Diana Mousina on Why Property Is Australia's Economic Backbone

In this episode, we're talking with Diana Mussina, Senior Economist at AMP, and we're going to explore the local and global factors that are shaping the economy and property markets in Australia. We also want to deepen our understanding of property and the way it fits into the economy so uniquely in this country.

And we'll also discuss the big R, recession.

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, mortgage broker, currently ranked number three in the 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.

Our guest today is Diana Mussina from AMP. Amongst other things, Diana provides global economic and macro investment analysis to retail, institutional and internal customers through her regular Econocytes reports and presentations.

She also regularly presents AMP's macro views through various media outlets and explains economic concepts for the layperson through a highly entertaining series of reels she posts on LinkedIn. And today we're looking forward to learning more about what drives our economy and the property market in this country.

So thank you so much for joining us today, Deanna. It's the first time we've met you on the podcast and we're delighted that you've come along.

Thank you so much for asking me.

Deanna, hats off with all your social media. And I guess, you know, what a great economist do is speaking to the everyday person.

I mean, when you've sort of been producing content and the work you do, what has been the major things that sort of really fly and why do you think it's been so successful what you've been producing?

I think there is a bit of a hole in the market and we have filled a bit of that gap because you see and you hear economists talking in the news, but a lot of the time they use a lot of jargon and people now are more interested in the economy than ever.

I think in the last five years, really since the pandemic, because of all the changes we've had to inflation, to interest rates, government policy, now US policy. So people are taking a much more interest in the macro news.

They want to understand it, but then they feel like they can't relate to what they see on the TV and to the news.

And the availability of reels and people watching reels so much more now compared to even five years ago, I think has just helped us to fill that hole in the market.

I think you do it really well.

So, look, there are a lot of macro forces that play into the property market and the economy. And obviously there's Australian things that happen in our Australian sphere, but there's also global forces that make their mark as well. I guess we'd like to kick off this conversation.

We might as well go big, right? How do you think the Trump administration could impact the property market here in this big island with only a few people on it?

I don't think that anything that is happening in the US right now is going to impact our property market significantly. And there are a number of reasons for that.

So when we think about what's happening to US policy, there is going to be a direct impact to US inflation, to US interest rates, US growth in the short term. And then there will be a flow through to financial markets as well. Directly for Australia, there will be...

the flow through to our financial markets because we are very much tied to what happens to US shares. Usually, whatever happens to US shares happens to Australia.

Not always because, of course, we have our own specific things that are going on that impact our mining stocks, our banking stocks, which make up the largest share of our ASX 200 or our major share market. But we do have a very close tie to what happens in US markets.

And then there's, of course, there's an indirect channel through what happens in China in global trade. So if we see a slowing in global trade from tariffs, then that could impact Australia's ability to export a lot of those commodities that China demands for its growth when it's

producing and increasing, for example, industrial production and activity. But in terms of the property market here, I mean, the main factors that are driving our property market in Australia is basically one factor, and that is housing under supply across the country.

And that has really been a factor in Australia now for the past decade. 10 to 15 years in particular, and it's gotten worse since the pandemic. But I don't see any implication from what's happening in the US hurting our housing market or improving it. I don't think that there's any correlation at all.

When you think of housing supply, because a lot of people say that, right? We're not building enough, but there's so many facets to it, right? I mean, how do you see it when you say the problem is housing supply? How many different elements to that?

I don't actually think it's that complicated because when you're thinking about the overall picture of the housing market, I think we just simply need to look at it. What is the demand for housing and what is the supply?

The demand is basically just the population growth adjusted for how many people live in a dwelling, adjusted for how many knockdowns we have and conversions. Those are quite small. So it's basically just the population growth. divided by how many people live per dwelling.

The supply of dwellings is just the completions of standalone houses and detached dwellings that we have every single year. And you just need to look at the difference between the two. Since 2005, we have had a problem where across the country we have had a period of housing under supply.

Demand has been running well above supply. Supply flatlined in the five years from 2005.

had a bit of a boost. And then it hasn't been accelerating to the same extent that demand has. And of course, the past five years, we've had this big boost to demand from more immigration, but that is playing catch up after the pandemic.

