Opinion: What we might expect.....

by Geoff Doidge

The direction in which Australia's economy moves ahead will be due, to a large degree, on the recent change of leadership in this country.  The ability of the new Labor government to address the issues relevant to investors is yet to be seen.  In the meantime, as the year 2007 drew to a close, Geoff Doidge, peered into his crystal ball to give us his insight into the future.
 

Wages, Inflation and Interest Rates

With all the attention directed at W.P.A.’s (Work Place Agreements) and looking at the composition of the majority of Labor’s support base (Trade unions) one would have to expect that there will be some kind of wage push. Whether the Rudd’s Labor Party has the political will to resist this pressure in Government (its easier in opposition) remains to be seen.

If wages do go up across the board then we will surely see an increase in inflation. There are already strong pressures as a result of the shortage of labour so this combination might be enough to cause a wages breakout leading to higher inflation and …higher interest rates.
 

Small Business Owners

It is possible that as these laws are repealed they will be a little reluctant to hire more staff until things become clear. The result may see a drop in unemployment in the small business sector as it slows down. I think big businesses however, will just see it as a cost of business and forge ahead.  It all depends on how interest rates go.
 

First Home Owners and First Home Non-Owners

Already this group is hurting as they hunt for a home. There is a smell of desperation in the air as their dreams drift on up into the median value heavens. Here is a typical example of what is happening in the market.

Lets say Matt & Kylie are hoping to buy their first home.

It’s estimated to sell for $300,000 and they have saved 10% deposit, that’s $30,000. It was a long hard 3 year slog to save that $30,000 as it has to come out of ‘after tax’ dollars and after they have paid the rent, food, car, transport and clothes etc.

They go to an auction to check prices. They are shell-shocked when they see a house that was selling for $300,000 go under the hammer for $400,000 with eager bidders trying to grab their dream.

The dream is turning into a nightmare as they realize their 10% deposit required is now up $10,000 to $40,000. Another years saving needed in 10 minutes of furious bidding.

They go home and the weekly rent they were sick of paying doesn’t seem so expensive after all.

Are they going to say, “stuff it, let’s go out tonight and have a good time”. If so…there goes the weekly saving …and they are going to stay First Home Non Owners.  Bad for home buyers but good for rental property owners.
 

What will the Labor Government do?

Maybe they will consider a restriction placed on the maximum value of the home to qualify for the grant. Say around $600,000. However, any first home owner buying a $600,000 home as their first home, I would suggest, can afford it without the F.H.O. grant courtesy from Aussie tax payers!!!

I wonder if someone will realize that with vacancy rates of record lows of 1-2% that there actually is a critical shortage of accommodation and offer incentives to build more.

It would be easy to do as it requires rezoning to higher densities all areas within walking distance of main transport hubs, major bus interchanges, railway stations etc. This is starting to happen but could be accelerated.

The difficulty that may arise if Labor does succeed in convincing developers to build more, is the chronic shortage of trades-people. We are already at record low unemployment levels and we can’t create tradies overnight without increased overseas immigration. So will the Labor Party with its strong union affiliation allow an increase in the importation of overseas workers. I’m not sure they will.
 

Uranium, Kyoto and Climate Change

The no new nuke uranium mines attitude by the more militant unions will have Peter Garrett scratching his bald cranium. e.g. The Olympic Downs project in South Australia is massive and will involve mining of uranium. Should this mine not get a go-ahead because the unions demand ‘no new uranium mines’ it would be a major negative for South Australia. On the other hand should Peter ‘bite the bullet’ and approve it… then S.A. will boom.

The Labor party also has set targets for reduction in carbon dioxide from coal fired power-stations but we don’t yet have the technology to achieve them. Should the technology not be developed in the medium term, then many of these coal stations will became sub-economic and unlike other developed countries we won’t necessarily have the nuclear option allowed to fill this gap. Wind Power can’t do it and Solar can’t do it economically. Use of Gas will increasingly become an option.

Furthermore, if coal mining suffers restrictions due to climate change restrictions, it would be bad enough, but what will happen to all those coal mines and the towns around them that we have in Queensland? Are they going to eventually go the way of the dinosaur? If you are making money in investment property in mining towns, then swap the local rag for the Financial Review. You need to be forewarned and fore-armed. You are investing in China and India. If China switches from or decreases it’s consumption of coal (there is no sign of it yet by the way) you may have to think about whether to recover your investment from those China coal dependent towns in a hurry.

At the very least, Kyoto means the cost of producing coal is going to go up and there will be money to be made in alternative energy sources. I would expect the solar power substitutes to get additional subsidies. It may even become compulsory as a new development in appropriate (sunny) locations.

Click Here to Read Part II of Geoffs' Predictions