Alan Oster on the Data Behind the Housing Headlines

In this episode, we ask, what if the economic signals we've all been watching are no longer enough to make sense of a market under stress? Investors are bombarded with commentary, yet business surveys, household spending patterns and even unemployment data can tell different stories.

When property decisions hinge on the future of interest rates, growth and demand, how do we know which signals matter the most? To help us unpack this today, we're joined by Alan Oster, who for 33 years was chief economist at NAB and one of Australia's most trusted voices in economic forecasting.

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 and buyer's agent mentor, co-host of Foxtel's Location, Location, Location Australia, author of Auction Ready and co-host of Your First Home Buyer Guide.

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Amongst other things, Alan built NAB's monthly business survey and pioneered the use of real-time banking data to reveal shifts in household and business behaviour, insights now shared with the RBA, ABS and Treasury.

With decades of experience shaping policy and guiding investors through cycles, Alan brings a unique lens on how economic data really translates into the property market, and that's what we want to talk about today. Thanks for joining us today, Alan.

Okay, thank you. Pleasure.

Alan, I absolutely love when we get people like yourself come on and it just gives an opportunity to basically delve into your mind. It's one of our biggest things that we love on this podcast. And thanks so much for your time.

The economy is just so, you know, you can start micro, you can go Australia, you can go global. And there's always things that are happening. I mean, now that you're retired, you've got more time to think.

I mean, how are you thinking about the way the world's going right now and how the global economies are coming together?

Look, I think globally, it's tricky. And basically, that's coming out of the US. I think the US actually last year did much better than everybody thought it was going to do, much better than what Trump was telling people we're doing. Now you've got tariffs and you've got uncertainty.

You've got a problem, I think, that's really... important, where Trump is trying to, well, basically, when he got data he didn't like in the labor market, he fired essentially the statistician responsible. And now he's trying to get into the Fed.

He's got one person who's legit come in, and then the other one they're fighting in the courts. But I worry that basically at some stage he may get more influence And that will basically trash the reputation of the US. And it's not good.

The issue, I think, is not so much purely on the US, but what it does to our trading partners, what it does to China, Japan, Indonesia. So that's tricky. And I've built models for a long time. People aren't rational. And so therefore what it, no, it's true.

I can remember many years ago when I was actually in the bank building not only economic models, but pricing models.

And so what we found out was people basically didn't care about a monthly, they do now, but at the time, they didn't care about a monthly transaction fee, but they'd cross banks for $100 establishment fee. So just do the arithmetic. You charge them $8 a month for 30 years, and that's more negative.

They don't care about that, but they worry about $100 up front as a fee. So it's not rational. And so how will people respond? Will the equity market suddenly die? Will people be nervous? And will they be irrational and just say, it's all garbage and I'm not going to do anything?

And I always think of economics as applied psychology. You've got to have a bit of a baseline, a sort of system that says, okay, you've got a lot of investment, a lot of them will be imported, et cetera, et cetera.

So you build your models, but you've also got to say, well, I was wrong in the past, and what sort of data do I look at to say that I might be wrong now? And the one thing that I think is really different is essentially bank data. There's essentially real time.

So in NAB, the data that we built was by Wednesday, we would have every electronic transaction as of the previous Saturday anywhere, and we'd have real time.

We could also see what business, now business, when they take a business loan, have to fill in their profit numbers, and they probably lie all the time. But as long as they lie consistently, you get a good view. And then the last thing is the monthly business survey.

Whereas back in the days when I was in Treasury, they had a quarterly business survey, but not monthly. You just need to be a little bit careful because things like Chinese New Year, school holidays, they all change. So you're probably better off looking at it monthly rather than weekly.

But I mean, for example, I was the head of forecasting, modeling in Treasury in the early 90s. And honestly, I didn't know we had a recession for six months and I was advising the government. Wow. Okay.

That's fascinating. Tell us more.

So that's real, yeah, real time. Then we had COVID and, you know, we can do this, oh, sorry, NAB can do the data and I'm sure all the other banks can do it by postcode.

So, you know, we look at some of the postcodes in some of the Chinese suburbs and we were seeing 40% falls within a month. in essentially restaurant. So Box Hill in Melbourne, et cetera. And you could see that. And so we knew what was actually happening.

That's the difference we've got now. I don't think it's any easier or harder to forecast than it used to be.

The one thing I would say to people, and it really annoys me when the government and a lot of politicians on both sides say, oh, in 10 years time, there'll be X. And my sort of response is I've got no idea what's going to happen in three years time.

Maybe two, maybe three, you get by. Ten, I mean, my simple answer to anyone would be, okay, so what was your forecast for the next 10 years in 2019? Okay, I had no idea about COVID. How's it going? If all other things work okay.