But fundamentally, we just have a problem where we're not building enough homes to keep up with the demand for homes, which is our population growth.

So this is sort of interesting because a couple of things, I mean, obviously the formation, you know, the housing formation, so how many people live per dwelling, because that has changed too. I mean, we have had less people per dwelling since COVID. Is that going up again?

I think it's going up again from the rental side of things. I believe it's going up. Yeah. But there's, so supply and then you've got population growth and through immigration, of course.

But then you've got supply, which we've never built, ever built enough properties to meet the current government target, which we're falling behind on anyway. And finite, I mean, demand is sort of not finite, is it? Demand will long go. I mean, people will always want dwellings. So...

Have we really had this lag problem where we have actually been increasing demand over time? So it's a double-barrett question here. We've been increasing demand over time and it's just taken a while before we've realised at the tipping point.

But also, you know, if we talk about a lack of supply and a lack of approvals and completions, Since 2005, we've had situations where we've had oversupply, and I'm thinking particularly unit stocks in Brisbane and Melbourne in particular, through that same period.

And we've had booms, we've had property booms where people had lost money if they bought the wrong type of property. So that supply thing is really about the supply where it needs to, where the demand resides, correct? Yeah.

So many parts to your question. So, gosh, I can't even remember the first bit of that. But, I mean, so starting with the point, I guess, about supply and demand, yes, absolutely, there are going to be differences across countries.

different capital cities, different regions, even within the detached housing stock, within the semi-detached. So I'm talking nationally. There are differences, though, in various states. For example, my analysis in the past

10 years has shown that victoria as a state has actually had an oversupply of dwellings they have been building too much uh relative to how much they've been demanding they've been building more than any other state and you have seen some pockets of oversupply in particular parts of the apartment sector just like you said in brisbane and in uh

Melbourne, but nationally, there is still this problem that we just haven't been building enough dwellings. And in particular, a lot of that has been in New South Wales, that we have had a lot of housing under supply in New South Wales.

There has been, usually when migration comes through, migrants come through into Sydney.

Mm-hmm.

And then they tend to move out after that. But that's why we get a lot of this flow into New South Wales and we just haven't been building enough to keep up with that new flow. I think I missed the first part of your question. I can't remember exactly what it was.

Sort of about household size and also demand has been growing steadily, but we obviously were able to absorb that for a period of time and then there must have been some tipping point. Yeah.

Yeah. Yeah. So household size, I mean, it's slow moving, but you can see trends in it. So it did start to decline in the years after the pandemic. So basically what that means is you need more dwellings to live.

For the same amount of people. For the same amount of people, that's right. And it has started to pick up a little bit again.

I think people are being more comfortable moving back into share houses and affordability problems are also, of course, pushing people to get back into rents and to live with larger groups.

So that has actually helped to ease some of the undersupply issues that we've had in recent years, that the dwelling size has started to creep back up again. But it is slow moving. We know on some estimates...

Like the Reserve Bank, they think that the change in dwelling size has led to a shortfall of like 200,000 dwellings recently. So it can actually have big implications, even though it is slow moving. And to your point about demand always growing, that's absolutely true. As long as we have population growth,

increasing of course we're always going to have demand growing the issue though is the rate of change so the rate of change in demand versus the rate of change in supply supply the the change in supply just hasn't kept up with change in demand we've had a big increase in demand but supply just hasn't caught up to that same increase

Just with your thoughts, I mean, it's a bit of a social question. I think this is something that Sydney is really dealing with right now is housing affordability, rental crisis. As an economist, how is our housing problems or our property challenge

really going to affect us over the coming years you know it's just becoming such a big part of our economy it's it's issues with talent like you know someone who sort of tracks you know Australia's future have we sort of backed ourselves into a bit of a corner here where we've got a property challenge housing affordability people can go into a lot of debt you know innovation how big is this problem when you look at the overall economy of Australia

So I think that there are a few implications for it. And I wouldn't say that Australia is too dissimilar to many other large global hubs, Western global hubs, or even, you know, big global hubs in China.

