Today we talk in Trillions not Billions and today the talk is about Depression not Recession. In the 43 months from August 1929 – March 1933 global GDP dropped 26.7% and unemployment reached 24.9%. The contemporary definition of a Depression is 20% unemployment and 2 years of negative growth. On Tuesday October 29th 1929 the American Share Market crashed by 12% in 1 day and within 2 months stockholders had lost more than $40bn. During March 2020 the same market crashed 30% with losses in excess of $2 trillion.
Predictions were that our latest experience would be a V-shaped recovery meaning a sharp drop and then an equally quick recovery. The only relevance of the letter V in this instance is that the pandemic started with a V for Virus and will only end with a V for Vaccine. Now let’s talk about the letters DA. DA stands for Daniel Andrews and it also stands for Dumb Ass. This arrogant narcissist dropped his guard and now Australia is going to suffer immeasurably.
In a flash, year 2030 is now. The impact of the digital age has become applicable instantly to which we now add the pandemic and the impact of the Baby Boomer Bust. As the Baby Boomer demographic progresses to retirement it transitions from being a taxpayer to a tax taker with major drawdowns against pensions and health care. Businesses, as a result of the pandemic experience, are now rationalising their operations and the focus is on higher productivity which converts to less jobs. Less jobs means less tax collections and the loss of revenue from this traditional source will require a reassessment of the GST, to compensate. Contemplate if you dare a world in 2030 with no income tax but a GST at 20%. The paradigm shift in fiscal economics will see Jobseeker replaced by a Subsistence Wage to support a dignified lifestyle for all Australians caught up in the new classification of the underemployed. Interest rates will be at zero and inflation the same.
Traditional investments are going to be challenged. Property values may not rise in the way we have been used to however the yield on net rentals will become attractive when compared to other options. There is now a need for the Federal Government to create new investment opportunities. By example 5 million Norwegians now have access to a superannuation balance of $200,000 each all due to the syphoning off of royalties derived from the discovery of the North Sea oil fields some 40 years ago. We have the same ‘golden egg’ in the form of the $2 trillion plus deposits currently held in our super funds. The Government should apply a 10% levy to all super fund balances to establish a $200bn investment fund (NIF) to be invested in nation making projects that would create investment returns for superannuants. National projects should include the capture of tropical floodwater from our north piped into the low-point epicentre of the Continent in Lake Eyre to create the world’s largest food bowl and spur off excess water in the Murray Darling Basin to ensure maximum primary production from that critical artery. Another could be to establish a nuclear generated power system to provide drastically lower power costs to industry and households. The NIF would guarantee Australian ownership and create millions of Australian jobs. If you think $200bn is a lot of money, Apple Corporation has $193bn cash in hand at the moment. We should also be reminded that it was in the 1990’s that two nation making schemes were born – Compulsory Super and the Future Fund. The decade of the 2020’s is that of the NIF.
For real estate to thrive it will need to change. As the sun sets on the investment cycle of the Baby Boomers so too the life of ever-increasing property values. A new product is about to enter the market in the form of Build-to-Rent. As the digital age diminishes the security and numbers of jobs so it will equally detriment the opportunity of home ownership. Permanent, secure jobs are a pre-requisite to servicing a mortgage and in turn the right to home ownership. Just as there will be 25% less cars on the roads by 2030, watch the home ownership rate drop from currently 65% to 55% over the same time. As less people qualify for home ownership the demand for rental properties will increase and the take up will be in the form of high-rise Build-to-Rent accommodation units. The Build-to-Rent facility is owned by a unit trust with investors buying units in the trust that contribute to the capital required to build the facility. These buildings will be for rent only and offer 1 – 3-bedroom accommodation which will allow tenants to sign long term leases and graduate into larger units as the family needs expand. They have the security of knowing that their tenure is not going to be affected by a landlord selling. Another change will be the conversion of redundant office space into residential accommodation particularly in the CBD and near Universities.
Let’s conclude by referring back to the letters of the alphabet. FF stands for Fear Factor. Even when a V for Vaccine is discovered the actions of you and me are going to be based on a high level of scepticism. As the DA in Victoria has confirmed, OBTS, Once Bitten Twice Shy, will mean many years to come before we relax. The last D for Depression 90 years ago lasted for 4 years and this current experience might not be any less.