ and is currently the Industry Professor at UTS and Chief Economic Advisor of The Executive Connection. Warren has also appeared in the media on multiple occasions, to give his perspective and expertise on the global economy and how our small country of Australia feels it’s effects.
Here’s what we covered:

• What will be the legacy of 2020?

• How has Australia relied on China to keep our economy afloat?

• What can Australia do to pivot our primary exports?

• How long will Australia keep its border closed?

• What can we do about net zero immigration?

• Is it inevitable that we will lock down again in 2021?

• Is Australia’s raw material export going to save the economy again like in the GFC?

• Are we going to see negative interest rates any time soon?

• Will APRA step in to slow down the property market?

RELEVANT EPISODES:
Episode 150 | Meighan Wells
Episode 117 | Shane Oliver
Episode 75 | Warren Hogan

HOST LINKS:
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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 on 15 December, 2020.

Veronica Morgan: As we head into 2021, I think it's safe to say we're all hoping to put the year that was firmly behind us, but we can't really ignore the fact that there are a lot of question marks hovering around us. The global economy, China vaccines changes to government stimulus and whether or not appro will step in to slow a galloping property market.

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. 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 the services of a professional. Don't forget that you can access the transcript for this episode on the website, as well as download our free fall or forecast report, which experts can you trust to get it right? The elephant in the room.com did I, you

Veronica Morgan: To help us get a better understanding of the big things that could make or break us this here we're joined by economists Warren Hogan. Warren was formerly the chief economist for a and Zed bank, and currently wears a number of hats, including that of industry professor at UTS business school and chief economic advisor at the executive connection. Now we last spoke to Warren in mid 2019 episode 75. If you want to go back and have a listen. And at that time there was plenty of talk circulating around us, heading into a disaster, a recession. Now I think it's fair to say that none of us anticipated that a pandemic would send us there. Thank you for joining us today. We're looking forward to your insights.

Warren Hogan: Thanks, Veronica. It's great to be back and a very different world to last time we spoke.

Chris Bates: What a year to be an economist, I guess just watching things and learning, I guess. But before we talk about Australia, what do you think the global sort of legacy 2020 is going to have on sort of the global economy?

Warren Hogan: I think we'll, we'll put it down as a, as a, a change in the direction of world history. Those things obviously accumulate. But this was a tipping point, at least in terms of recognizing it. And that'd be change is obviously the end of what might be called globalization And financialization and the rise of the people that didn't benefit from that. And that's best sort of summed up by Trump. But a whole range of other things such as, you know, the rise of China and geopolitical discord. And of course, what this pandemic really showed apart from all the health issues, which are really important of course, but is there when it comes down to it, we're all a bunch of nations. And although we have worked very hard to coordinate and everything in the end, everyone's first sort of preference or priorities to look after their own country. And I think that's the challenge that the world represents right now is that the, the model that we've had for the last 40 years, which is Australia has benefited from greatly is changing. It has been changing since the GFC. And I feel that change is going to get is the pace is going to pick up a lot more as we go into the 2020s,

Veronica Morgan: We use a Brexit really reversal of globalization. Well,

Warren Hogan: That's certainly a banner issue, a headlines sort of issue. I think there's a lot more to it than just tried or the movement of goods and services and capital and yeah, well look, the pandemic stopped the moving to people, which is great. I think that will revive maybe not to the extent it was, but it's actually a recognition that whatever happens in an economy you're a winners and losers and the smart societies help the losers and make sure that what's going on is sustainable and America certainly didn't get that right. They've got a whole sort of industrial working class that's been displaced or is seeing their standard of living stop. We've got to set to some extent here. But it is it's people who don't like the system that's brought a lot of wealth and economic benefit to only a proportion of the society. And then of course there's all the things that go along with that sort of ultra sort of profit motive type driven corporate world and things around the environment. And there's a lot of stuff. Yeah. So yeah, globalization is the headline, but it's a lot of, I think what people would regard as unsustainable behaviors that are an offshoot of that, that, that era

Veronica Morgan: Greed

Warren Hogan: Great over a greed over concern, I suppose it could be, it could be part of it, but yeah, look, there's, there's a world that's changing. The rise of China is obviously the, the, again, the headline. But it's really about the fact that the European model, the post-World war two model is, is not the only model

Chris Bates: Do you envisage that China is probably going to be one of the biggest beneficiaries of this sort of change. I mean, saying today that they don't want our call anymore which you'd probably know that Canary in the coal mine saying is kinda hard to sort of put together, you know, do you think that China's going to literally be demanding the way the world's going to go from here,

Warren Hogan: They're going to have a big sign on it, or they they're at least going to do what they feel I've got to do. And that has got a lot to do with the rest of the world because they're resource dependent. That is they have to import a lot of stuff, whether it's our well not call anymore. But on order and food you know, they, they need to trade or, or have an empire like the Europeans used to have they need resources. They're going to very much want to shape the world and they are, and their behaviors to Australia right now in 2020 all geopolitical, they are all about China, exerting its dominant position in Asia, exerting its global muscle and, and, and where we're really the ones copying it. And what'll be interesting here is how much the rest of the world comes to an offense I saw when they put the tariffs on at wine, wine lovers all around the world got together and sort of had had a drink for Australia. But right now the, the, the, the issue is actually whether the, the, the free world for lack of a better term actually really stands up to China on what they're doing to Australia, because if we appeased China as well, we saw it that happened in the 1930s with the Germans.

Veronica Morgan: Well, it, it, it, you know, call me simplistic, call me naive, but why are we still selling so much iron or to the men?

