The Elephant in the Room Property Podcast | Australian real estate
The Elephant In The Room Property Podcast with Veronica Morgan & Chris Bates

Episodes

Episode 75 | Is Australia heading into a recession? | Warren Hogan, The Executive Connection & UTS Business School

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What's happening to our economy & where are property prices headed?

Listen very carefully, in this episode you will hear all about the signs that show when a bubble is about to burst!

Warren Hogan, Industry Professor at UTS Business School & Chief Economic Advisor of The Executive Connection, shares:

  • Are we heading into a recession?

  • What are the big levers that impact the property market?

  • What impact does the property market have on the rest of our economy?

  • What is inflation & what makes it go up? 

  • What you need to know about debt & how to service it. 

  • New technologies & fast tracking, is it harming our ability to make good decisions?

  • What are the signs in a cycle that shows a bubble is about to burst!

It’s a great episode packed full of insights, we hope you enjoy it!

GUEST DETAILS:
Warren Hogan - LinkedIn

Work with Veronica? info@gooddeeds.com.au

Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT:

Veronica: You're listening to the elephant in the room property podcast with a big things that never get talked about. Actually get talked about. I'm Veronica Morgan, real estate agent buyer's agent and Co host at Foxtels location, location, location Australia and I'm Chris Bates, financial planner, mortgage broker and wealth coach and together we're going to uncover who's really making the decisions when you buy a property,.

Chris: Please stick around for this week's elephant rider boot camp and we have a cracking dumbo the week coming up

Chris: before we get started, everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyers agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica: We've had the first drop in official interest rates in nearly three years and as generally accepted, there is more to come. Great News if you're paying a mortgage and haven't fixed your rates, not so great if you're a self funded retiree, but what does it really say about the economy? Overall in the lead up to the recent federal election, we were often told the economy was in great shape. However, now it's all over there's talk of Australia being on the brink of a recession and I have to say I personally have headline fatigue following an onslaught of sensationalist negativity about the property market over the past two years. So who or what should we take notice of? Well an economist of course. So in this episode we're picking the brains of Warren Hogan who has made a career out of making the analysis of the economy useful for business government and investment managers. Warren currently wears a number of hats including that of industry professor at UTS Business School and chief economic advisor of the executive connection. He was formally the chief economist for the ANZ bank. Well, I think we can expect some very thoughtful and commercial insights from this discussion. Thank you for joining us today, Warren.

Warren: My pleasure. It's great to be here. Thank you, Warren.

Chris: A good intro there, Veronica, because I think that's been the problem. We, you know, it's, everything's been worrying about the election and just getting the election through now, the election's over and we're starting to see rate cuts. Now people are thinking about the real problem, which is the economy. And, um, I'd love to get your insights. Are we on the path to a recession?

Warren: Um, well we can always be on the path to recession. You never know what's around the corner, but I don't think they're, that we are in terms of what you're getting at. I don't think it's a slow sort of burn process. The housing market's down, people are spending less. And then the next step be that banks stop lending, housing market's fall game. People start losing their job and the whole thing, so of goes into a hole,. Well, there's a probability, maybe one in three that that could happen along with trade wars and a few other things. But I think, you know, we're actually seeing how good this economy works. We had a housing bubble, um, lots of elements to it, but it was a bubble in Sydney and Melbourne and uh, we burst it through a variety of measures. And just about any bursting of a major economic bubble in any country, all through history usually does result in recession.

Warren: This economy, we were sort of taking it on the chin. It's not pretty at the moment. That consumer is going through a major balance sheet repair effort and then cutting their spending in recognition of low wealth. Also it with lower income growth as well. And that's taken a lot of the wind out of the economy sales. But we're getting there and I think a, I think there's, there's the central case is still at where we're going to get through it. Um, so yeah, no, I don't think we're going into recession, but there, the rhetoric has certainly changed and the same does that election seemed to be the big turning point, um, where yeah, everything was foreign to rate cuts and headlines of recession I agree. And that's an interesting point in itself.

Veronica: What is the technical definition of recession ?

Warren: here in Australia? And most countries, it's too, um, quarter's six months of negative economic growth, which, you know, is, he's really a broad, uh, naive definition, but we use it and we haven't had a recession on that basis since 1991. Barry Amman in 1991 that was our financial crisis. That was very similar to the great recession that the US and Europe experienced in 2008 Westpac almost went out the back door like Lehmann brothers and ANZ. wasn't far behind. That would be recapitalized that was a bad recession. Unemployment got to almost 11% just like it did in the US.

Veronica: Yeah. So we haven't had a recession for 30 odd years. So you know, what happened to the property market back then?

