About Ed ChanEd is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Visit www.Chan-Naylor.com.au
The RBA cut rates by a further 25 basis points on Tuesday, October 2.
This should not have been a surprise, especially when one considers what is happening in Europe and the US and our own retail sectors, which would have to take a toll on public confidence. I would say it’s all about the rest of the world, and we needed a buffer to help us through the next few years of turmoil.
While there are encouraging signs from the US with a falling unemployment rate currently at 7.8% (first time in more than three years this has been below 8%), Europe’s long-term outlook however is still bleak. I would anticipate 10 years of no growth in Europe.
The US will enter a long period of small to moderate growth as it tries to keep the economy growing (which keeps unemployment down) by the printing of money to the tune of $40 billion per month. On the other hand, the printing of money is similar to giving a drug addict heroin when what is really needed is a detox.
The USA and Europe have an ageing population and similar to Japan, which has had no growth for about 21 years, both Europe and to a lesser extent the US are compounded by record levels of debt.
China’s growth has slowed to around 8% per year. As the world’s baby boomers reach retirement, their spending naturally slows, which has affected demand for goods and services. China exports to the world, including the US, but the slowdown in demand from the baby boomers has affected China’s economic growth. However, the demand for goods and services from their own burgeoning middle class as they become wealthier has kept the fires burning. Their desire to increase their urbanisation rate from 37.5% to those of Western nations will continue to feed the fire.
As stated above, an ageing population means spending slows, and when spending slows economic activity slows, which means higher unemployment and lower tax revenue. Japan has an extremely tight immigration policy, which means very few immigrants were allowed into the country, and the consequences to this is the older population were not being replaced by younger people.
Natural births to replace an ageing population have two disadvantages.
It generally takes 21 years of investing into a newborn before he or she is old enough to work, plus a further two years training on-the-job to attain a skill before he or she can start contributing.
This is slow and a highly costly process. Also, the number of children per household has dropped over the years. There is also no guarantee that job sectors that have skill shortages can be filled, because there is no guarantee that Australians will go into those areas even after they have attained the necessary skills, qualifications and experience.
Immigration, on the other hand, has many advantages for a young country such as ours.
It means one can select the skilled people required and only allow those who have those skills into the country in areas where we are experiencing a shortage, or restrict their entry conditions to areas that have a skill shortage. They are already trained and the training paid for by another country; they are immediately productive and can pay taxes; they also create an immediate demand for services such as homes, cars, schools, food and other services, creating economic growth and prosperity.
Australian immigration story
In Australia unlike Europe, Japan and even the US we have a robust and healthy immigration policy allowing in around 250,000 to 350,000 people annually. Our average age is 35; Europe’s is 45.
Our unemployment rate is 4.8%, and this is considered full employment. Much of this can be attributed to Australians not being prepared to travel to take up jobs in mining towns and other areas that are perhaps hard to get to or other occupations that perhaps Australians are not prepared to accept. One will never achieve 0% unemployment.
Despite fears that immigrants will take Australian jobs and I have heard this statement for over 40 years, and the fact is that our long-term average unemployment rates have always sat at around 5.5%. This is considered full employment. Naturally there are times when it has hit around 10%, but it generally does not stay at that rate for very long as long as there is economic growth.
However, one must be careful and selective about immigration because it can change the nature and landscape of the country. Allowing people into a country with different values and beliefs can cause social unrest. One must balance economic wellbeing with the type of social fabric we want the country to become. That simply comes down to tighter government policies about the type and quality of people who are permitted to come into this country.
Why it makes sense
Economically there are very sound reasons for a healthy immigration policy balanced with a socially responsible selection process.
Australia does have a two-speed economy; certain industries such as mining are doing extremely well where other industries such as retail are not doing so well. With what is happening in Europe and the US, global market sentiment is a huge factor that affects our economy. This is proven true by our record savings in this country since the GFC as the general population adopted a defensive stance such as savings and paying down their debt, as opposed to an aggressive growth strategy such as leveraging through increased debt.
I believe the RBA has got it right with the recent 0.25 percentage point drop in interest rates leaving it more room to move if the world economy deteriorates further. This will give the property market a little optimism.
There is also a two-speed property market. The higher end market has continued to drop in value, but the lower end market has shown stability and in some areas has shown growth. However, when one averages all the markets together it distorts what is really happening at a micro level. One has to be much more careful and selective and do much more research to buy properties that are doing well.
Gone are the days when one could buy any property in any area and you could sit back and watch your properties grow in value.
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