You can see where some economies are running into serious strife. And I think that's what's going to happen in America. It's going to slow a lot.

I think they'll cut rates again a couple of times and maybe not so much after that, but they'll sort of by 2028, they'll be down to about 3%. What that then means for Australia, I think Australia's actually

in a pretty good spot, but don't tell me there isn't a hell of a lot of stress out there. There still is. And, you know, a lot of people, for example, and there's some technical issues you need to know about. One, you can see what's happening in the monthly business survey.

One, you can look at the real-time data and generally look at the labour market. I can remember a Reserve Bank governor was asked one time, if he only had two pieces of data, what would he use? This is Glenn Stephen. So I've been told this. I wasn't there.

First thing he'd look at would be the monthly labor market numbers. And the second thing he'd look at would be the NAB business survey. And the reason for that was they sort of look at it as like a type of national accounts, except you got it monthly.

And you can correlate it to what's happening in the real economy.

A couple of things there, Alan. You said that you didn't know, like back in the early 90s, you didn't know there was a recession for six months.

If that was exactly happening today, given the access to data that you have in real time today, would you have noticed any quicker or would it still be a have-a-lag?

No, we've got data that we didn't have in the early 90s. They say beware of fast food. It's not good for your health. Same thing, fast data is not good for your health either. But it will tell you if there's a really big change.

Yeah, so that leads to my next question. Because sooner you can react quicker, is that quicker reaction time good or bad or good at times, bad at times? I mean, for example, we saw the equity markets plummet around April when all the terrorist stuff started coming out.

And then we've had record highs in recent weeks. So that's all quite good. Quick turnaround, if you like.

Yeah, but be careful. I mean, economists typically say the equity markets has forecast 10 of the last two recessions. So they're very unreliable as a mechanism.

But it's reactive though, isn't it? Because they've got a lot more data on hand, say, than the property market.

I don't think they have.

You don't think so?

In terms of the equity market. No, because, I mean, the banks will report quarterly, but they actually physically, as in audited, et cetera, is six monthly. And if you wanted to, you can hide a lot of things.

And you hear all the time, I mean, one of the lessons for me was, I won't say who, but let's say big retailers lie all the time about their Christmas sales. Because if they didn't lie about it, they'd get trashed in the equity market.

So you've got to remember what has caused recessions in the past. And one of the big issues is long and variable lags in monetary policy, because it really depends on what businesses and what consumers decide to do. And this time, what they did is they shoved all their spare cash into offset accounts.

And so you can see that. And you can also need to know a few things. For example, I'm sure NAB's similar to all the big four banks.

Everyone says, right, there's no bad debts, or not many.

But what people don't know is in a big bank, I think you find that 70% of a bank's mortgage book is owned by the top 20% of the income distribution. So the real damage is actually in the non-financial sector, where you're not regulated as much.

And so you've got to be a little bit careful about that. And ultimately, you can say, well, people can just get scared. And what we saw at the start of COVID scared the hell out of us.

Because the other thing we can see is we can see the number of bank customers who are paid the dole on the Saturday, and we're getting numbers on the Wednesday. So that gives you a good feel of how the labor market is, and the labor market's still okay.

And if I'm looking at anything in Australia, the thing that makes me really pleased is the fact that the unemployment rate's 4.2. What's actually happening, and I think it's still happening, is people are struggling They're basically buying down market rather than up market.

They're trying to put their stuff away, as I said, into the offset accounts. And provided they've got a job, they can struggle through until interest rates start to come down. And they've started, and now I think they'll still keep going.

The market gets thingy about inflation, but the monthly data that came out yesterday was essentially affected a lot by the ending of electricity bills. And so if you looked at the trim mean, which is the one the RBA looked at, it went from 2.7 to 2.6.

So I think a lot of the sort of reaction today, et cetera, that, you know, is overblown. And you just need to be careful about that.

You said there's a lot of stress. A lot of people are struggling. You know, they're putting money in the offset accounts. The unemployment rate still stayed pretty low. If America sneezes, we all might catch a cold, depending on what sort of Trump happens. And same, I guess, with China.

But, I mean, how do you sort of see this world playing out? I mean, you said you can't focus 10 years. But if you think about just the next... few. There's a lot of people that say we're going to get to this, another inflation spike, right?

Or there's this world that maybe we're in a bit of a lower growth world and they're going to have to support the economies. Like you said, people are struggling. So how do you sort of see it playing out?

I think the world will be different in the sense that some of these big economies like Europe, Japan, et cetera, will struggle. They probably won't get growth of more than 1%. The US will come down a fair bit.