New Speaker: Look, it was a commercial property recession and a corporate, a debt problem that drove all of that. And actually the, uh, property prices were falling and they'd actually been going up quite substantially in the late 80's. Um, but the big cuts in interest rates, we got, you know, because they'd got up to 18%, I think. And I think the mortgage rate to get up to like s6%. Yeah. People were working second jobs and they rise to pay the mortgage, which is interesting. And I was working with people who had second jobs to pay their mortgage. Yeah. That's a really important insight. We shouldn't lose about what people in this country will do in a non-recourse environment to pay their mortgage. People often lose sight of that in the last 10, 15 years. But anyway, the big drop in interest rates that came in the wake of that recession, um, made housing so much more affordable, um, that as soon as the economy stabilized, uh, the house housing prices stabilized and probably were important element of getting the economy going. Cause we've got a really nice bounce in 94 and it's been blue sky ever since in many respects.

Chris: you said that you mentioned that we're charging along or we're gonna we'll get, you know, some parts of the economy aren't doing well, so let's say retail and consumer spending and things like that. But what are the parts, what are we are green shoots? Where are our positive parts? I mean your work in education, I assume that's probably one part of it.

Warren: Yeah. Look, education has been strong for a while and obviously the, it's the growth in the international, um, uh, students, and I, I'm on, I think there's still a bit left in that, but, um, it's an important sector. Uh, that's for sure it employs a lot of people and uh, but I think the growth here is gonna continue to be, um, around construction. I mean, you think about either the economy's going into recession and just how much work is going on in building and it's, and you know, yes, housing is going to come off, especially with multi, the approvals for mulit's coming off. Um, but commercial's still strong. It might not be growing like it was in the last five years. And then of course the infrastructure we're building a lot in this country. Um, businesses are still, you know, in good shape and I think as long as they can get some visibility on, yeah, some stability.

Warren: And I think the election was important there. I think getting the coalition returned was big for that. We're starting to see that with some business surveys, like you know, in the last little while, last few weeks that confidence has bounced in that sector. So if they start investing and they have an under invested in the last, you could argue the last 10 years. So I think there's a lot of scope with new technologies for them to get out there and invest in their business. Um, and uh, the, the mining sector, um, you know, there's a lot of projects which is still just sort of rolling off. And so the actual investment numbers are sort of still waiting. But the, the strength in, in commodity prices, I'm pretty much the strength in demand. And I don't think it's a China only story. I think it's beyond that whole of Asia.

Warren: So there's good investments on, we saw Adani seems to have been approved and I'm sure there's lots of other stuff, you know, record level high for a dollar gold price. So, look, I don't see a boom coming. But the thing is is a good strong economic expansion is based on many different things. And what we need now is yeah, to keep an even keel on the economy while consumers are going through this adjustment to lower house prices, to lower income growth so that we don't see that consumer hibernation, that consumer adjustment, you know, forced businesses to start laying off workers. And that's where government fiscal stimulus, you could argue rate cuts, although I'd argue differently. But that's where it just keeping some demand in the economy this year is important. Cause I think as long as we've got the employment story there, which we do as of May, um, then I think we'll, we'll hang in there and actually, yeah.

Warren: What is, what are we going to do to get consumers sort of, you know, back, comfortable. Again, you know, we're not going to know it till we say it in aggregate, but you've got to stabilize housing so it stabilize the balance sheet, stabilize their net worth position and make sure that wages growth doesn't have to go back to three and a half, four or whatever it used to average before the crisis. But it just needs to still be heading sort of gradually upward and of course employment and all of that. I think it will see consumers go, oh, okay, well maybe we can go and buy a new fridge or buy a new car. Yeah. The really bad stuff for the last eighteen months has been everything related to what I would call nondiscretionary and durables. Anything you can the delay. Yep. Luxury. Anything that's like, yeah, of course that's there.

Veronica: Oh well is the tax cuts that the Liberals are talking about or trying to get through, is that a proxy for wage growth?

New Speaker: Well it is the, there's the, there's two ways or two things to look at. One is the lower middle income tax offset, which is essentially cash handout cash or a government that's ideologically opposed to cash here. Now that's my line. Yeah. To offset here's 1000 bucks. We don't hand money out. Yes you do. Um, and that's going to be, you know, cause it is down targeting low and middle income earners. I would say, you know, people say, oh well it won't all be spent, you know. Okay. What will it be done with it? Well, it'll be saved or used to pay off debt or good. That'll get you close to the point where you're comfortable with your balance sheet again. So you know, the thing will work one way or the other.

Warren: Yeah. But a lot of it will be spent, I think is reality. Yeah. I mean it was just, well that's what happened with the Rudd government after GFC. Right. And this is bigger than that. Uh, people underestimate what could happen, you know, kind of August, September in terms of a nice little spurt to the JB hi fi, that'd be high fi the Asian manufacturing complex. Um, yeah. By look, it's all part of it. There's the longer term tax cuts are critical. So I don't think we can, you know, people aren't stupid. So first of all, the fact that the government's budgets back into surplus, they've got, you know, I don't think having a surplus is, yeah, really. Yeah. The be all and end all. But people should remember that when you've got a massively indebted household sector, the fact that the government's got its finances and all that is a good thing.

Warren: It gives people a confidence, they run a bit more debt, you know,

Chris: well, they know the government's got the ability to save them a little bit.

