INSIGHTS: To combat inflation you need foreign workers – and somewhere to house them
24 March 2022
You know the outlook for the Australian economy is volatile and unpredictable when forecasts for the next rise in interest rates are changing by the week.
As recently as last year, Reserve Bank Governor Philip Lowe was reluctant to call any official interest rate rises until 2024. Then in November he hinted at the possibility of a 2023 hike. Now Dr Lowe is telling us we could see the first rate rise in more than 11 years – yes, 11 years! – as soon as the second half of 2022.
On the raw numbers, the Australian economy is enjoying its best run in decades, with GDP growth hitting a 46-year high of 3.4 per cent in the December quarter and the unemployment rate holding at a 13-year low of 4.2 per cent.
What is changing – and what is clearly exercising the mind of Dr Lowe – is inflation. For the first time in almost a decade, inflation, which is currently running at an annualised rate of 3.5 per cent, is consistently within the RBA’s target band of 2-3 per cent.
Although Australia is faring better than many other industrialised nations – the US this month raised rates for the first time in four years to combat soaring inflation of 7.9 per cent – we are definitely experiencing our own bout of supply-side inflation. COVID-related international and domestic shortages, supply chain blockages and rising raw material costs, most recently energy and fuel prices due to the war in Ukraine, are driving up the costs of goods and services. The RBA is now openly calling this a ‘supply shock’.
One of the most obvious shortages in Australia is labour, which is affecting a wide range of sectors, including construction. And one of the key reasons for the shortage is the fact that our borders remain largely closed, shutting off the supply of working-aged temporary and permanent migrants who typically bolster our workforce.
The RBA is not yet seeing any signs of this translating into wages inflation. But Dr Lowe admits there are ‘uncertainties’, in part because we have no living memory of the effects of a sustained unemployment rate below 4 per cent.
What is certain is that ongoing labour shortages – exacerbated by the glacially slow opening of our borders – and a continued rise in the cost of living can only put upwards pressure on wages. Dr Lowe calls this Australian’s inflation ‘psychology’, and notes the risk that expectations of higher consumer prices can set off a self-reinforcing cycle of higher wages claims and inflation.
What does this environment mean for the property sector and for Qualitas?
We have talked previously about how commercial real estate lenders like Qualitas benefit from increases in official interest rates, which due to the structure of our loans translate almost directly into an increase in revenue and returns for our investors. A bigger, longer-term issue for the entire property sector is how Australia responds to the current pressures building in the economy.
One of the biggest swing factors is the pace that migrants, skilled workers and foreign students return to our shores. If we do not import workers fast enough, there are risks we will not have the labour to fuel the current rates of growth and/or that we will set off Dr Lowe’s feared wages and price spiral.
Clearly, governments will want to avoid those scenarios, both of which can end in severe economic pain for business and households. As such, we should be able to bank on a rapid reopening and an influx of tens of thousands of foreign workers and students.
The challenge – and the opportunity for the property sector – will be where to house them, where to feed and clothe them, and where to educate them.
As anyone trying to find a rental property at the moment will know, the market is already exceptionally tight, with rents rising and national vacancy rates at a 16-year low.
New research from consultancy Charter Keck Cramer shows the situation is only going to get worse, with a slump in new apartment commencements across the east coast predicted to create a severe undersupply of new homes in two years, just as international workers and students stream back into the country.
Charter Keck Cramer forecasts a 60 per cent drop in build-to-sell apartment completions across Sydney, Melbourne and Brisbane from 28,200 this year to just 11,400 in 2024. The fast-growing build-to-rent market will soak up some of the anticipated demand, with recent figures from JLL showing the national BTR pipeline doubling to 14,500 apartments last year.
But there is no doubt that more development, particularly in high-rise housing, is needed, along with the shopping centres, schools, hospitals, roads and other facilities needed to support a (re)growing population. And all of that development will require a source of capital – the kind that Qualitas through its various targeted funds can deliver.
Sadly, anyone hoping this coming wave of investment will ease the housing affordability crisis is likely to be disappointed. Thanks to the rising raw materials, labour and capital costs we discussed earlier, the cost to produce new buildings is rising.
With higher property end values, owners and investors will be looking for higher returns and, for homeowners and renters, that can only mean one thing.
Andrew Schwartz, Group Managing Director and Co-Founder, Qualitas
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