Some of the price to income ratios in China for property is very overvalued as well, just like Australia. So if you just look at the capital cities, Sydney compares in the same ballpark to other major hubs like Rome. York or Shanghai, Paris, London.

It's not like we are the only place in the world seeing these very high values of home prices relative to incomes. And there are a few reasons for that. But in terms of how it affects our economy, I think

For Australia, the long-term impacts that I'm seeing are a decline in productivity growth because the housing challenge takes up so much, basically, time and energy of governments, of people. I think it is a drain on productivity growth.

Yeah.

And also because now we have this problem where we're just taking too long to build homes and that's a productivity challenge. And it's also a drain on people's incomes, which can be used for more productive resources.

And there's also an inequality problem because now we're going down the path where because housing affordability is such a challenge for young people to get into the market, they're relying on parents or grandparents if they have that ability. Of course, that's a

equality problem for the long term is causing intergenerational angst between the different sides of the population. I think you can see that leading up to this election and, of course, government and election challenges and how do you alleviate and solve for this problem.

Then you get some sort of a population drain. So you either see the population moving to different parts of the country, and you can see that people have moved out of New South Wales And in Victoria, maybe less in Victoria because of affordability, but other issues after the pandemic.

But a lot of people have left New South Wales and moved into Queensland, into South Australia, Western Australia, more so Queensland, though. And that's not necessarily bad. It's just a change.

in in how the population moves and then of course you know long-term other longer term issues in terms of people renting forever the rent a generation or people having a mortgage even up until the point where they enter retirement we haven't seen that as much yet because i think obviously the the groups that are retiring now are the gen x's and the baby boomers so we haven't seen the impact

to the millennials or, of course, the Gen Zs. But that's sort of the risk that we're going down, that as people move into retirement, they're still going to have these large mortgages that they need to pay down.

You mentioned about Victoria. That's quite interesting because Victoria, as a state, is not as economically robust as the rest of us at the moment. And obviously their property market has been in the doldrums for the past year, maybe not so much this year, but we'll get to see how that plays out.

But I wonder how important that fact that you say that Victoria in particular has had an oversupply of properties compared to the rest of the country. I wonder how instrumental that is in terms of the current state of affairs down there.

I think it's definitely led to some of the decline that we saw in property prices last year in Victoria because they still had quite high levels of construction in the last few years at a time when demand had slowed after the pandemic.

And, of course, demand slowed in Victoria probably a bit more as a lot of people moved out of the state after the pandemic. And maybe they were just over it after being locked down for, like, what, six months out of the 12 months? It was eight. Yeah.

So, yeah, the most lockdown – I think outside of China, wasn't it the most lockdown city in the world? Yeah, that's right. Shouldn't lie.

So, yeah, I think that the last few years has made the oversupply challenge even worse in Victoria. Of course, you know, there – When I sort of tell people this, they don't believe me because they feel it's such a challenge just looking at a property in Victoria or in Melbourne in particular.

And that's fair. I am talking about the whole state. I'm not talking about specific suburbs. People get very emotional about property because, of course, they're looking at specific suburbs or a very specific part of the suburb even. But I can't talk to that as a macro economist. I'm looking at the whole state.

I'm looking at the whole capital city. It's very hard and it would be very time consuming to look at specific micro level data and you would need multiple versions of myself to be able to do that. So I am talking about the whole thing.

And it's interesting because we do talk about in this podcast, we go macro right down to micro because in my business, I've got a buyer's agency and we are very micro. We are local specialists. But it is interesting because we do all agree that there's not one Australian property market. Yeah.

However, it is referred to often in economic reports. So I'd like to know from you, I guess, when's it useful to consider us as one market rather than dozens?

I mean, even when you look at capital city markets versus regional, it's sort of a bit ridiculous when you think about it because anybody making decisions on one region is not going to be the same. Newcastle is not going to be the same as Bunbury.

So, yeah, how does that – what's the relativity and when is it important to focus on macro? Yeah.

It depends on the cycle. Usually, the property market in Australia does tend to move in similar cycles. I would say in the last 12 to 24 months, it has been quite different cycles across the country, but usually things tend to move in one line.