Warren: that they're not going to have to increase taxes down the future. Maybe you're in Europe, you know, you've got these massive government debt, massive chronic deficits. Yup. You know that, you know, you probably don't want to build too much wealth or into much income because the government will come and take it. Whereas we haven't got that problem here. And those tax cuts, the government's outlining out to 2024 I mean isn't hilarious Albo is out there saying oh it's a second or third, you know, election away. It's like isn't the criticism that we don't do enough long term thinking around policy making Albo, put it away. You've got bigger issues to deal with past the tax cuts and of course the parliament in 2021 or 2022 we'll make an adjustment if the economy is not in good shape.

Warren: I mean, but the thing is you tell Australians, yeah that's structural reform because it simplifies the tax system and we can all argue about the fairness element, but it's structural reform and it's coming and that's the stuff that gets people, not, I mean fear is been a major play here in this household balance sheet adjustment, this adjustment to the lower house prices and that counteracts that. So I think the Labor party's just had it handed to them. They've lost the unlosable election and now they're arguing about stuff they should just get this program through and I'm not a big coilitan guy. I'm just saying the Australian people went with these against the odds and they must be something to it, let this stuff through, have a look at yourself and then come back, you know, in 2020 and we can just re-commence combat.

Chris: Yeah, I mean the whole tax cut thing around the brackets, I think it's, I think it's a really good policy. The reason why is that some people have got the strange warped view that they don't want to earn more money because it pushes you into the next tax bracket. And it's like, well hang on a sec. You're still earning the money and you still ain't going to give 38 cents to the government instead of 34 cents. You know, it's not a big difference.

Veronica: So you know, every dollar, that's what, if they don't understand the brackets, you know the additional money.

Chris: Yeah, that's right. So we don't really understand it. So if you just simplify it and make it, you know, between that, you know, 40 to 200 so this tax bracket, it's actually means that people won't even think like that. They'll just think, if I earn more money, that's great.

Chris: We, why not, you know, et Cetera. So I think it's just a mindset. I think with the RBA and I know you've done a bit of work around all that stuff over many years, um, the rhetoric and the story's quite a changed a lot. You know, initially full appointment was say, you know, 5%, but it seems like now that's 4.5% we need to, well, I just wrote that record. Yeah. I mean, I just find it that the, this, the story's changed dramatically very quickly and yeah. Um, you know, someone will dealing with mortgages all the time, you know, I was expecting like most people that, you know, rates were going to stay flat or the are, the banks weren't going to pass it on. And if anything, we were going to be at the bottom of the cycle. But it's like, it's completely flipped. Um, what's your view on kind of what the RBA are thinking and you know, what's good or what's good or not?

Warren: Yeah, so they've turned a lot. Um, and I think they have not turned because they think the economy is going into recession. So we can put a line through that. And I think the government has made that quite clear there an inflation targeting central bank, two to 3% on average over the cycle. Now for the average Australian, it's just a bunch of hogwash that they don't even get it. But for the RBA it is like the Bible. Um, it is,

Chris: why do you think that is?

New Speaker: Oh, it's just, it's, well, the last major shake up in central banking in the late eighties that the shift was towards inflation targeting. And look. Yeah. From what all everything I've ever done around this, and you know, I've been looking at it for 30 odd years is that monetary policy is all about just trying to keep enough money in the economy to make it work. Um, and a great way to in the own, you need a little bit of inflation. And we had a problem for most of you know, our living memory of too much inflation. But the reality over the long term is, is that you've got as many problems with too little is too much. But the problem is that we've just seen too much pressure put on central banks. They got their independence so they weren't affected by politicians theoretically and superstar central banks and we've, we've would put too much on them and they've done too much. I think quantitative easing and everything was fine in an emergency situation, but it's now stuck. Um, and we've got a whole range of problems, which, you know, we probably don't know what we can go into if you want to, but in terms of the RBA right now, they caught, um, because inflation is way too low for their target.

Warren: Now I was making the argument that they're targets too high. It was set up in 1993 when we were higher inflation economy. Um, the rest of the world has an end target of effectively one to three too. Um, but one to three in our sort of flexible sense, not two to three. Um, but they s they want to stick with two to three. They think it's important that they have that continuity, that it anchors inflation expectations. And the bottom line is inflation was slowly going up in 2018. And then the last six months of readings we got, it just went boom. So it was just getting up to, two bottom of their target. This has gone bang down in core terms down to sort of 1.5. So that scared them and they feel that if their target's going to have any credibility, they've got to respond. So it's not about the economy being really weak. In fact, I'd say, my guess is that, you know, they're reading on the economy hasn't changed in the last six months. They're going to wing it. I'd think I'd share the view that I have, that we're, we're dealing with an adjustment to a bubble and we're getting through it pretty well. But you know, it's, I'm going to be pretty, but we, we, we're tough. We can take it. We can get through this as a community.

Veronica: It's a quick explain just for people who may not understand the lever of inflation or why it's important. You know, what happens, I mean, what makes it go up and then why don't we want it to go too high and why don't we want it to go too low?