So it was doing like 3% last year and now it's probably going to do one and a half this year. But do remember on tariffs, unless you respond, the effect on inflation is just in the US. So we're not going to necessarily, now we may get supply chain effects that increase our prices.

But on the other hand, someone in Japan may decide, well, it's too hard to sell stuff into the US. I'll basically buy some more stuff in Australia or trade better with Australia. And so there are lots of options out there that are still important. You just need to be careful.

And I've watched the data. So I watched the unemployment rate. The other thing that I think is different this time It's normally when you get big interest rate hit. A third of the economy rents, so they're not really affected.

A third of the economy doesn't have a mortgage, so it's the third of the economy that has trouble.

This time is different in the sense that the course of the immigration levels and some of the state government policies, which have been pretty awful, land taxes and things like that, it means that two-thirds of the economy is in trouble.

One of the things we used to say is we used to look at the charities. When I was in NAB where you bank the charities and you see new customers, people living in their cars, charities paying the registration of people living in their cars.

Because if you don't pay the registration, cops come and get your car and you've lost. You see those sort of things and you just say, hey, there's a lot of stress out there. People are now starting to get a bit nervous because electricity prices are going up again.

And, you know, you need to understand some of the dynamics. So one of the things that people talked about a lot with the last National Council, they said, oh, consumption went up. So that, you know, the consumers are now starting to spend. Technically, that's wrong.

Because what happened is when you pay the subsidies, it doesn't count as consumer spending. It counts as public sector spending. And when you stop paying the subsidies, consumption goes up. Of course.

But the public spending goes down. You need to look at the bigger picture now.

The worst has probably passed, but one of the issues I have is that a lot of the growth, and this feeds you into productivity as well, is basically coming out essentially of health, education, and the provision of public services, which from a productivity point of view is all pretty low productivity stuff.

And so you have this issue that the private sector is still not growing very much at all, and the public sector is still contributing all the growth, and they're contributing in areas where there's no productivity. or very hard to measure it.

And then I look at the government and the government says, well, what we're going to do is we'll understand where productivity is, but they're not saying I'm going to cut back any spending. They're just going to say, I'm going to raise the extra revenue somehow smarter that has less impact.

And that is dumb. So one thing I would say to you on productivity, everyone out there normally says, oh, that's just means productivity is when you sack people and get the same amount of output. Wrong. Productivity is the output you get out of three things, labor, capital, and technology.

And what you've got to do is whatever amounts of those inputs you use, you want to get more out. So if I could be guaranteed that adding more labor means I get better use of capital and better technology, that's fine. There's a lot of sort of holes in what people talk about productivity.

And the other thing is, tell me any structural change that's been really important in the last 10 years. And the answer is, I can't find any. And so why would productivity improve?

Yeah. Although a couple of things, though, that I'm curious about. One is a lot of our immigration has been these so-called students that aren't really students. They end up in delivering Uber Eats and stuff like that. And that's pretty damaging for our productivity, isn't it? Yes. So that's one aspect.

But the other side of things, AI, obviously, and CBA, didn't they famously, a couple of weeks ago, sacked a whole bunch of people, then unsacked them, didn't they? Because it's not good for the optics.

But the reality is that there's going to be a reshaping around the use of AI, and that's going to make us more productive in some ways. So sort of a bit of a long question, it's got a couple of tentacles, this one.

One of the things I'm thinking about, there was an article in the AFR a few weeks ago about the basically we're going to have a decimated middle class because AI is going to take all of the knowledge workers jobs and whatever.

And it's like, is it really a good idea for big business to cut so many heads when if those people don't have jobs, they're not going to be able to afford to buy the products and services that these big businesses offer.

And therefore, we're going to have a real problem with being more efficient because we're going to have a tiny customer base that So fundamentally, we've got to keep people employed so that they can keep buying stuff, right?

Yep, that's right. Okay, a couple of comments. I really agree very much about the students, and a lot of them are not coming here to get an education. They're coming here to get a passport.

And so if you want a really simple solution, oh, sorry, want a really simple illustration of that impact, the number three source is of students into Australia is from, you'll never guess it, Nepal. So I think it's 8% of all Nepalese students are living in Australia.

And, you know, they've got to be old enough. So I have no problems with the idea of a faster growth of population, provided it's skilled, not... Then the second thing you were talking about, sorry, remind me again in terms of...

It's really around the erosion of the middle class by AI. By the erosion, right. And what would that do to the fundamental customer base?

Okay, so my problem, and maybe I'm just a certain age that I'm a sceptic, I think AI has some really interesting... And you can see the AI being used to design new ads for the banks, et cetera, and to sell to customers a product. So that's fine.