And I do feel like the rate cutting cycle that we have begun, we'll see more uniformity across the property market and the periods of outperformance that we've had in some capital cities like Brisbane and Adelaide, I think are going to start softening and you'll see a big catch up in places like Melbourne and in Hobart.

So It just depends on the cycle. But you can also make broad blanket statements about the housing market. I think it's quite fair to say that Australia as a nation does have unaffordable and overvalued property.

And you can say that more so than you could just say that the US has an affordability problem. There are definitely pockets of the US where affordability is a massive challenge, but Australia versus the US is still much more unaffordable.

And that's because of where the population resides, basically, that not many people live in the regions in Australia, whereas in the US, a lot of people live outside of their major capital cities.

Deanna, a lot of people do blame the supply, and I agree with you. I think that's our biggest challenge, and that's one of the ways of fixing it, a bunch of lots of ways. But I mean, other people say, you've just got to cut migration. We're importing too many people. What's your thoughts?

When people have that argument to the housing problem, is it that simple? We just cut it back and just stopping students coming and cancel our visas? Or is there something much bigger that people aren't considering down the line with that strategy?

With something so nuanced as the housing market, just doing one thing like get rid of negative gearing, cut the capital Y, stop the students, nothing, if you just build one thing. Yeah, that's right. Nothing is going, not one thing is going to fix the problem.

But I think we also need to be realistic about, Fixing the problem. The basic problem is that housing is overinflated on our metrics about when you think about how much should an affordable home be based on 20% of an average income, an average time to save, how much should an affordable home be?

And obviously the affordable home in Australia is not at that level that you would expect. It is maybe multiples of that. Or a share of that multiple. So when we talk about making housing more affordable, fundamentally, we are saying housing needs to be cheaper.

Home prices need to fall by, let's say, about 50% actually for it to be quite affordable. But is that really going to happen? This is the question. And the answer is no. Housing is not going to fall by 30, 40, 50%.

And, you know, we can sort of get into the reasons as to why I don't think it would actually be favourable for most people to see such a decline in home prices. So what really needs to happen now is we need to make, is we need to stop housing from becoming more unaffordable.

The way to stop it from becoming more affordable is a number of those different things that we just spoke about. We do need to align our migration targets better to our supply targets.

We do need to think about if we need to do some tax reform around negative gearing, capital gains tax to limit some of these things. And absolutely, we need to build more. Building more is definitely the biggest thing that we need to do.

But that in itself is multifaceted because to build more, we need to cut down regulation. We need to make it cheaper for the developers to actually want to develop. So there's multiple things that go in that.

I would say, though, that I think that the current Albanese government has been doing a lot more to help build to invest in housing to try and get supply up. I think that they've been doing a lot more than any other government in memory for me.

So I think they should be given credit for that. But people want to see a quick fix and there is not going to be a quick fix with something like housing.

To actually make housing affordable, prices will need to fall by 50%. No one really wants to see that happen.

No, not if you already own a property, and a lot of us do.

On that, though, one of the things that sort of props up the argument for continued immigration is that we need to keep our economy growing. And so I'm curious why. Like, if you look at Japan, Japan's got a shrinking economy. The economy's not growing. They seem to have a pretty good lifestyle.

I don't know. You know, we're all going there skiing at the moment. But, like, why is it so important that our economy grows?

So... There are three things that make an economy grow, and these are what economists call the three Ps. Productivity, population, and participation in the labour market. So population is one of those things.

If we look at a country like Japan, like the example that you gave me, what has been the fundamental problem there? The fact that they have no immigration has meant that they have no growth in their economy or very little growth and no inflation or deflation. And...

That is negative for asset price growth. It's a problem for wages growth as well. So despite the fact that they do have a low unemployment rate, their wages have not been growing since before the pandemic for 20 years or so. The last few years has been quite different for Japan. So...

It's a problem for asset class growth when you have deflation. It's not good for consumer confidence and it's not good for wages growth. So that's why there is a sweet spot in terms of how much you want inflation to be.

You don't want inflation to be too high, but you don't want it to be too low either, which is why central banks settled on targeting inflation at 2% or so. In Australia, we have a 2% to 3% flexible inflation target.