Warren: Yeah. So in a theoretical, perfect economics slant world, what you see in a textbook, cause it's like there's no such thing as inflation. Um, what matters, you know, um, market economy, um, is relative price changes and that's what sends the signal to do things. But in reality, you know, central banks or whoever controls the money supply, which is a central way, um, yeah, I can't, affect fact that, so there's always going to be some sort of guesstimation around that. And then there's also stickiness. So relative prices don't change instantly. Although with modern technology, it's getting more instant. And this is actually one of the issues around inflation is so back when we'd set up inflation targets in the, in the early nineties, the accepted wisdom around the world was that you need a little bit of inflation, 2% seems to be about right. We need to let the system work.

Warren: You don't want to have zero and it was too penal. Um, but I actually think because of technology and globalization and it's actually more like one, but I think all and tougher to get that inflation. That's exactly right. Being more productive. Well, because yeah, there's a big, another big part of economic theory in the modern context, especially in the new Keynesian frame, is I'm downward price stickiness, particularly wages. But you know, again, our more modern market economy sees prices go up and down, you know, look, look at the problems with Coles and Woolies is low prices every day. I mean, it works, right? You stick 50% off and people buy it and that's, so prices are going up and down, whereas pre 1990 prices tended to be there or go up, you know, price stability was, you know, the option for prices going up. Um, so anyway, I look anyway that's what the RBA, are trying to get the two to three target.

Warren: I think it's too high. Um, they're scared of changing it cause I think if you change it, it loses its credibility. I think they overplay its credibility. My analysis of expectations of everything from, you know, professional financial market participants to everyday consumers is what are the affects your expectation about the next couple of years. Most is what's going on right now. Not What a central bank tells you or not what the long term average is or whatever. But you know, they, they, they're, that's the frame they want to see it in. And I don't think there's anything wrong with it. Um, other than cutting interest rates from very low levels to virtually nothing comes with risks and they've done it well. It doesn't give you a, I mean, a lot of people talk about running out of Ammo and you know, that's one debate. But you know, people sort of think about low interest rates. The problem is runaway inflation. But you know, we're seeing in Europe, in Japan and other countries, yeah, there's other consequences. And especially in a world where there is no inflation because of technology, because of global supply chains, because of oversupply and the global economy around manufactured goods and asset price inflation. Well, the thing is, I actually think that the, the, the way inflation, extra money supplies escapes, is no longer through CPI through consumer prices because there's so much competition, discipline and everything all around the world. We're in a global marketplace for most retail goods, but it's increasingly escaping a, through value of asset prices. And you know, in America you see it in the equity market in this country, you see it in the housing market. And that's because we, uh, no longer have major credit constraints on consumers. So you go back to the 1970s and you had to beg your bank manager for a bank in this country, but now you can, you know, buy a house with a credit card, what maybe not, but you know, get my idea and through something like brick exits, that scares the shit out of me.

Warren: But, uh, but you know, the, the, it's exactly right. So the excess liquidity that loose monetary policy tiles is, it's coming through asset prices, which you know, people like, yeah, Ben Benake is really the, the father of the modern QE modern approach to this unconventional monetary policy. Um, would say it was the good thing? You know, cause otherwise we were staring at the Great Depression and another world war two. Well yeah there political social outcomes, which of course are exacerbated by the economic scene. But the question that we now face 10 years down the trout track with Trump, France riots, everything is well are we going to change that or we just kicking the can down the road. And there are, I think there's more in bad outcomes around the fact that, you know, one of the reasons that you have capitalist or market economy, they're brutally efficient. They take resources away from the least effective, efficient to the most efficient. And yet, you know, I sort of sit there until these small businesses in Australia, you know, there's no productivity or hardly any and they look at me and go, well we are just re-investing digital technology. I mean things are changing so much, it just doesn't make sense. Well maybe this low interest rate environment, is meaning that we're just not getting rid of enough efficient companies and you're certainly getting a lot of academic studies now showing that in Japan, in Europe, the Zombie firm.

Chris: And creating incredibly bigger inequality between the rich and the poor.

Warren: That's the other one. That's the other one is that when you use asset prices, yeah. Is your vehicle for driving a driving monitor policy in the economy? You're going to get inequality in that? Yep. Yeah. You could, again, you know the sort of the, the the smartest guy in the room, economist type can sit there and go, well that's going to mean the economy is going to do fine. Well yeah, but what's it going to do to your political, you know, outcomes.

Chris: But also if you've got, if you keep increasing the money to the rich, you know, they can only spend so much, they can only get so many dinners. They're buying shirts, buy houses. Yeah. Well they buy other assets or they don't, they're not going to spend them. I just going to keep saving and investing and you position, you spread that money across the whole population economy to Spain. You keep the whole system going. So you're, you're kind of shooting yourself in the foot by just pushing up asset prices and um, it's, yeah,

New Speaker: On the flip side of that you've got the wealth effect, right? So when you've got a situation that we've just had where what Sydney prices fell on, fell 11% or whatever and people think that they home, which is most people's great asset it if they own one, um, it's not worth as much as it was. And so therefore they can track all that spending. You're talking about retail spending earlier. So there is such a thing as the wealth effect isn't there. And so that's obviously in their minds, you know, they still have assets, whether it's worth more or less.