Warren Hogan: Well, they, they're the world's biggest producers steel. They make about half the world's steel. That's a position they've attained in the last 20, 25 years. And they, they don't have a lot of iron or within their borders. They have to employ that key ingredient to steel you'll note that the coal white bands on Australia are only for thermal coal. I believe not for coking coal, which has obviously the other components of steel. So they, they the world's biggest producer is still there exports of steel more than the second biggest producers, total output, which is Japan and South Korea is another massive producer of steel. So Northeast Asia is the world's steel making hub. Australia and Brazil are the big suppliers of ore. And so they need us the question is,

Veronica Morgan: Yeah, there's a bargaining chip

Warren Hogan: That's right. We can, and look, the Australian government's sort of caught between trying to manage the situation and also be a good sort of global citizen in terms of trade behaviors. But one thing I've sort of suggested is an export tariff on, on, or where you actually charge the Chinese more. But that, that will be us, you know, you know, turning the turning of the dial up on the conflict. So I don't think there's any Shreeny illusions that we're, we're in a cold war. And that's, it's where it right in the middle of it right now in Australia.

Chris Bates: Well, I think through the JFC or post GSC, the coal price, you know, it was one of the saviors for the Australian economy and trying to hit 90 Hawes again. Now, do you think that we can just sort of piggyback off on, or to get us through, even if other parts of the economy don't get sold to China, for example?

Warren Hogan: Well, look, I think it's, it's just a wonderful feature of the Australian economy and natural resource base where sort of, you know, 25 million people with this massive land mass that has a lot of resources from, from things like steel and other minerals and metals to precious metals and food. So we should always be, you know, sustainably taking advantage of that and we've done it in various ways back in the, you know, it was wool and wheat at times now it's metal. But it does highlight what's going on now that, you know, we, we are vulnerable to this international economy and to particular trading partners. We are, we need to diversify and we will one way or the other, whether it's painfully or not if this situation with China deteriorates, but I think there is a broader issue is it's great to take advantage of that resource base and the money that comes with it, but we shouldn't let it stop the rest of the economy being match fit.

Warren Hogan: And I think that's the big issue here is getting a manufacturing sector up and going again, it just shrunk over the last 40 years from 14% of the economy to six. And the government is identifying that as critical and they've identified key areas, a services economy. I mean, unfortunately some of the most important sectors for Australia have been hit hard by the pandemic in terms of tourism and international education. We do not want to be just, you know, totally reliant on those resources. And, and that's, I think something that we're gonna, we're gonna continue to have to look at very closely and we will be forced to,

Veronica Morgan: So you see a future for manufacturing in Australia.

Warren Hogan: Totally. we have to get the right policy settings. You know, the big challenge, you know, the way the pressure brought to bear on our manufacturing sector is all essentially about our currency being higher than it otherwise would because of our mineral exports because of iron ore exports, because of college sports, the Aussie dollars higher, that makes it harder for our manufacturers to compete either with imports or in terms of exports into international markets. I've done a lot of work with the food and beverage manufacturing industry in the last 18 months. And this is our biggest manufacturing sector by far. And we have a natural marketplace feeding Australians. We have a great natural resource input. I agriculture, I mean, Australia produces about three times as much food each year as we need. But we are losing capacity in that space. We have been losing what we call non-food grocery.

Warren Hogan: So, you know, all the 10 sanitizers and toilet paper all that stuff has gradually gone overseas. Cause it's, it's cheaper to make over there and we're starting to see longer life foods shifted overseas as well. And so this is an area that's gotta be addressed. We've got great history in this space and the government is now actively looking at ways to support investment in that industry. So I think, yeah, we do. We do in the we've got the nut, the know-how you look at some about successful manufacturing in the last 20 years and it's actually high end stuff. So there's there's companies in Victoria that produce the machines that produce the manufacturing equipment to make Apple iPhones. For example, you know, the Australian company makes the machine that makes the machine so to speak. So we're very high end. It's just about getting the economics, right. And, and the Australian government doesn't provide a huge amount of support to industry like it used to generations ago. And of course a lot of Asian countries are very heavily government influenced, obviously China being the ultimate expression of that with all the state owned enterprises and so forth. We've got a challenge

Veronica Morgan: Because what, I mean, you haven't mentioned wages because obviously our cost of labor is, is a lot higher than a lot of those countries as well.

Warren Hogan: Totally. Yeah. And you know, it, it'll, it'll preclude certain low in manufacturing. And then you're saying the Chinese actually shed a lot of textile and cheap manufacturing into Southeast Asia in the last 10 years because their wages are going up. So yeah, it is about what kind of manufacturing. So I remember visiting when I was at iron Z, you know, Mercedes in Germany and, and sort of, yeah, cause I ended was very Asian focused and I was giving them all the wage costs for different parts of Southeast Asia and trying to tell them why they should sit up in this, you know, C class manufacturing facility in Vietnam or something. And they actually said, well, look, it actually doesn't matter to us anymore because you know, basically we automate everything and you know, we have high-end manufacturing workers and we want to make our stuff in Germany as much as possible.

Warren Hogan: And that's the mentality. It's the interesting thing. And you'll find these without unions is, you know, in that car industry was a classic example of, you know, you lose jobs in manufacturing, through automation, but the data shows that the countries with the most manufacturing employment with the highest levels of pie or those with the highest levels of automation that being Germany and South Korea. So yeah, yeah, we've got a future. We just gotta be smart about it. And we are coming from behind the eyeball because, you know, we, we, we have, I wouldn't say let that industry with lot divine, but you know, it, it, it hasn't had a critical mass in many different sectors.