And Japan is now running into the problem where the ageing population is a massive issue for them. So if Australia did not import as many people as we do through migration, young people basically, we would not have a dynamic workforce.

We would have an even bigger problem with our old age dependency ratio, which...

means that you have uh the younger population taking on you have less younger people relative to old people in the population bigger burdens on the government budget as well through things like spending on health care and aged care so long term for the economy it's not sustainable japan had been trying to increase inflation uh for for a long time before the pandemic

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Because, I mean, I imagine people say, well, asset prices are not going up. That's not a bad thing if I want to buy a home. And I'm okay with my wages not going up as long as asset prices aren't going up, I can still afford a home.

You can sort of hear people potentially making these arguments. But I guess that's all right. I guess if the old people are dying at the correct rate, right, and so making sure that the drain on the public purse isn't –

you know, going to come back in higher taxes for young people to sustain that. When we look to New Zealand for a moment, because New Zealand has been put forward as being sort of a poster child for affordability. Look, you know what they did in Auckland and they made properties more affordable.

But my understanding is that now they're in a recession. In fact, they're losing, you know, they're youngest and brightest. They're all coming across to Australia and impacting our population figures. Yeah. And so the property prices have really been falling in the two biggest cities in New Zealand.

But if people can't actually afford or they don't have a job and they can't afford to get a mortgage, then they're not going to take advantage of that. So I guess, is it really a good news story that supposedly some measures have resulted in more affordable prices?

So I think what's happened in New Zealand, I mean, they were growing. Their property market was sort of moving very much in line with ours up to the last few years where property price growth was very high. They did have very high levels of immigration.

But their central bank was much more aggressive in raising interest rates in the rate hiking cycle, which is what's caused the technical recession in New Zealand, and their unemployment rate went up. So this is why young people – are moving out. It's not really related to the falls in property price.

Well, it is related in the sense that you've had lower growth, property prices have been hurt by that, and also they've been putting in some of these controls in capital cities to try and limit property price growth, which has worked.

But I don't think that yellow people are necessarily moving out because property price is falling. I think it's all just happening. at the same time that the unemployment rate is rising. So people are choosing to move elsewhere to try and find work. Although their economy is now stabilising.

They reported better GDP results this week, actually. So I think that things are looking up and the central bank has been aggressive now in cutting interest rates. And I think that that should spur some property price growth again in New Zealand.

Deanna, when you look at the Australian economy and global economies and you had sort of ranked them around how they're going to look in, say, five, ten years' time, how do we sit on that?

Like is there, you know, we've got obviously a massive exposure to mining and property and resource, you know, and, you know, et cetera, and banks. So how do we sit? You know, is there any major shortcomings we've got?

And where around the world are you sort of feeling like they've got it set up quite well?

No economy is perfect, of course. I think Australia's biggest challenge in the next five to 10 years is tackling the lack of productivity growth that we've had.

Economists love to talk about productivity growth, but it is quite important because it's really the only factor that will drive long-term real household disposable income growth. If you plot the two against each other, you will see that productivity and household disposable income growth go hand in hand.

So our productivity levels have been stuck basically at 2016 levels. We haven't had much of an increase. The private sector has had better levels of productivity growth. The weakness has been in mining and also in the non-market or the public sector.

The non-market sector has really added to jobs growth recently, which isn't necessarily bad. It's just what's happened.

And non-market is like government and… It's healthcare education.

Yeah. So it's a lot… Healthcare education and government admin or public sector admin as well. It's very hard to measure productivity growth in those areas. How do you become more productive working in a hospital? More operations, seeing more patients, that's not necessarily right. How do you measure health outcomes for people?

How do you become a more productive teacher? I think there's definitely room for the productivity measures in those areas to be looked at properly. So that has been a technical drain on our productivity growth.

But nevertheless, even in the private sector, we need to improve our productivity growth outcomes to fundamentally help Australia grow. And there are... There are so many things that go into that.

I think we do really need to have a good look at tax reform because we are becoming a country that is heavily reliant on personal and corporate taxation as a share of the government revenue. And if you look at the government projections in the next five years, they're expecting that

Our budget's going to go back into very large deficits over the next five years. And basically what that means is that, you know, there's less money to play around with.