Warren: with an aging population where people are closer to retirement, um, people are very sensitive to it. They are literally doing the calculations on what that nest egg needs to look like. What you know, if I, how many Australians when they get to 60 65 one of the downsells or the $3 million, $2 million family home and buy a one or one and a half million dollar, you know, townhouse to live in. And if that suddenly that is a, you've wiped out $200 grand through a full on process, then people go off to find $200 grand somewhere. And when you're earning a hundred grand a year, finding $200 grand is hard work. So the wealth affects real. The other thing is that, you know, the wealth effect operates through just availability. So you know, the mortgages in this day and age with all the, you know, the, the products, they're basically a credit card. Right. And if your house, prices are going up and look to be fair, since the crisis, since 2008 joins, haven't been doing this. They certainly did it in the original housing boomers. Sort of 98 to 05 but yeah. Yeah. House price goes up by a hundred grand, you know, more. Mortgage redraw, let's go to Fiji.

Veronica: Oh, I have come across people that have been using mortgage free draw to pay the kids school fees and go on ski trips. It's not sustainable. No, it's an investment. It's a long term that's still coming from someone in the education.

Chris: So yeah, I mean it's, it's, it is getting hard. I mean there's some banks, especially cash out policies and you know, before banks would just throw the money at you if you set up to 80% for example, you know, there was no questions really asked. It was easier, it was easy. And now, I mean there's a few banks that will do it. Most banks will put a limit on over $50 a hundred grand and yeah.

Warren: Or, they want the money to be on something that'll add value to the house, will be part of the house.

Chris: yeah, they want some serious evidence for renovations or if it's construction, et cetera. Or if you're going to buy another investment property, they'll give it to you if you've got a contract, et cetera. But yeah, before you're right like it was, you know, and then you would, you give the people the money to the people. And then it's up to them what they want to do with it. And

Warren: Well, I think, I think, you know, if you're not a first time buyer or you know, someone who's right on the edge in terms of your LVR, um, the banks I think is still pretty accommodating. I mean, the reality is the LVR of the bank Big 4 books, mortgage books is under 50%. So most people are massively, um, yeah, got huge equity. And you know, if you've got to yeah. At $1.8m home , I mean that you've got the equivalent of a mortgage of $200 grand on it and you want to borrow 5$0 grand to go on a, you know, once in a lifetime family holiday, I'm sure that you could.

Chris: because there'll be a way around it. Yeah. I think that's one of the points that a lot of property doomsday is, um, like to play on this, I was so in debt we're so in debt and you know, it's, yeah, portion are first time buyers. You know, people who bought in the last say five years, they might be a negative equity, but the vast majority of the 10 million properties out there, you know, maybe three of them are paid off fully. You know, maybe three of them have got very low mortgages and you know, one or two have got high mortgages. I think people forget that there's so much wealth, it's just completely paid off.

Warren: There's a lot of equity. But there needs to be, because people, unlike businesses or governments have a lifecycle. So I think one of the scarier elements he's, um, you know, we, we have to get to a point to zero debt, preferably before we die. Um, so you get to that nest egg in retirement. Um, but look, there's a lot of innovation there too in terms of reverse mortgages. I think the culture, I mean my father did a review of aged care, you know, 25 years ago and the culture he found around, you know, people using their nest egg and that wealth and selling the family home to pay for a really high quality standard of you know, last five years of your life aged care. So much resistance. And there was both in terms of the children and their inheritance and entitlement. Ah, it's, it's not talked about but it's sitting out there yeah.

Warren: You speak the politicians about the try and deal with that. Oh Wow. I think that, I think I, look, I'm not in that space and it's a very tricky area to um, get a good read on about people's attitudes to this. But the reality is it isn't changing. And look, I think this generation of people under the age of 40, you probably again a little, a much different view on that sort of inheritance entitlement as a general concept wealthy people are always going to feel entitled. But, uh, um, but yeah, I think it is changing but because the realities of an aging population, but the point being is you, we do need to have, yeah, there are limits to the debt and when look, we, it, it's all new. I mean the first thing we looking at Australia is our mortgage levels and household debt levels is that yeah, they might be the highest in the world and 190 or whatever it is at like the next three or 175 to 190 and then, you know, the lowest is 140.