But it doesn't. This idea that AI will give you something, you don't need as many people to get that, but it will generate new jobs. in a different sort of thing.

So if I go back to Karl Marx, Industrial Revolutionary Army was basically everybody got unemployed because technology was going to basically wipe out the middle class, and that's what they're saying AI is. So I don't see AI as necessarily being very helpful for an economist's position.

I see it being helpful for advertising and maybe advertising getting big institutions to focus better on their customers and figuring out what their customers are doing. Although the banks have done that for ages and I think telcos and frequent flyers and all that sort of stuff have huge databases.

So I think there will be some people who will never work again, won't be happy, but there'll be other people that will have new jobs that we never heard of before.

How long will that take though? I don't think it's going to take a lot. You think it's going to be pretty quick?

Well, I think there's a lot of change already happened and I'm still seeing a labour market with four in front of it.

Yeah, fair enough.

So when I see the labour market with a six or eight in front of it, that's a different issue. But at this stage, I think AI has really good things for some areas of the population, but I don't think it's going to change the labor market that radically.

So I don't believe in the industrial army that Mark's talked about. It hasn't ever happened.

Yep. I mean, you had access to amazing data. I mean, I think about, like you said, you know, Glenn Stevens, yeah, that business service, but you know, you didn't have to just have two, you have lots of data in your role.

And, you know, when it's real time and you've got access to, you know, millions of customers, millions of Australians, income, expenses, billions, what are some of the things that

You know, your competitive advantage, if you put yourself in a room of the top 10 economists right around the country, what were some of the things that your data that you were having access to that a lot of other people didn't and it gave you a different view than a lot of the other people in the room because they just didn't see what you saw?

We could see what consumers were doing. We could see real life what they were doing.

And so if you're saying, oh, the world's about to end, the inflation is going to go through the roof, you've got to increase rates by huge amounts, as a few people did, you sit there and you say, well, that's not what the data is telling us.

And sure, it may be next month and you'll need to look at it again, but each time you look at it, you see something that says, no, this is not... killing the economy. And so therefore you reposition. And, you know, some economists, unfortunately, like to get a headline.

And so if you can be counter, if you're in a big institution, it's a bit more tricky because what tends to happen is you have dealing rooms, but in particular, you have essentially where the bank puts this money. Hmm.

And you can't be swinging it around each month according to a different number because you will generate huge losses for the bank or huge gains for the bank.

So what we sort of do is we get information like we see people going to cash converters and that sort of stuff, cashing their stuff in. And we see from some of our –

the sentiment surveys, people saying life is not worth living and I've got mental health issues and all that sort of stuff. And it's tough. But I look back and I say, okay, if I'm looking at it, I'm seeing a consumer that's still struggling, but maybe the worst is beyond.

I'm seeing an unemployment that's still pretty good. And I can see nothing in business investment, but I can see a lot of public sector investment. So we'll probably keep seeing inflation under control.

So I would not be surprised to see a trim mean when they get the full quarterly numbers like 0.7, 0.8 and two and a half, 2.6, 2.7, that sort of story. And so I think you'll still get a couple more rate cuts and that will help.

I look at Australia and I sort of say, well, we didn't get damaged anywhere near as much as Other countries with COVID, okay, we all got locked up, but particularly in Melbourne, which is a different story. But we are still in what Ken Henry used to talk about the Asian century.

We have, believe it or not, quite a good education system. We don't count at all in the corruption sort of things of politics. We have a legal system that's really good and we're focused on Asia. And we're coming out with a low unemployment rate

Financial institutions in a touch wood, pretty good position. If you get productivity up, that'd be even better.

But generally, I would say that let's assume that my sort of forecast and the government's general forecast, they say maybe 2% increase in GDP next year, maybe four and a half for unemployment, inflation back in the target range. Our debt, despite what everyone thinks, is relatively low as a percent of GDP.

So they talk about, oh, a trillion dollars debt coming up, and this is awful. Well, the economy generates a trillion dollars, actually nearly two trillion, each year. In the old days, they used to say someone's got a million dollars on their credit card, but yeah, but they've got $10 million of assets.

Yeah, yeah. And that's roughly where the Australian consumer is. You look at that, if you're outside... That's a pretty good environment. Not many countries around the world are going to be like that.

It'd be good if we could have the politicians do something that would help the economy run better and not spend huge amounts of money on health, education, and public services. That's a choice. But even with that choice, I'd still say we'll have good fiscal policy. We've got inflation back in the target.

We're going to grow it around trend and our unemployment rate's really low and we're cash to Asia. That's really good. I'm on a personal mission to help more people make better property decisions.

You know, most people don't realise that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need.