If we're already in deficit, how are we going to increase government spending on particular areas or particular things that we want to do will be incredibly hard if we're sitting in these deficit regions. in these deficits and then adding to public debt. So for me, that's the biggest challenge for Australia.

If we compare ourselves to a country like the US, which has its own challenges, but they have had very strong levels of productivity growth recently and they do have some of the best companies around the world and their share market reflects that.

Although maybe that's going to change. Who knows? I guess this sort of fallout of a quite systemic change, an attitudinal change in government, in the US government. And of course, they're refusing to rule out recession.

Everybody freaks out when the word recession is bandied about, particularly a big economy like America, right? And stock markets already reacted to that. We stopped looking, you know, if we're worried about recession, we stopped looking for new jobs. There's a stagnation there. We stopped spending.

Do you think this is a risk for Australia? Yeah.

Look, just because the US goes into recession doesn't mean Australia does. I personally don't think that the US will go into recession. They will have a softening in growth this year, but I don't think that a recession is banked in for this year. It's obviously a possibility, but it's not my base case.

People worry about recessions because it normally tends to have the worst outcomes for share markets, so shares can easily fall by 20% or 30%. In a recession, they have already in the U.S. fallen by 10% peak to trough, and then, of course, things like the unemployment rate go up, et cetera.

So I understand why people worry about it. I sort of think by the time we get to a recession, it's already been priced into markets, so If you're a long-term investor, don't worry about cycles. Focus on the long-term, especially if you're investing in shares.

Periods of drawdowns can be opportunities for buying for some people.

We're not going to go back to those periods, I think, where you had very deep recessions. So 1930s Great Depression where you had prolonged weakness in growth. You had very high levels of the unemployment rates. I think the government and the central banks now are

will come to the rescue as sort of, I guess, playing a bit of moral hazard issues or too big to fail sort of GFC types of thoughts come back into my mind when I say things like that.

But I do think that there is some sort of central bank or government put on the market where they would try and step in and support the economy. And I think that they've learnt from the pandemic how to do that.

Well, it's throwing money at it, isn't it? Yeah.

Really. Inflation genie, though, do you think it's – there's a few schools of thought on this, right? Like it's we've got it back in the bottle, you know, we're going to slowly cut down rates, you know, et cetera.

Or there's an idea that, you know, maybe it's going to be quite sticky and it's going to be quite – it's going to have to keep rates higher for longer.

Or maybe it's going to go completely back in the bottle and then we're going to have to cut rates significantly, like we said in New Zealand, and we're going to go back to where we were. Like –

How do you sort of see inflation sort of playing out and what's the major challenges that we have?

A lot of very strong opinions on inflation. I'm in the view where that inflation is going to settle at about 2.5% to the 3% band over the next few years.

So not quite back to where it was before the pandemic, but not at levels where you're constantly seeing high rates of inflation above 3% where you're sort of worried about growth because inflation is high. Yeah. So I do see a few more rate cuts from the RBA, for example.

I think we'll get two or three more this year. I think the other major central banks will cut less this year because they've already cut a few times.

And in the short term, I actually see inflation slowing a bit further, particularly on the core or the trim mean measure, so the one that takes out some of the volatilities. I think we're going to see a further slowing in services prices. particularly in things like rents and insurance and medical costs.

The government is trying to do a lot to try and bring down electricity costs and gas and also now they're talking about cheaper medicines for people, which will be included in the budget. So the government is trying to do what it can to reduce measured headline inflation, which does

flow through to people's perception of inflation too. If you expect that or you know that electricity prices are going to be cheap, you know, you sort of bank it into your own inflation expectations. And wages growth is not a problem here. We haven't had a significant wages breakout in Australia.

And part of the reason for that has been because the private sector wages growth hasn't been as strong as the public sector. I mean, it has still obviously increased since the pandemic because the labour market's been tight.

but it hasn't been at levels like it has overseas where you've had a 6% wages growth like in the US. We've had this big response in labour supply in Australia.

We've had a big increase in our labour force and the labour force participation rate, which has helped to keep the pace of wages growth a bit softer compared to some of our peers.