Warren: You go back 30 years and were all 70 or 80%. It's a global phenomenon which just reflects the fact that technology and reforms in the swhat the eighties really opened up, the access to credit to the household sector and what we're trying to do is find out what an optimal level of leverage is and that has input. Yeah. That's determined by lots of things like demographics and things. Yep. But in the end, debt is all about being able to service it. Um, and keeping interest rates low is a, is a great, is a great short term, short term help. But if it encourages a debt level, I mean this is a good thing. I mean you imagine what Australia would look like if the RBA cash rate went to 7%. Um, there would be a small mushroom cloud form over our economy. The RBA cash rate probably couldn't go much higher than about two, three quarters to three and a quarter. Um, without causing a recession in my view. And that's a guess. But you know, I mean sort of looking at these things for a long time and

Chris: yeah, cause we, we get used to interest rates at a certain level. I think now if someone said, I think people are getting used to full percent in their head now. But you know, it wasn't that long ago people were thinking fives and sixes. Yeah, exactly. For years that was the benchmark. So I think, you know, people are getting, you know, we've been down at fours probably for five years now or something like that. Well, probably, you know, say three to four, heading towards three pretty quickly right now. Yeah, that's right. And I think the, I mean that's one of the reasons why they want inflation although isn't is as well because, you know, inflation, you know, closely gets rid of debt, gets rid of debt. And I think that, yeah, you know, the reality is if we can kind of keep pushing up wages and pushing up products and profits and, um, the government's debt as a percentage of GDP, if our GDP keeps thriving, then it doesn't look like we're in that much debt. Does it? If we keep it up.

Warren: But the, the question is whether or not they can achieve that. And there is some real question mark. So the US economy now has had its longest ever economic expansion in its history or since the civil war. Um, it's got its lowest unemployment, right. Um, in 70 years or something. Um, and inflation isn't where they want it. Hmm. Now, I don't know what they're going to have to do to get it above it, but even if they got the unemployment rate to zero, um, and the economy was running for another five years, you could still find the environment where inflation is, maybe be just a bit about above two in the sense that there's something going on around the inflation process. Yep. That is not as responsive to monetary policy. And the big issue with so much when you're looking at societies, whether it's politics in general policy or economic policy, he's fighting the last war and every, I mean there should be like a whole section of the RBA devoted to are we fighting the last war, which is essentially saying what are all the things that could go wrong if we just keep doing this frame.

Warren: But what we've seen in the last three months from the RBA is a reaffirmation of their long standing frame around things on not uh, non accelerating inflation rate of unemployment. Ie it was full employment lowered it. Um, you know, lower interest rates, more growth, higher wages. That whole frame is just could potentially in 10 years time we might look back and go, that was where the mistake was mine that the world changed and I didn't recognize it.

Chris: What about the relation to Japan and you know, that low interest rates to say 20, 20 odd years and you know, and people are thinking we're turning Japanese is what, you know, sometimes you start to read what's sure,

New Speaker: yeah, totally I mean Japan, Japan is, you got away with it to some extent I believe truly because they were experiencing deflation. Um, and they had um, this quantitative easing starting in the late nineties when others didn't. And because they were, it was, I got an open capital account. Ie. Money flows in and out of their economy. I sort of the, the, the, the damaging effects of it sort of dissipated to some extent, but they've got a massive demographic issue which many countries do. Um, yeah, they're natural. Their populations shrinking now they've workforce is shrinking as sort of one, one and a half I think. Which means that, you know, their starting point for economic growth is in minus 1.5%. Now if they get 1.5% of productivity growth, which is a struggle anywhere in the world of the moment, then they get zero growth. A four years ago came out and said, we're going to go for 2% growth. Where are you going to get that from? Pal. Yeah. I mean, what are you going to blow up in the meantime to get that?

Warren: You know, it's about sustainability. It's about taking a long, a long term view. I mean they, obviously they retreated on that, but it just shows you how far out of whack the politicians are with underlying economic reality. I mean, even just out lightest. Yeah. It was good to see Morrison not emphasize as much, but the Turnbull government was jobs and growth

Veronica: There's just an answer to every single question.

Warren: Yeah. And I can tell you from a macro stuff, sustainability, debt, all that sort of stuff is there were question marks about that. And that's not even bringing into things like the environment, you know, blah blah, blah, blah. So yeah. So

New Speaker: it's not physically possible to keep growing, is it?

Warren: I mean, well, I don't know. I mean, the strains on the strains on the environment are becoming pretty obvious, I think, um, by from a pollution, um, and then, uh, shifting around the atmosphere and climate. And so obviously a lot of different views on that. And then of course just resource extraction and sustainability. But yeah, I think that's right. I think you know where we're headed because people are ultimately sensible and the economic system is good at getting us there to be clumsy. Let's see. What's the old saying it's the worst system mirrors. It's just better than all the others. Yeah, I think that was Churchill about democracy. But, um, it's going to be about the quality of growth the next 50 years. It's not going to be about the quantum. It's going to be about the quality. And the thing is new technologies, fast tracking, our ability to make good decisions and not just, you know, the smartest people in the room or the politicians with their advice from all of government. I'm talking about every single person in the community because of access to, yeah. Their little phone and all the information in there. I mean, we were going through a process, early process right now, just sorting out what's fake news. I think it's pretty much the opposite of what Donald Trump says.

Chris: Yeah.