Chris Bates: So I mean the exchange rate is the issue there plus wages, but I mean, obviously exchange rate the government's trying to reduce it, but every country in the world is trying to do the same thing. So you got this currency war that's been playing out for a long time. But if not amplified through the last year, I mean, what's your views around this easing and, You know, are we going to keep on doing it? I mean, is there enough, you know, I guess as a, you know, bill Evans, I guess thinks another a hundred billion in 2021, I mean, do you think something similar to that? So watch, what's your thoughts?

Warren Hogan: Yeah. I mean the, I thought I'd just read that in the paper myself and yeah, that seems reasonable. They've done a hundred billion for the first six months of the program, which will take us through to basically budget time next year, then outside of that program will be extended. Yes. That th the, the QA in Australia, which I didn't think they were going to do, and I don't think they should be doing it right now. Is us officially joining their currency woven? The problem we've got is, you know, that a hundred billion is just nothing compared to what the Japanese, the Europeans and the Americans produce. I actually don't think it's material. But it's a, it's a, it's an insurance policy against not just the currency going up, but, you know, long-term funding costs going up and, you know, that does affect the ability for our financial system to provide cheap credit to the domestic market, which of course is important right now. And obviously a major factor driving the housing market.

Chris Bates: Well, that's it, isn't it, you know, we might not win the, the strange right war, but we will definitely push down the cost of long-term credit, which, you know, you can already say that's going to sort of mortgage rates and encouraging people to pump up house prices, I guess.

Warren Hogan: Yeah. And I think that's the big story right now is, is the housing market in Australia. I think it's a, it's, it's, it's it's a phenomenal story. And I think 20, 20 ones is going to be a big enough property in Australia. And when, I mean, we feel that

Veronica Morgan: On the ground, but what are you looking at when you say that? Yeah,

Warren Hogan: I thought that, yeah. And you guys would know this better than anyone. We had a, we had a cyclical downturn in property in 2016, 17 that stretched into 2019. Yeah. We had that huge bull market that we had the opera standards that were tightened rates didn't go up, but they didn't come down. And so we had to slow down and that was probably a health, it was a healthy thing. I was even surprised how long it went for. I thought we'd turn around in 19. I was probably quite bullish when we spoke in mid 19. But by earlier this year, it did. Yeah. And it was like a year. It really started to turn. And we went into the pandemic with a bit of momentum in you know, eh, you know, sentiment. And the activity was picking up in the housing market.

Warren Hogan: The pandemic obviously is just like a pause button. And then the RBI obviously has cut rates even further and various other sort of things going on in the industries in terms of startups and non-bank lenders. And a lot of there's a lot of funding out there. The deferrals have been critical to just stick the whole economy, but it's also sort of taken the, sort of that risk of a wholesale fire sale in the investor space. So what you're seeing is you're seeing something quite unusual for Australia in the context of the last 20 years. Anyway, that's unoccupied is driving this upswing. And I think that's the pent up demand in that sector from the downturn, which started in, you know, 17 and really should have been really picking up speed when the pandemic hit. But didn't, so there's some pent up demand from a few years of soft market conditions.

Warren Hogan: And then there's a preference shift off the pandemic. I'm strongly of the view that people are to actually, I want to live in the suburbs. I don't want to live in an apartment or I'm happy to, I should buy a place three hours out of Sydney now, not just two hours where it's really expensive or what have you. So w we're seeing this surgeon activity by an occupied by first first-time buyers and upgraders, and yet the investor market's still being lagging. And the new mortgage data shows investors have been really soft really now for three years. So my view is that we're gonna, you know, assuming we continue on the path of recovery from the pandemic, there's huge amounts of government stimulus in the system that looks like we should transition through the end of job caper pretty well though. We've got to keep an eye on that.

Warren Hogan: And then the end of the bank deferrals doesn't look like it's going to be the hiccup that we thought it might've been given that so many of those deferrals have sort of been brought back online. So I think the big thing for 2021 is that the owner occupies a leading the way I think the investors are going to come to the party next year, big time. And that's not just because the market's building momentum and it seems attractive to investors. It's not just because investors have been too soft for three years now, but it's because investors have got nowhere to put their money. You got terminals, it's 50 basis points, and they're going to work out after getting, you know, three quarterly statements where their 200 grand deposit is pay them precisely, you know, what, two grand hundred, $1,000 a year. And then they think, Oh, house prices just went up 15% in Jaron gone.

Warren Hogan: So I reckon the investor's going to hit the, hit the market hard next year and put that sort of typical marginal that. Yeah, the is usually the one driving the market in Sydney and Australia in the last 30 years. And I think they're going to get back in there and I think house prices are going to really take off. And this is, this is all in the, sort of the broader, consistent with the broader story that when central banks ease monetary policy, which you know, was cutting rates in the old days, which is now cutting rates to zero and doing quantitative easing. Is it the old fear of inflation, which is measured as the price of milk and butter is not there and where all the inflation is, is in asset prices, all that extra liquidity they foresee in the system gets blown out into the economy, into the society, through housing markets, through equity markets, you know, maybe through the price of things like gold and collectors items and find out so it's asset price inflation.

Warren Hogan: And I think that we saw something unique with this pandemic, not just in this country, but around the world, which was both a massive fiscal stimulus and further monetary stimulus it's proven to work, but as soon as it works, it's almost by definition too much. And the thing's going to just explode. So the explosion in this country, more than just really when the world is going to be house prices and some commercial property as well, although I haven't got as much sort of visibility on that or strong view on that, but it all asset prices are going to go up and in this country, it's, it's residential property, the leads the way.