And what I do is help people with tricky real estate problems, which often masquerade as simple questions like, should I sell my investment property because the interest repayments are hurting? Or should I buy before I sell? Or the other way around.

You can connect with me and access all of the tools that I've created to help you make better property decisions at veronicamorgan.com.au. And there you will find resources for first home buyers, details about my buyer's agent mentoring program.

You can connect with my Sydney based property management and buyer's agency teams, Australia wide vendor advocacy, or ask me for introduction to the small group of buyer's agents that I would personally recommend across the country. That's veronicamorgan.com.au.

If you're considering a property move such as buying your first home, upgrading, renovating or investing, the team here at Alcove would love to help you think through your decision and get the finance right. Please go to alcove.com.au to reach out.

You're pitching it in context to say, actually, we're not in bad shape. And yet the headlines are not that way. And people talk about all this doom and gloom and the cost of living crisis. This is something that's interesting. I was having a chat with some friends the other night.

And the question was, are we really in a cost of living crisis or have our expectations just continued to rise? And we're just struggling to afford all the things that we got used to buying.

To me, it's the latter. And it is a problem in the sense that in some areas, construction costs, for example, they used to go, well, they used to go two or three and then they went to seven or eight. They haven't gone backwards.

They're now going to two or three on top of that seven or eight. So it's bloody expensive to buy a property.

Yeah.

And people struggle. Even with low interest rates, they struggle. And you see the stress, as I say, at the bottom end of the income distribution and the top end, we're still going overseas. Yeah.

I mean, we've always seen stress at the bottom end of the distribution though, haven't we? I mean, that's normal. It may not be great, but it's normal.

Not as bad as what we've had at the bottom end of the income distribution in the last five years. Is that due to the rental crisis? I think the rental crisis is really important. And state governments, I'll use the one that I live in, right?

State governments are saying, right, during COVID, you've got to go to VCAT. And so if you own a house and you've got a bad tenant, you can't get them out. You return, they put a land tax on that basically means in some places you're not making any return.

So why would you bother trying to rent? So you sell to get out. And when you don't care whether someone gets a new rental or whether someone's come and living here. And in some areas where the land tax, so let's say you're down in Port Seal, places like that in Melbourne.

So that's like the, I suppose in Sydney, it's like the Northern Beaches. Northern Beaches, yeah. Northern Beaches. Okay. So what happens is that people die, kids get the house, which is worth a couple of million, but they get a $60,000 a year land tax.

And so you go down to Portsea at present and the Northern Beaches, I'm not sure, but certainly in Portsea where I know, half the places are for sale. And all that does is just cause stress.

It actually lowers the amount of supply of rental properties, which is the complete reverse of what people want.

At a time when there's migration as well, right? So it's the supply and the migration plus the pent up of the lack of building due to the cost of building, the lack of investors buying new stock because they're buying regional houses rather than in the cities. And so it's just perfect storm.

And then you've seen rents have gone up dramatically. And then if you can't afford it and you can't get a place, then it pushes it all down to the people at the bottom 20%, unfortunately.

Yeah, that's right. And they're in a disastrous situation. And you see that in terms of the way charities are talking. And if you're banking a few of the charities, that helps as well because then they tell you the truth.

There is a shift though. I mean, certainly when you look at Victorians, I've spoken to a number of Melbournians who have been selling up their properties because of all of that.

Interestingly enough, there's a lot of investors, a new generation, if you want to call it investors, who's swarming in there from Sydney, Perth, Brisbane.

Yeah, they're saying they're coming to Sydney now or from Sydney now.

But they're buying different properties. They're not necessarily buying the stock that was sold by an investor. They're not going to buy the house in Portsea. They're not going to buy a family home even. They're going to buy something relatively cheap.

So therefore, the distribution, if you like, of available properties for rent does significantly change. Yeah.

Yes, that's right. That's right.

What's your take on the economy in Victoria too? I mean, you know, look, as I said, Melbournians are pretty negative about it. So what's your thoughts on that?

When you look at, okay, so I won't say my take, our business survey and the unemployment rates and house prices, Victoria has been for a couple of years, the worst. It's getting slightly better now, but it's still it or Adelaide are the two worst. New South Wales is better.

The best is certainly Queensland. And the one that no one talks about is it used to be Western Australia, but that's come down a long way because of mining. So it's mixed and Victoria's still not good, if I can put it that way.

Alan, I think you're retired now, but you probably got friends at the banks and you probably got still conflicts of interest, but it's a bit selfish, this question. I mean, how do the banks think about residential property and mortgages?