Warren: Um, but you know, that information and quality of information and you know, objectives around the environment, objectives around equality. I mean, I think the, the, the economic system of the last 30 years, and don't get me wrong, I'm a big believer in free markets. Just that, you know, they need to be realized when, what their weaknesses are, but it'd be one of the big problems has been the rise of inequality and not as bad in these countries elsewhere. And that has political ramifications in a democracy as we're saying in the United States. Yeah. Um, say, look, there's, there's a lot of sustainability issues and we've been really good at and pragmatic in this country, sort of resisting bits, all sorts of parts of that. Um, but the problem with the Reserve Bank is I think, yeah, they've, they've sort of almost thrown up the white flag on rates and now where we're heading towards that zero interest rate, Uber easy monetary policy world where we don't fully understand the negative consequences.

Veronica: I think what I've, I mean even just in the recent housing downturn and we've seen what precipitated it, which has been policy rather than interest rates because interest rates has always been the end of the mark to the boom or crater at the end of the boom in previous times. And so this is new uncharted territory. The drivers are different, the reactions are different. We don't quite know how it's all going to play out. And I often wonder about in just generally in terms of the economy, and I'm not an economist, um, but if you use all the frameworks, you've always used all the theories that have always worked in the past and they stopped working because technology and the use and the globalization, all these things that fundamentally shift the foundations of everything, how everything works. Then how useful are those frameworks?

Warren: Yeah, look, they are very useful. And I don't think a lot of the fundamental sort of principles of economics have changed. It's just that, you know what I'm saying? It's changed as the relationship between money supply and CPI. Um, and yeah, it happened in the 80's where they had, a break down in, um, the way, the monetary policy of what they thought by monetary policy works. Um, the principals are all still there, but economics is abused by politicians and business to some extent, you know, not constantly but at times to get what they want. Um, so I don't think we should throw it out, but we're in a world where, you know, where inflation isn't the only sort of casualty of globalization and new technology. And I think we, you know, we're in a higher level of uncertainty. So for example, the old frameworks tell you that property markets, should get a real kick from a cut in interest rates. And also if the APRA mortgage thing goes through or, guess what, I think, I think it will, I think it will rise to jumped.

Veronica: I remember back in 2016 it was May and August were the two rate drops right the last ones we had and our, and so we document this in our business in terms of we reflect what's happening in the current market if all the time. And, and I remember at May just before that drop, we, we were feeling signs that this boom was gonna was starting to peter out and that just kicked along again and exactly the same thing in August that year. And then it kicked it right through to the end of the year through 2017 into, into May, 2017 and, and it was really noticeable, um, at that time. So yeah, it'd be interesting to see, I think the Liberals winning the, uh, the election that's had an immediate impact open houses and you know, I've spoken to agents said the following Wednesday when they had their open houses, they saw immediate, noticeable increase in people going through open houses. And now I've actually seen, so those leading indicators, that's one. Uh, auction clearance rates is another one.

Warren: And important one.

Veronica: And this is isn't, this is in a situation where we're still got difficulty getting finance.

Warren: And I think that ease back, I mean the banks, you know, writing mortgages and loans to small businesses are where they make their money and it's, they role in their community. So I think they're obviously been stung by responsible lending and that trying to get that sort of house part of their house in order. But I think they've done a lot on that and I think, I think they will, um, sort of ease back. Um, the, in the, some of them is I think ANZ have come out and said as much a few months ago. So look, I think, I think there's a good chance we're going to get a bounce in the market and clearance rates are telling you that in, um, early 2020 annual house price growth in Australia should be somewhere around 5%. Yeah. Which I think probably implies from here. Oh, it's 7% rise now that, that actually tells you, yeah. what the RBA has done is stupid because, yeah, they, they're telling us they're trying to avoid a recession. Well, the Info, yeah. People are saying, they're doing it to avoid a recession. There's no evidence that we're going into recession. I think they're doing it because their inflation target is so far away from where their inflation target is. So they trying to defend it an inflation target. But I think that's the wrong target. They should change it. And then if I, if we go and restoke the housing market and get house, household debt again. It's like back to square one. What do you want? Do you want us to get onto a recession to sort of sort this out or do you want to just gradually try and get this .... we were doing such, it was going so well, you know, I mean you guys are in the market and you know, you know, your business has been affected because the turnover's down so much, but we're just getting through it, you know?

Warren: And it was so, I don't know, we'll see. I mean, I, I'm, I'm, I could be wrong and maybe the housing market won't bounce cause there's enough here, but, um, people got jobs and people need houses and we've got an under supply too. That's another thing people have. No, you haven't mentioned. But we literally do not have enough houses. Even with all the apartments and everything, we do not have enough houses, um, on the base of, historical sort of and membership rates for all of Australians.

Chris: Yeah the assessment rates are big one with just yesterday, Westpac have kind of come out and they've started to reduce their assessment, right? And I was thinking, oh, it's not gonna make that much of a difference really. You know, but I've already seen in the last week where we've looked at applications and we thought, actually, you know what, we need that additional assessment, rate. That means that pushes up their purchase price. Or they could do that extra, you know, five or 10% borrowing capacity. And so I'm already starting to see, well actually this is actually a quite a decent benefit, um, on mortgage applications. And it doesn't seem like much, but it will actually help people just kind of get more confidence with their borrowing capacity.