What about sort of over the medium, longer term? I mean, you know, the green energy transition, there's trade wars, you know, there's so many, I guess, that might mean inflation sticks around. Or, you know, we could be going to that...

point you know say five years ago where rates were heading zero I mean just even prior to COVID I mean rates in the UK were zero for 12-15 years so I mean are we heading to that you know we can't grow and rates are just going to have to go back to zero we're talking about negative interest rates even pre-COVID so do you think we're going back to that world or that's sort of been kicked down the road?

I don't think we're going back down that road because I think fundamentally we've had a shift since the pandemic where we have now structurally higher budget deficits, so higher government spending.

The problem before the pandemic, in the decade prior to the pandemic, was that monetary policy was doing all it can to stimulate growth. Fiscal policy was nowhere to be seen across the Western world. And now that's been flipped on its head.

The government is at a record high share of our economy now, and it's hard to see that

You know, falling significantly, I think it will plateau, but it's hard to see it declining significantly from here, which means inflation is going to prove to be a bit higher than where it was before the pandemic.

So I think inflation will be at 2.5%, 3% on a yearly basis for the next few years, even, you know, 5%, 10 years' time, I think. There are multiple reasons why inflation is going to be a bit higher, so higher budget deficits, larger government spending, more defense spending from the governments.

We can see that everywhere around the world, here, Europe, U.S. The aging population tends to be inflationary as well, a peak in globalization, and we can see that with tariffs.

The only thing that can sort of offset some of these trends is artificial intelligence, and if that has a deflationary impact, it's probably too soon to tell.

How could it have – I mean, I'm curious to know what the impact of AI could be on inflation.

So it's basically this idea that it can make us more productive. So if we can produce more using the same output, we are technically more productive and that will reduce unit labour costs as it's measured and that could be positive for inflation.

But I think it's just too soon to tell if that's actually going to happen and when that's actually likely to occur. Yeah.

But it's interesting that the things that you're touching on, they are all sort of a new world, isn't it, where there's things that we've got used to living with now or ways of living now, even post-pandemic, that really fundamentally must cause our leaders to reassess what the previous benchmarks and targets were.

Our RBA, for example, do you think it will revise? Do you think the time has come to revise the inflation target up, for example?

I think we have fundamentally come into a new world since the pandemic. And if we ever go back to the old world, it will take a while.

So I think, yeah, there has been this sort of this permanent shift in the way we work, the way that we expect the government to step in as well. That's been quite a big change.

In terms of something like the inflation target, there was a reason that central banks started targeting 2% or 2% to 3% inflation. And lifting the target band would not help us to achieve better inflation goals. It would just mean that higher inflation is baked in forever.

So I don't think that there's any need for the RBA to revise up its inflation target. Having the inflation target at 2% to 3% still means that they have the flexibility to have inflation moving around through the cycle, but to fundamentally target inflation

2.5% over the course of some business cycle, which, you know, that's up for debate as well. How long is a business cycle? No one really knows. But, you know, over a period of time and to have the knowledge that inflation is going to settle somewhere within that band.

I think the RBA would be uncomfortable if inflation was going to be at 2.8% forever and they would try to keep rates high for longer to eventually bring it down. But, you know, would they be in a rush?

to hike interest rates again if inflation was at 2.8%. I don't think so. I think they'll just be a bit uncomfortable about it and they'd want rates to stay on hold for a bit longer to get that level of inflation down.

There's an election soon.

We're not sure when, but do you think it really matters to the property markets or both sides really pigeonhole into just doing what they've always done and a lot of big promises will come into the election and how they're going to help first-time buyers and some policy tweaks, but the reality is for the property market, neither have got like a silver bullet.

So do you think it has a huge impact at all?

I think the Labor government is wanting to do a bit more in terms of investment into like the build for rent sector, into social housing. That seems to be more the platform that they're coming through. And they have already made some decent investments into that.

And the coalition is coming out from the point of view of their super for housing policy, letting people dip into their super, more people dip into their super for housing. They're talking about more institutional investment in housing as well. That could be a bipartisan issue as well. So,

Again, longer-term solutions, we may see some more targeted first-time buyer support. I'm not really a fan of that first-time buyer support. I think it just inflates property price as well in the short term. But we could see more of that.

