Don’t Start From Here

On a trip to Ireland, a tourist stopped to ask how they might find a particular village.  In that lovely Irish brogue they were told… “to be sure, now I wouldn’t be starting from here!”

Australia’s living standard peaked in 2011 with extraordinary commodity exports, mostly to China and unlikely to be repeated.  Since then our living standard has been falling.  The remedy to restore it is to shift Australia’s savings emphasis from housing to exports.  It’s a tough transition, as we all have a personal interest in housing and the lobby group is huge – banks, advertisers, trades and real estate agents.

In the midst of electoral politics, we do not wish to take sides but we would like to focus on the core problem in maintaining our living standard – we need a shift in emphsasis from investing in property to investing in exports.  Just as a household’s standard of living is directly linked to the income the breadwinners make, Australia’s prosperity is a direct result of our export income.

Australia is discarding its long role in car making and related jobs, yet higher wage countries than ours manage to turn it to profit.  We’ll be one of the worst affected countries from climate change and are well placed to prosper from renewable energy, yet we’ve discouraged this too.  Coal, uranium and gas are plentiful here, yet it may be necessary to gradually adjust to leaving them in the ground.  So, if we asked our Irishman how we might improve Australia’s standard of living, might he say ‘don’t start from here’.

Where do we actually invest most of our money, could this lift our competitive advantage?  Most Australians invest more in housing than in any other sector.  We all need somewhere to live, but we’ve been building steadily bigger houses since the baby boom of the late 40s and 50s.  Unfortunately more expensive houses do not improve the wealth of a country unless underpinned by rising exports to pay for it.  Normally, houses are a store of wealth rather than a wealth generator. The driver of lasting national wealth lies in exports and despite its recent growing pains, China is a shining example of this.

Deep seated structural problems contribute to inflationary land and property prices. We have strong incentives to accumulate housing wealth – capital gains and land tax exemptions for home owners; negative gearing and concessional capital gains tax; and Age Pension asset test concessions for home owner retirees.

Young first time buyers now find it increasingly difficult to afford a home.  In the 20 years since 1982, home ownership for young people has fallen from 56% to 34%.

Home ownership rate 1982-2011 (%)


Source: ABS Surveys of Income and Housing

The Australian home ownership “dream” is disappearing for young people, but we don’t have a shortage of housing, they’re just poorly distributed.  One in 6 Australian households own two or more properties and for 30% of them, the second property is a holiday home.  In 1990 the average family home was 4 times the average household income, now it’s over 6 times.

Though our government debt is small, Australian households are drowning in debt – mercifully rescued by falling interest rates.  When interest rates rise back towards normal levels again, it may create a mortgage-led recession and banking crisis.


Normally, as people approach retirement they pay off all their debt and begin to live on the income from their savings.  Unfortunately, Australia’s deep-seated structural concessions have encouraged strange investor behaviour.  Australia’s capital gain and gearing rules encourage deliberate and sustained rental loss (for a tax deduction on other income) in the hope of a lower taxed capital gain.  Yet elsewhere in the world, accepting a sustained rental loss is simply viewed as poor investing (and the loss can’t be used against other income).

Mortgage debt to income


Source: ABS Surveys of Income and Housing

Is this the behaviour we really want to encourage for Australia’s long term prosperity?  Wouldn’t we be in a better position to seek a higher standard of living if we changed the incentives to encourage exports rather than housing?  We’re a small market, so we should be agile.  But it also means we need to sell our innovative products into larger markets overseas for scaled success.  Traditionally our export income has been dominated by mining (commodities) and agriculture (farming).  A real breakthrough in innovation and agility would occur if we provided structural incentives for investing in export activity instead of housing.

In 1988, the concept of franking credits was introduced for company tax on dividends.  It had the effect of encouraging investment in large dividend-paying stocks over the more speculative ones that so disappointed in the ’87 market crash.  Perhaps a similar visionary breakthrough may create a preference for export-oriented companies.  Tax saved by reducing housing-related concessions could pay for this new incentive to prioritise export activity.

Who knows, we might even restore car building exports with expertise focused on electric vehicles.  Renewables might also prosper again – we definitely have the climate to be world leaders in this.

If you would like to discuss property and your investment options with one of our wealth management advisors, get in touch with Wotherspoon today!