Veronica Morgan: And that's sort of interesting because if asset prices are going up, then it's still not pumping more money into the economy, is it?

Warren Hogan: Oh, no, it is. It is. Yeah. Well it does a lot of things. So yeah, there's obviously all sorts of bad stuff like energy, intergenerational wealth transfers and putting massive mortgages on young people, which basically is a form of enslavement. And it's been going on for a while. Right. We've all been joined that party modern slavery. So I was probably, I was starting being disrespectful for people to actually have experienced that stuff. But anyway, yeah,

Veronica Morgan: Yeah. I have heard employee employers say, you know, I want, I want my workforce or big mortgages, so they have to come to work.

Warren Hogan: That's right. And that's why there's no wage, you know, people aren't asking for wage encourages because they've only the severity of the income more than an extra one or 2% in a pay rise. Cause they've got to pay that mortgage. You know, you don't go and start that start up when you've got that big mortgage destroys. Entrepreneurial-Ism I know three people younger than me, but good friends who have one of them is taking the life until them just couldn't do it. So, and the one who took the leap as got an outstandingly optimistic and you know, risk, loving disposition you name it now, you just, the ability of taking risks. I mean, when your wife and his case, the wife, in fact, all of them with the wives who have kids, young kids saying the wives are working it's just that they needed the two incomes to live, where they wanted to.

Warren Hogan: So, so anyway, look, I think you know, we're going to see you know, that asset price inflation, dynamic, that, that sort of easy money it does get into the, through perceptions of wealth through the fact that someone actually does get the cash when you borrow the money and they may put it into something else. I mean, immediately that might end up in Mercedes and Lamborghini's and boats, rather than a, it does speak to a broader problem. We got around inequality and underlying demand in the economy, not go into that now, but it does get in there. It's just a, I think it's a very clunky way to do it. The big one though is construction. And that's the area where we still got a few sort of question marks because of the pandemic. Of course, they shut the borders, the population dynamics in the short term, going to shift, and that may have some implications for construction, particularly in the apartment sector, which has been, been pretty much half the market for the last 10, 15 years in terms of construction. But that's actually the real key to the economy. When the housing market picks up prices, pick up, people get involved, then they start going and building and doing renovations. And that gives people jobs and get solving, fight up. And I think that will happen, but I think price is going to move a lot more early I 2021 before the construction piece and the job space goes lighter.

Veronica Morgan: We're already seeing a renovation, boom though, you know, like may not maybe, maybe not in the multi dwelling space, but actually individuals renovating the properties. You know, I mean, on a, on a micro level, I was talking to my builder cause I renovated and finished at the beginning of this year. And they said, they've got contracts signed up for the next 12 months. And they've, you know, they've had a good pipelines before, but they're never actually had the contract signed up, you know, 12 months worth of build. And you know, across the board, you see hoarding on so many properties. It's noticeable the increase in renovation and I'm only talking to Sydney of course, but 

Warren Hogan: Well it's happening everywhere. Cause it's is that dynamic? There's the typical dynamic, which is the capitalization story. I, because the land value has gone up, we can now, you know? Yeah, yeah. Well afford to, you can get access, but also justify it yet. No one's actually ever told me what the right ratio is, how much the house is worth to the land. But anyway, there's apparently some, some, some numbers anyway, all we know is when prices go up, people put in new kitchens. But the other thing is, I think again, a behavioral shift is everyone's been stuck at home. All these people are normally slaving away at the office for 60 hours a week of sitting and working. I'm going okay, I've really got to do something about this place. I'm sure that's part of it. And that's why I reckon if you want to do a renovation, which I would like to do in a new kitchen, but I'm waiting at least eight months. It's just going to be a nightmare, trying to get their work done, Sydney and the kitchen and survive. I did a kitchen about four years ago and my previous place. So I think I can just wait on this one for a little while.

Veronica Morgan: It might take 18 months to get built. That's

Warren Hogan: Right. And it'd be just like the last one. We were there to kitchen for four weeks and I thought I was going to move out.

Chris Bates: I mean, you can say that heroin is Harry is very in the major. He loves it anyway, but I mean, he's, we've got to get any stimulus. We need subsidies. We need to get rid of the farm in a tax additional stamp duty. Ultimately you haven't got university students, you haven't got migration, which generally do by no comments, no investors. A lot of first-time buyers have been made aware of hopefully through podcasts like this, that the building issues and the risks of buying off the plan and new property and the performance of those. So, you know, you can say that construction sites has really kind of struggled to get that confidence back, which you know, a lot of the building issues are a part of it. Yeah. Yeah. But I actually, haven't heard many really dire and it above plenty for you,

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Chris Bates: Mine this one today is a fun day in Australia. And this is I mean I'll acknowledge in Atlanta, Lisa subsidizing. This is not nothing to do with Lendlease in particular, but you know, there's a housing development package. That's in Jordan Springs, East in Western city, and it's been built on a dump basically. And the whole suburbs sinking, you know, 600 million Lend-Lease, they're going to have to fund all the buyers in that neutral housing land package development to sort of offset the house thinking, I guess it's a pretty nightmare. That is a nightmare. But I think on that,

Veronica Morgan: Just because, you know, we all know that the Opal tower story and the mascot towers story, but this is the first one really about a suburb, you know? So we talk about all this one building, this is our suburbs. So it's an interesting and terrible example, I guess, of how bad it can go. I I'd like to think that if you know, high-rise Harry and others like him, instead of just trying to get the government to say, yay, let more foreigners buy us stock because then they just build it to a different standard. They don't build it through a local standard. I like to see the whole bloody standards rise and the demand from buyers, who's those developers to actually build better product. And then, then we can have more confidence in encouraging people to buy them anyway.