Like, obviously, we've got a huge portion of our wealth as a country is in the property market, a huge portion of the bank's assets and their profits and their future profits come through lending growth. The banking system is such a big part of our economy.

economy, how does this property Ponzi sort of mindset within the bank, how do they view that system?

We don't think it's a Ponzi scheme, I'll tell you.

Let me start then by giving you a few statistics that you probably won't believe. If you're looking at a balance sheet of the average consumer, and so average, you have to be really careful because it's sort of distorted at the top and still at the bottom.

On average, debts in the mortgage area are around about $2 trillion. Anyone like to have a guess at what the actual assets?

Yeah, 11.

11.8, I think it is. That's right, nearly 12, I think it is.

Yeah, it's probably jumped heaps in the last couple of years.

It's been going up a billion a month for about the last 18 months.

And so it's a balance sheet that as long as you can survive temporarily, as long as you've got a job, then it's not going to fall over. I used to go to New York all the time and they say, oh, they'll give you the keys back and blah, blah, blah.

And my answer is, yeah, but unlike the US where that's all you can get back, in Australia, we, the banks, will come and get everything you got. And so they don't want to default. No, no way.

Back in the days, not in NAB, one of the sort of things was the philosophy that people just don't understand in the States. And this is a bit crude and awful, but they say a typical Australian will starve their kids before they default on their mortgage.

And so they will do everything they possibly can. Prices over the long period of time has been a good investment. So they don't want to basically sell out cheaply to the banks. So to me, the mortgage industry is such that margins are very fine.

And so everybody now wants to come and get NAB, which has got business bank, bigger margins.

Yeah, yeah.

And, you know, that's what you do.

Yes.

You don't have to be Einstein to figure out that sort of issue, that you can't get your return on capital in the mortgage book and you can easily get it in the business book. You can do more business banking.

As an economist, I mean, it's one of the arguments around anti-property, putting it rather than a bank view, right? Like an independent view, looking at the Australian economy. Have we pigeonholed ourselves as an economy, right? Like we've put people into property. It's such a huge part of their wealth and it's tied up.

And then they're also taking out big mortgages, which stops innovation and entrepreneurism. And how do you sort of think about the system we've built? Is that one of the reasons we're not as productive as we should be?

No, no. The productivity issue in Australia is something that's occurred in the last 10 years, or hasn't occurred. Okay, so in the 80s or the 90s and the 2000s, when you had Keating and Hawke, and then you had technology, the average productivity in Australia was 2% to 3%.

Today, it's 1%, and today, it's below the OECD average, and I haven't seen that for 40 years. Okay, so this is very different. This is not a mortgage thing.

So if there was a big problem with mortgages hurting our productivity, it should have done it for the last 40 years, and it did not.

Is it us? Are we lazy?

I think one of the problems is that you've switched into the public sector. So most of your growth is coming out of areas where you can't probably measure productivity very well. And so you typically don't get, so, you know, what's the services that's coming out of it? How do you value NDIS?

Really difficult. All you can do is you count the number of people so that the best productivity you can get is one. And if that's all your growth... then you've got a problem.

And the real problem in some ways is think, okay, let's say wages grow at 4% and you've got productivity of one, that means inflation is going to be three in the long run. If it was one and a half, inflation is two and a half.

So therefore you can push interest rates a little bit lower, grow the economy a bit faster and still be okay. So that's why you need productivity. And you go back to productivity. If I go and I have to do a 10-year forecast for some silly reason, I tell everybody it's always three.

But there's three things that matter. Population growth, participation rate, and productivity. So they're the three things that matter. Population growth is probably going to come down and the par rate's at the top. So unless you get productivity going up, your growth rate's going to be slower and slower as you go forward.

Otherwise, it'll blow up in inflation. That's the way you should think about it. But very few people do.

If the goal is to get his productivity up, right? And I think you're not the only one who says that, right? Like in terms of it's a major issue. Yeah. If Albo called you up and said, look, take over. He won't, but that's all right. Yeah, that's all right.

I'm sure he likes his position. But what would you do?

I would do number one. I would try and get the growth in expenditure down. to a limit. I would then look at things like, how do I fund that more effectively? Well, I like the idea of them going off to do some cutting red tape, although you never see any sort of response.

I really would like to see an increase in, yeah, I'll get into trouble, GST. And you offset it by what Howard did, is you basically lower the income tax, particularly at the bottom end.

And then the other thing that I think is really important, well, a couple of other things, but one of the things that I think is very important is to index the tax scales.

Okay, and so that'll get you into that you won't get bracket creep and then the politicians make themselves on either side a hero just before the election where they'll give you back what you've already given them.

And also when you get into negative gearing, I don't have a problem with negative gearing because that's right through the system. And so if a businessman invests in a new piece of plant and equipment, he can write that off.