But I do think that the Labor government has made good inroads into investments into housing. Just on that too, it is hard for the federal government to influence everything around housing because there is a big role for the state and local governments to play.

So as much as the federal government can say, we have this national housing target, we can't just blame the federal government for not meeting that target. It is really more up to the states and the local governments to try and ease some of the regulatory burdens to actually get investment and supply up.

It's also the market, you know, like because they're relying on developers to build, to commence. And if developers can't see a return on that, they're just going to hold on to that.

They've got one opportunity to maximise their return on that investment of that site and they're not going to blow it just because the government's got a target. And I think too there's a bit of naivety around about, you know, rezoning and that's going to suddenly result in property being made available and

Have you got a property Dumbo for us?

It's not exactly a specific thing, but I've just heard it so much. And it's people trying to time the market in property, you know, whether it's up or down or say, you know, I'm going to, I guess it's more that people have been saying property's going to fall.

I'm going to wait for the fall in prices to get in. And whether it's property, whether it's the share market, it is impossible to time the market. And with something like property, fundamentally, you have to live somewhere. You have to have a roof over your head.

So try and do the calculations about what is the cost of renting? What is the cost of buying? But when you're doing it, make sure that you actually take into account capital growth of the property that you want to buy. Because

Rent, you should just think of the cost of rent basically as the interest expense that you would pay on actually buying a home. And everything, the principle should actually be the capital growth that you would receive on that and the additional investment that you're making into property.

Long-term, for example, property and share markets, have grown about 9% year on year in Australia when you include things like dividends and rent. So the total accumulation, so the same level of growth for both asset class. I think don't try to time the market.

You need to have a home to live in, whether it's renting or buying, do your calculations properly. There is no perfect time to buy a home. Some people are just lucky when they purchase, but trying to time the property market is incredibly difficult.

I love that analogy where you just basically said, you know, rent is similar to interest. I use that as well. Because rent, you're never going to see again. Interest, you're not going to see again. And, you know, the principle you're paying off your mortgage is kind of like saving.

And when you're looking at rent versus buying, you've also got to factor in, well, now you've got an asset versus you haven't got an asset when you're renting. And a lot of people don't do that. So, yeah, there's so many elements to it.

But I think people look at the mortgage and go, oh, it's X amount per month versus renting, say, half the cost. I'm just going to keep renting. Well... Technically, that's not the way to think about it. But a lot of people do make that mistake, particularly when interest rates are a bit higher.

A lot of people are looking at it right now and say, maybe I won't upgrade because that means I'm going to have a much bigger mortgage. And I'd much rather have more money in my pocket right now. Then all of a sudden, markets run 10%, 15%.

They're like, oh, actually, now I've got to pay a lot more to upgrade. So it's a good way to think about it.

No, it's a great way to think about it, actually. And, in fact, the reverse can be the case as well. I did a strategy session with a client the other day and because he's living in Sydney for a finite period of time, you know, and their main home is in the country.

And so he's like, oh, well, I want to buy an apartment because rent money is dead money. And I'm like, it's only dead money if you can buy an asset that's going to go up in value, you know, because it's actually sometimes rent money is – is good money.

It's actually live money because you're not stuck with a dud asset that you can't outflow. You can't sell for more or less.

So I love that nuance, actually thinking about rent and interest payments and really being mindful of the asset that you're buying and what's intrinsically that, the quality of that. But you're absolutely right. Trying to time a market. I've been in the property game for 25 years and whenever I've

time to sale or a purchase at exactly the right time, that's been luck, you know, and I'm not going to hang my hat on that because there's been other times when I've been extraordinarily unlucky, if you want to say it by the same way, because things haven't necessarily worked just in terms of timing in my favor.

But what I've bought has been important, you know, buying when you're ready, when you found the right property. Yeah. Deanna, that's been such a nice chat today. Really appreciate you coming along. And I think you've got a great way of explaining things.

And we hope our listeners have appreciated as much as we have. And I'd love to see you back at some point in the future. Thank you. Thanks, guys. It's been a pleasure.

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