Warren Hogan: And I think it also Is this cheap money phenomenon where, you know, where money's not only cheap or interest rates are low, but readily available. You get sort of you drag in a lot of second tier lower standard pliers under the development game. And yeah, the standards I think really important. So I would agree. I mean, this, this has gotta be one of the big sort of battlegrounds and decision points for our society. Is do we want to run a high immigration program or not hand, you know, if we do, and I don't see any major reasons. So I think it's, there's more risk to stopping at the not, but then, you know, w what does that mean? And things like you've just talked about around building standards. I think there's a lot of issues around standards, full stop that our community needs to be clearer on. If we're going to run sort of a somewhat chaotic society, which I think Australia is just managed brilliantly and it's created a great place, but we still need standards. You can't have the standards or anything, whether it's building codes or certain behaviors coming in from other countries with these nearly arrived Australians. So anyway, that's a different story, but I think it's part of what the bio people are going to be thinking an issue, but we're going to be thinking about, as we de globalize and nationalism rises,

Chris Bates: Well, that's kind of a, you know, in 12 months time, let's say we haven't gone there, but the vaccine, or, you know, that's the conversation itself, but let's say they do open the borders in 2022, 2023. What's your thoughts on what's the alternative for the government? Do they go back to importing people? We all know the economic benefits of that. Or do they take a more conservative approach or do they even increase the number that they were thinking to play catch up, but also just because it's such a sugar hit for the economy.

Warren Hogan: Yeah. So the, the budget actually has the government's assumptions around these things under underpinning it, cause you have to have some view on population in order to correct that forecast for the economy and therefore for the budget. And essentially the way they've, they've sort of structured in terms of the going forward is that you obviously got the borders closed till the middle of 2022, in which case you have a massive decline in permanent visas and temporary visas. So actually the population growth goes to sort of near zero for, for, for sort of a year, and then it comes back. But when you come back, you, you come back to essentially a a population dynamic the same as what we had before. So essentially it's no catch-up, which are my numbers telling me that means we're going to lose about 400,000 Australians from what we would have been otherwise, which in the long scheme of things isn't that much, but it is significant in the next few years.

Warren Hogan: Then the other one is, is that they're not factoring in curtailment of the immigration program. So that's gonna that's that's yeah, I think there's a sensible why the government's gone about it. Just, we're going back to normal what we regarded as normal the last 10 years, but that will be the political issue. And there'll be an issue that I think will be a difficult one. Australia's managed it pretty well. It doesn't explicitly exist by immigration policy. I mean, this government cut immigration back a little bit in a headline manner with announcements, but in reality they'd hardly did anything. So they're fighting a battle between listening to the sort of anti immigration nationalistic, you know, this sort of these forces that are sort of getting louder and bigger that I'd talked about earlier around the world versus an economic reality that without immigration Australia's growth rate would be a lot lower and our whole economy would be a lot more problematic with all the debt that we've got out there in the household sector. Well, Gladys is out there quite publicly, wasn't she, we need to slow down immigration. Even though she was on a building sort of burn kind of it's allowed it to ease congestion, but I hear that it's kind of back to where it was when we use the public transport.

Veronica Morgan: Well, she just got to say, we have to use masks for public transport. I think a lot more people would actually use public transport, but that's a whole other issue. The vaccine though, I mean, all of these, all this conversation about population growth returning to normal levels in inverted commas really relies on vaccine, right? And the type of vaccine that will, you know, prevent the spread of the virus. And I was just listening to Dr. Norman Swan this morning. It's quite fascinating in terms of what this vaccine that's that Pfizer has just released is meant to do. It's he said, it's, you know, it's really, you still get it, but you don't get symptoms. I think that's basically the way it was. So it's like, there's different, there's vaccines in these vaccines. Right. and, and then it's got to get rolled out and then it's got to be proven to see what does it actually create immunity amongst in the, in the population or not. There's just so much that we don't know about these vaccines is just like the first line of defense. Right. you know, can immigration return without that?

Warren Hogan: Well, no, I don't think we're going to be opening our borders in any meaningful way to anyone while the virus is still circulating. I mean, w we're still so early in the piece with this virus and we don't even know what immunity is like once you get it, the vibe they're saying it's kind of funny in the last few months ago, we think immunity lasts for eight months. So I was at all because people have had immunity who got it eight months ago when it first came up. Okay. That's very scientific. So they don't know that it looks good for the vaccines. I'm no expert in that stuff. But we, we, we, we, we, the one thing about this virus, which just is obvious in the UK announcement overnight about this new strain there is, it's just, it's just so bureaus it's just so contagious.

Warren Hogan: Yeah. And we know that we've already painted it as the absolute bogeyman, that it's the world's sort of, you know, it's, it's, it's a major threat and they can say that in our domestic politics, at the state level and border closures. So it's going to be very hard to convince people in this country or elsewhere that, you know, we're going to have to live with the virus. So Australia and New Zealand have locked themselves into an elimination strategy effectively where, you know, if we, if we're not going to be out near our borders in any meaningful way, things not around. Cause if it gets in at all, it just, it's just weird. Just it's got no immunity in our community. It'll just take off like these incorrect South Korea right now who did so well in Germany who did well. Yeah. It's just, yeah, it's just so variable. So yeah, look, it's, it's a long way to go.