But the issue was that they couldn't figure out how to index for the capital gains.

Capital gains, yeah.

Okay. So they did the 50%. Building new houses, which helps the sort of housing shortage, you should maybe do 70. At the existing, you do 30. Average, it doesn't hurt. And the final one that I think is important is what they call investing to rent.

So basically what happens is as a developer, you basically go away and you build all the apartments, but you don't actually sell them. You sell them to rent. Yeah. and you get an income stream out of it.

And to give you some rough ideas, I've seen numbers that said in Australia, that's five or 10% of the supply. In America, it's like 30. So that would help a little bit as well.

So massively fund the bill to rent sector, cut income taxes, put a indexation on income tax, particularly cut income taxes for the younger, or no, the lower incomes, because they're more likely to spend it rather than bank it and put it in their offset account, which will encourage the economy to get moving.

The first two points are around they're cutting their spending and maybe expand on that.

One of the problems is the indirect effects that flow on. For example, when you talk privately to big building firms, they say, well, the cost of cement and the cost of all these inputs hasn't come down. In Melbourne, I can get tradies now, which I haven't been able to get.

I still can't get them in Brisbane. And in Sydney, it's iffy. But I can't make any money because I'm paying the price of the cement and the input. And so therefore, I... I ain't going to build them because I won't make any money.

And that's also part of the reasons why the government's got, I think, a good idea to try and build more houses, but they need the private sector to help them. And the private sector's not going to go in there and make a loss out of that. They're just not going to do it.

Well, the New South Wales government has just come out, the Minns government has come out with an initiative. Well, it's a guarantee. It's basically if they don't get their pre-sales, they're going to guarantee the pre-sales and supposedly help funding. How are they going to fund that? To get these out of the ground.

Well, maybe. I think what's quite interesting too, that if you look at statistics, the proportion of resales of brand new apartments that sell at a loss is very high, particularly in Melbourne. And so it always interests me that governments are going to guarantee those.

And even with the 5% guarantee and the government's paying the LMI, or effectively being the lender's mortgage insurer. And I'm like, have they not aware that they're now going to be potentially... Well, that just means their debt goes up even more. Oh, that's it.

It's a very risky investment, but it's helping buildings get out of the ground, supposedly.

Yeah, so there's a lot of those issues.

I don't want to bring up a reactivating PTSD or anything, but when you're back in the COVID days and the banks all came out, United, on 20%, 30% falls. I don't know whether you were part of those articles, by the way, and those predictions, but obviously you got very concerned.

You said it scared the hell...

Okay, so I think the government or certainly privately, the Treasury and those guys, we all thought unemployment would get to 12% to 15%. Yeah.

Not only that, we will have huge amounts of bad debts.

One of the things we learned in the 1990s is as a bank, don't go and try and get your money back first before everybody else gets theirs because all you do is it all just escalates down. And so one of the, you know, if I feel, I know Phil Lowe pretty well.

What he was really trying to say is, look, interest rates are really low and you can go out and borrow, because I'm going to keep them really low for a really bloody long time. That's what he was trying to say. He stuffed it up. It didn't come down well.

To me, I look at that and I think, well, that's what they tried to do. And these days they won't do that again. And so you can see Michelle Bullock never says anything. It's always difficult and I don't know what's going to happen. So she'll get away with it that way.

But anyway, so I still think Australia's not in a bad place, to be honest. It's tough. I look at Canada. I really like Canada. A couple of years ago, I went over to Western Canada. It was great. 80% of their exports go to the U.S.,

That's tough.

That's tough.

They've also got a real issue in the housing market, and I've only just dabbled on the edges of this, and you're probably a lot more aware of it than I am, but I've heard that they've got real issues with affordability and some very similar issues that we have.

One thing I should have said about the house price thing, and people say, oh, it's abnormal in Australia. If you actually look at the coastal region, right around the Pacific, any country, any city on the coast is bloody miles more expensive than the cities in the middle.

And so we look a lot like Vancouver or LA or any of the sort of countries or cities that are on the coast. So Australia's not that unusual in terms of that.

So we don't have inland cities?

No.

Yeah. That is quite fascinating, though. I hadn't thought of that.

Yeah, no. And that's something you can look at. And our debt levels, I'll give you another statistic that no one talks about and no one knows because none of the newspapers are interested.

If I said to you the second best country in terms of net debt, in terms of the consumer, is Australia after Japan.

Yeah, right. Really? Yeah.

Because that 2 versus 12 that we talked about before in terms of their assets, so that's net. Now, just look at the gross. Right. Not the debt.