Veronica Morgan: They are actually living with it. You know, my sister lives in Italy and I was talking to the other day and of course they had these terrible what still terrible. They got 600 deaths a day. And I mean, it's still pretty horrible. But you know, obviously at the beginning they went to a very hard lockdown and they led the other than China. Of course, they sort of led the world cause they were the first ones really to get, to get infected with it. And, you know, I said, well, what's happened after summer because of course they all went on holidays all throughout Europe. And then of course they've had a second wave and it's worse than the first wave. And, and I'm like, what are you doing? Are you going back into lockdown? Because know, you know, there's three States, we've got yellow, orange and red. And if you're in red, you know that you can't move around as frequently, they'll close the restaurants and cafes, et cetera, et cetera. But if you're an orange, you know, that opening ever take away and restricting travel from one region to another, but largely even though COVID is very much in the community, they are living with it, you know, and, and they've all just accepted. I think they can't afford not to. And so it's that economic versus health decision really? Yeah.

Warren Hogan: Yeah. It is. It is the payoff and we have been lucky. We've managed to sort of get on top of it. And yo Australia and New Zealand did better than other countries in the Spanish flu a hundred years ago because of our natural isolation. And also don't underestimate the fact that we don't live in as congested a lifestyle is the European and Asian and North American countries. So there is, I think that explains why people want to live in houses again in Australia after sort of 20 years of moving into apartments. So, you know, we just don't have that mentality. And what I see is the risk and I don't, I don't think this is going to happen and I hope it doesn't, but the risk for Australian New Zealand is that we're going to have to live with this thing forever. Yeah. That there is no effective sort of elimination strategy. It's like any other flu pops up, but because so virile when it pops up, it hits like a ton of breaks as a community. And if that's the case, which, you know, we all pray that it's not the case, but if that's the case, Australia, New Zealand strategies, there aren't one.

Chris Bates: So you kind of mentioned them do a bit of a segue back into the property market. I think you you know, people want to live in houses, but I think another thing is obviously driving that as interest rates, which we spoke about before. I mean, I noticed this week, that is the first time that I'll be a treasury rights. So that went on to zero. You know, that's a very interesting thing, you know, to get your head around and you know, a lot of your talent for a long time, but, you know, w what's what's really happening there and is, are we going to say negative rights here? I mean, what should,

Warren Hogan: Yeah. So because we're part of an international financial system with a free flow of capital, we, we get, we just, we get sucked into the vortex of what's happening overseas. And the thing about the international the world economy is that while capital flows around freely almost completely uninhibited with the exception of a few places like China trade in goods and services moves around, but not quite as freely, you can't sell a big Mac might in Sydney and Tokyo, if it's a mispricing. But there is a lot of trading goods and services still, but the one thing, this huge restrictions on which we were just talking about is, is people. And the big thing is, is that there are countries like Japan right now and has been the case for a while that have shrinking populations like literally their population is declining.

Warren Hogan: Their working age population has been declining now 15 years. In parts of Europe, it's sort of not far behind Japan. So you can argue that when, you know, when you wake up at the start of each year and sort of go, okay, well, our economy is going to be where our population is going to be 1% smaller at the end of the year, then having a 1% smaller economy is, you know, everyone's still got the same standard of living theoretically. And therefore you could also argue because the interest rate levels sort of broadly just should match up to the rate of growth in the economy. There may be negative interest rates. Isn't a bad thing. Problem is, is places like Australia are our underlying growth, but know maybe not right this second, but you know, over the last 10 years is, is, is quite strong.

Warren Hogan: We've got immigration, we've got a, you know, a younger population than, than Japan or Europe. And our interest rates should not be negative, but because capital's flowing around everywhere, it's dragging our interest rates down and pushing our currency up. And so, yeah, the international economy is not perfectly integrated, but the money system isn't far from it and that's what's causing it. So yeah, Erin Erin's has, right. Shouldn't be negative in any way, shape or form things like negative rates or other unconventional monetary policies like QA or term funding facilities for backstage. They're sort of things that in a place like Australia put in place when there's a crisis like a once in a hundred year pandemic, but you get rid of them straight away because their interest rates in this country, the base, right, which is currently 0.1% over the next 10 years, if we're going to get growth of one or 2% with inflation of one or 2%, that means our interest rates should be three or 4%. And anything below that is easy stimulatory and it'll create distortions in the economy. So the RBI is a price taker, for lack of a better word in the world economy. They just have to respond to all those money flying around the world. They've tried to resist, but they can't. And of course, what that means is that we're going to have bigger asset price bottles and everyone else, because we've got more growth, we've got a better brighter future than places like Japan,

Chris Bates: But then minus the bank, the bank margin never said the big four always controlled the market. And you know, I think good times for shareholders is the big fault. But you know, bit by bit, they're slowly not doing anything they're kind of stocking time and then love new entrance is sort of stealing their market share. So that margin is getting smaller every year. Not only is the RBI right low, but you know, the people with the costs that people borrow up due to competition is, is getting sharper and sharper. And so, you know, obviously this leads into what you said earlier about a property market, boom which, you know, a trend I can say as well, but do you think there's going to be that bra, you know, the who knows what could have out the payment holidays taught me a lesson and said, no one knows what's going to happen around the corner, but what do you think they're going to do to sort of slow things down?