There has been clients that have struggled with the mortgage. They've gone to their families. Their parents have helped. They've sold everything they've got. They've even sold down and downsized and got out of markets. They've sold the investment properties.

People just haven't gone into the three months or late on their mortgage because like you said, they'll starve the kids before they'll do that. I think you made a great point before trying to predict 10 years aheads. just impossible.

I got kind of taught a lesson early days in financial advice back in 2007. I became an advisor in 2008, happened in 2009. And then there was this European debt crisis and then Trump and Greece is going out.

And I was just like, oh my God, like every year you just get like knocked around. But pre-COVID, we did get stuck in a bit of a period of just declining interest rates and very low growth. And that then got shot up with all the overstimulator, you know,

Do you think we're going to head back to that world? Or do you think that that was that structural imbalance that we had before? It was just this lower, you know, or we're going to go back there?

I think one of the things that people also don't talk about is that after 2007 and 2008 financial crisis, the banking systems have become much more robust. And so there's not that big driver. I would go back to my three P's.

So I look at productivity, I look at population, and then I look at power rates. I can't see Australia growing much more than 2%, 2.5% going forward per annum. So we once would have said that's garbage. But I think most people would say 2 max. And in Europe, the growth rate's normally 1.5%.

So that leads to low interest rates, right? It lows, yeah.

So, you know, Trump can look around and say, oh, look at the ECB, their interest rate's 2%. Ours is 5 or 4.5 or whatever it is. I think I prefer to live in a country where my kids have got a job. It's basically the bottom.

So I lived in France for four years when I worked at the OECD. It was depressing. I arrived in 87, which was running into a recession, right? And it was Mitterrand and Chirac. It's 10% unemployment. It did not get mentioned even during the election campaign.

I don't want to live a country like that.

Yeah, I mean, not to say a personal story, but I think that's 2007 happened. I moved to London, and then 2008, 2009. There was a proper recession over there. I think unemployment went from two or so million people in the UK to three. It was a huge jump.

Businesses were all shutting down, and it was coming back.

Australia missed that.

Yeah, it missed it. Yeah, exactly. Everyone was very positive, and I was like, oh. That was not nice what I saw over there.

One thing to think about is that's where they had a lot of bank problems. And one of the lessons on history is if you have a recession, that's financial association, it's much deeper. So it sort of goes like a U. It doesn't have a V.

And if you want an example of that also, and it works in Australia too, is when I was working at the OECD in Paris, I come back and I was the head of forecasting and modelling. And they said, right, you can write what went wrong. Obvious one was interest rates.

But the question that we couldn't really answer at that time, why did Melbourne and particularly Adelaide have such a bad recession? And it hardly had a recession in Sydney and Queensland. Why? We had a couple of financial institutions that all fell over.

State banks, Pyramid, which was a big building society, et cetera. And the state bank in South Australia fell over, et cetera. And it didn't happen. So in Australia, the reason we missed 2007 was nobody thought one of our big banks were going to fall over.

Right. Interesting, isn't it?

Alan, we do a segment which you wouldn't be aware of. It's called a property Dumbo. So it's just a lighthearted end with a bit of a property story. It doesn't have to be you. A little story about a property, ideally, property transaction or something.

Just something we can laugh about and have a listen.

We can learn from. Yeah.

Well, the one thing that's probably not financial is I've just sold a house, tried to downsize, and I've had what they call decluttering. As part of that process, we had a sort of an attic room in the roof and we found boxes that we packed up and had not unpacked in 15 years.

That's fantastic.

We've now moved from a six bedroom to a four bedroom.

So you have to unpack the boxes and tuck everything out.

We're just throwing the boxes out. We didn't even look.

Didn't even look. Good on you. That is a very common thing that we hear, particularly with people upgrading and they just don't actually, upsizing and they don't cull. I've done it myself, had that same problem. Then you downsize and whoops. I love that. I love that.

And so you downsize, you were saying off air that you downsize from a six bedroom to a four bedroom. So that's a very interesting downsize. Do you think there's another downsize in you, Alan? I hope not.

I can't declutter anymore. We've gone through about four or five episodes of decluttering and then we got, quote, the stylist in. And the first thing they did is throw out about half of the other stuff.

That's gold. That's very helpful. That's fantastic. This has been a great chat. We really appreciate your time, you know, your experience and some of those insights and the things that aren't normally talked about is perfect because that's exactly what The Elephant in the Room is all about.

So thank you so much for your time, Alan.

Thank you. It was a pleasure. If you have a question that you'd like us to answer in an upcoming Q&A episode, you can send us a voicemail or written question via the website, theelephantintheroom.com.au, or you can email us directly at questions at theelephantintheroom.com.au.

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