Warren Hogan: I'm not sure is, is the, is, is the, is the answer. They, they, I'm pretty sure if the market plays out, as I'm thinking they will do something th th the RVA through the council of financial regulators, which is essentially yeah. Appar and the RBI and the treasury you'll see around. And as you can, I have trouble saying everyone talking about what the world is around them in the app, the RBA will say to appro, we need some help. We don't want to have to put rates up, but there is some it's financial instability concerns. People are just borrowing too much, which is essentially what happened in 2016. Remember in the old days, like, like pre 96 and 97 Afra used to be part of the RBI. It was part of the central banks function to monitor the banking system, which I would strongly argue is what it should be, but there was a mistake what we do.

Warren Hogan: But anyway, so the RBA will ask Afra to do something. What they did before was essentially look at investors. There's no need to do that right now because they're not, not doing anything crazy. So then the next thing they do is LVRs and that hits first home buyers. I dunno, it's going to be interesting to see, I, I, to fair, I haven't put a lot of thought into it other than to say, they're going to have to do something. Yeah, those are the two main things that they've done in the past, but because the cycle is different, as I sort of spoke about earlier, that has been driven by an occupies. Whereas past cycles have really at the margin, been driven by investors. They may have to come up with a different sort of approach, and I'm not sure exactly what that is.

Warren Hogan: They've only got so many tools, which is, you know, LVRs and, and sort of pricing, eased all of this stuff, right. They panicked when this pandemic, they just eased everything up to go back and it shifted sort of, they might be a bit reticent to it because it'll look like they're chopping and changing, but in the end they do what they've got to do. But what it means is there'll be light. So won't be in February, March, it'll be in June, July. It'll be once they, once they invest is you know, clearly pushing prices up 10, 15% across the whole country that, that the other respond they'll respond light. They should be doing something right now. Basically

Veronica Morgan: What's interesting is though in the absence of investors, it's showing true demand though, isn't it? Because of course, back in 2016, with investors really high and intention in activity in the marketplace, it's hard to separate out of that. Well, what is the real demand for housing, you know, for actual properties or, or accommodation, if you like. And I, you know, I, it's funny, cause at the beginning of COVID, I thought to myself, I think I have monitored it a couple of times in these podcasts, but you know, people being cooped up in their houses, the minute they let out, they're going to get bolt. Bolthead like greyhounds chasing rabbits. They're going to be like, gave me a bigger house. And that's exactly what we've seen. You know, we're seeing search terms, you know, for, at home a hundred percent stuff like that. So this is, this is a real reaction. I think that's quite measurable, you know people in actual living.

Warren Hogan: Yeah. Yeah. I think it's real. And you've got the issue about what it does at the residential end, which is, you know, home office and then you've got the, I think potentially it would be your issue is about what it means for commercial property, because I think there's no doubt that a lot of people who work in CBDs, you know, office blocks again, at least spend 20% of their time at home now more than before. So yeah. Fridays are done deal. But will I spend, will, will I spend two days or three days at home? Yeah. I mean, I think the reason you're looking at three, four hours out of Sydney or Melbourne or Adelaide for, for a, a country property is because, you know, if you're going away for a two day weekend, you'd sort of go away. You could drive for two hours, drive four, but if you're going away for a four-day weekend and you're working while you're away, you'll drive for three or four.

Warren Hogan: So suddenly vitamins buys in play. So I think that you, you really going to see this big shift away from office, towards, away from the city, towards the suburbs and the regions. And this is all technology enabled with a background of health concerns. And I don't know where it lands, none of us do, but I think it's, that's one of the big issues for 21 is, is what decisions are made by businesses and, and how people respond to people, leave jobs because you other, until they have to go back to the office and they can't actually work from home two days a week out of that.

Chris Bates: But that's the way it works in negotiation between employers and employees and the power always been with employers, but now employees assigned, well, this is what we want, especially the top talent. And they say, well, if you're not going to offer me flexible working, let's say they want three days at home. And employers want three days at work, which is much different to five days at work. You know, last year we just don't know how that negotiation is going to play out. I guess

Veronica Morgan: You gotta think, you know, an employer's position you think, well, I need less office space. You know, this is a real benefit to them.

Warren Hogan: Yeah. It's very real. And I think they're very, you know, a lot of businesses right now with the senior management are very keen to sort of get some visibility on what that looks like. So they can start making decisions because, you know, you're paying a lot of rent in places and you're seeing huge discounting going on across the CBDs of all around the world to keep, keep businesses in office space and so forth. This will take a couple of years if not three to five to play up, but there's got to be a structural shift down in demand that does it just made that a whole bunch of B and C grade commercial property. And the cities gets turned into retail or even residential. I don't know the answer that was sort of what was happening before people want to live in the city. Now, given the, you know, health concerns, we just don't know where it's going to settle. So yeah, I think it's, it's, that's one of the key unknowns for the, for the whole industry. But we do know one thing is that the people's views on where they live have shifted no matter what happens around the office. And that is we're going to spend more time at home. We want a bigger home and we probably want, some people are going to consider that they can have a serious professional job in the city and live three hours out of Sydney.

Veronica Morgan: Well, some people are moving, moving States and doing that, you know, the we've had a number of interviews around Brisbane and anecdotally we're in hearing for buyer's agents up there that people would be jobs who normally will be bound to live in Melbourne or Sydney and are actually relocating living in Brisbane and still having their big job, you know, working remotely.

Warren Hogan: And, you know, I mean, I think Chris, you mentioned about, you know, if you're, if you're on the superstars and you can negotiate it well, you know, if the senior management team or live in bar and buy, yeah, I got it. I can't then Michael middle managers and other executives all turn up to the office every day that culture will not work unless you work for Kerry trigger, awful, Frank, Larry,

Chris Bates: You know, they feel for them right now, cause they've just lost their beach. I was out there a couple months ago. I was like, where's this page gone? And then, you know, this big storm happening on Sandra. Yeah.

Veronica Morgan: It's a biblical principle on that. You know, as a few things I remember from my church, my Sunday school days, you know, those who build houses on sand

Warren Hogan: First year geography is that, you know, need sand dunes to replenish beaches. But anyway, can local councils in Australia, 50, 60, 70 years ago, never did that geography listen. No.

Veronica Morgan: And they still haven't worked it out in many cases, I'll fix it.

Warren Hogan: So is that your property done by wire or there we go. It certainly is. It's it's the residence in Terrigal. And when amble, who wants the council to bail him out and Collaroy probably some embargoed by maybe I don't think there is actually a lot of beachfront properties in Byron Bay, but you build on a sand June, you're gonna lose your house because the sand dunes are there to replenish the beach when you have a King tide or a major storm. And that's not just in Sydney or the East coast of Australia, that's natural around the world. And I don't think the rest of us should be bailing people out. Who've paid a fortune for beachfront property. I think in a world we're moving into where this is going to become a bigger and bigger issue over the next 50 years. You bother you build up, buy a house on a Sandra and then you're a Dumbo.

Veronica Morgan: Yeah. I'm inclined to agree. And I'm like, you know, it'd be different if all these people had invited everyone over in the, in the community that couldn't afford the beach front home and to actually give them direct access to the beach in front of them before these would be different if they were community monitoring that way. A lot of them haven't,

Warren Hogan: I'm not going to comment on that Veronica, but you know, there is ying and yang. There is Carla or there's a whole lot of stuff that goes on out there and their houses are washing away and not Frank report.

Chris Bates: I think it was, or maybe it was, is kind of sharing that in a suburb where there are premium properties that are on the ocean product or Harbourfront, or riverfront or whatever, you know, front it is. But yeah, the performance of them versus, you know, a straight back and this sort of disconnect where, you know, the ones right on the front have performed much better, obviously because of scarcity and livability, et cetera. But it's quite funny when you think about the longer term impacted that, where it could reverse, you know, the person a little bit further up the cliff,uyou know, it gets all the returns and the one at the front, you know, is losing its yard day by day. Yeah.

Veronica Morgan: See rising sea levels rising by up to a meter in sort of by 2060. So

Warren Hogan: You could, you could actually go for beachfront at various times in the future. So, you know, you're by three streets, back 2050 beach from you in your kitchen or

Veronica Morgan: Oh my God. That's hilarious. Thank you so much, Warren. It's a very interesting conversation. And and I do love the fact we sort of skirted around some, some pretty good Dumbo is sorry, elephants and Dumbos in there. You know, this is, I think this is all we've got to understand that we're obviously globalization may be changing about, we're still part of a global economy in many regards. And then we've obviously got all the Microsoft that's happening here as well. And so it's always great when you come along and help us understand what's really going on.

Warren Hogan: Well, thank you Veronica. And thanks Chris. It's been good to have a chat and yeah, look, we, we, we, we, we can only try and think about the issues out there cause you know, the thing that we gotta be clear on is the world is very complex and the economists shed light on the challenges. We've all got to make our own decisions and common sense never goes too much Australia.

Chris Bates: It's funny you say that about economists. I mean, one of the biggest benefits to be an economist is no one keeps you accountable, but how about we get you on in 12 months time and I'll have a chat about 20, 21. I think it's going to be another interesting year 

Warren Hogan: Jailed. I'll do 12 months and I'll take an option on as soon as the Sydney house prices go up 10% from today, then you got to get me on. Excellent. Well thank you very much. Thanks for,

Chris Bates: We want to make you a better elephant rider and this week's elephant rider training is

Veronica Morgan: Following up from something that Warren said a few times actually was that, you know, really investors typically drive property markets. And this recent surge of activity we've seen is certainly in the owner occupied space and, and you know, Warren sort of saying, well, that's, that's, that's novel, that's different. And I think let's break it down a little bit because what I find is very interesting is that yes, investors might get into the market. They might, you know, bring more dollars into it. Let's face it, more people, more competition, but the people that get most emotional about property are the owner occupiers. And so if you find that, you know, at an auction and there's a bunch of investors and an owner-occupier or two, typically the owner occupier is more likely to provide because they're the ones more emotionally invested in buying that property. So whilst the investors helped push the price up, sure they do. It's still the owner occupier appeal. That's so important when you're looking at choosing an asset to buy

Chris Bates: A hundred percent agree if you want the owner occupier appeal in what you're purchasing, but it's very handy if the investors are buying that as well. Right? So you've got first-time buyers, you've got downsizes and you've got investors in the market. And that all three of them wanting your apartment or your house, or what are you thinking about price really good for sort of pushing prices up when you've only just got the owner-occupier market. So I think that's what, you know, you'll find that When you've got this boom is you've got a lot of investors are buying those same low 1 million houses. That'll be pretty, pretty scary if that happens next year. Yes.

Warren Hogan: Hopefully not. But also I think you've gotta remember when investors, you know, push property markets is they're also buying a lot of investors stock and that's when spruikers go exactly. They'll lead the first time buyers alone

Veronica Morgan: Episode, we've got Eliza Owen from core logic joining us. And she's going to answer a very important question for us, which is why as the Australian property market crash, when everybody thought,