Warren: And all you need to see, I think to really get the confidence going is price is not to go down for three months and then just go, okay, I'm not catching a falling sword or whatever the saying is. And um, it's, this is a life decision for most people and you guys know better than me. It's like...

Veronica: Oh, I'm waiting to see what happens. Let's say you're waiting to see prices rise again and then you'll buy?

Veronica: Yeah, well it's the lags to i mean it's, it's a big process for the average person going through this. As you know, it takes months and you know, people are sensible and as Sydney, how often do you get to buy into the Sydney property market after it's fallen by 15% answer, a few times a century. So I've got a feeling people get that and I think the Spring this year could be okay.

Veronica: We're saying, look, I'm seeing that already in my business. That, and that is very much a commentary. Why have you decided that now is the time you want to buy? Because we've been watching, you know, we might've been looking in the boom, we decided on a process where I've heated, we didn't want him to play a part in that. Now we can see that there's value.

Warren: Yeah. And it stabilized. We've had the Shakeout, we've had, um, panic, I mean last November, 2018 was panic. Yeah. Yeah. That summer recess in the Australian property market could not have come sooner. FONGO And all is worse than that is the fear of falling into the live volcano. Yeah. Um, and then look at it. It, the, the autumn season was all about just, you know, lower volumes. The market just sort of treading water and you know, that sort of panic getting out of the market. And then the RBA cut and APRA moves and hopefully broader economic stability. I mean, the trade war stuff that's sitting there that's sort of not good. But then the equity markets. Yeah. All time highs Australia last night. Yeah. Yeah. So there's a lot of reasons to think that, you know, once we get through into early September, we could, yeah, there's through the backend that we know August is probably the quietest month. Right. Well,

Veronica: July, is really the quietest and certainly, you know, we're heading into winter and it's very, very typical to have low stock. You know, when you see that there was a graph that you actually put on Linkedin from corelogic the other day. Um, you know, it's Sydney property market is cyclical anyway. Um, yeah, I think they all are actually in terms of the seasons. But Sydney, you can very clearly see there's an absolute dip in volumes listing volumes, uh, in the winter and then they take off in spring and, and nothing in my 20 years, I've only seen, I think to springs where too much stock didn't hit the market and demand didn't leave the market. So therefore prices didn't sort of even ease off in spring. It only happened twice where it didn't, it was 2007, 2016. I can remember the two years where it just went gangbusters. Right up to Christmas with nuts. Yeah.

Warren: And that's, that's, that's bubble territory or that's top of the cycle stuff. So this, this coming spring, the signal that the economist should be looking for is stability and if prices are stable and volumes pick up a bit, um, then it's a really healthy sign. Right?

Chris: I think the pent up demand things are really big one cause I'm starting to see that through just inquiry where people are coming to me and if got an apartment and they were frustrated with the boom in 16 and 15 and I got pushed out, they went to auctions, prices were going gangbusters and their incomes are a bit lower, the savings were a bit lower and they just thought it's all too much. Yep. Let's just leave it. And they've just been sitting in the market, they've been living in apartment, they've been wanting to get into the housing market. And then 1718 came around and then they started to see price falls and the lot, well there's no point buying now. And then now we're into 19. And so you've got like four or five years I think at pent up demand of and first home buyers basically, you know, these are young families now they've got the kids or they're thinking about having kids.

Warren: Well, I think we've got a couple of economists who think the RBA cash rate is going to half a percent. So that should really drag those people into this market. Yeah. Uh, yeah, I think that's great.

Chris: Do you agree?

New Speaker: No, not at wow. I don't know what they're going to do. They're um, they've got to make the decision. Um, yeah, I think, I think it could go to half a percent if we get some sort of a shock, you know, like a global political meltdown. I think just recently we just saying Iran shoot down at US drone in the Gulf that could deteriorate rapidly. So, barring all that stuff. I actually think the underlying dynamics, uh, for, um, the things that go pretty well and therefore, I think the RBA, the RBA is going to deliver another cash rate cut. They just said it. They can't about about face on that. Yeah. I think that they want to whack in 50 points, which I begs a question while they just do 50 last night anyway. Um,

Chris: Well people feel better and it's better for the banks to play the PR game.

Warren: Well, it's, well, it's harder for the bank, so they've got to do it twice. Right. Um, I think, I think, um, there is good reason for it. Um, it also, one of the ones is that once the last rate cuts done and no one's talking about it, you'll lose that sort of impact on the community psychological out there. It's probably not a bad thing

Veronica: keep it on the front pages of the papers. Yeah.

Warren: And to get it in the spring, I mean, if they really were wanting to be cute about it, which they're not, um, but you'd hold that next rate cut through til probably the September meeting at the beginning of September and have people in the markets to debating it for two months and then deliver it and then hope that gives you some bang for your buck.

Chris: We all want the sugar hit though, so you know, and I would rather just give it to us now rather than let's think that it might not come right.

Warren: Well the RBA actually sits back in takes a view that, it's what level of interest rates is appropriate and just get it. This sort of thing that I'm thinking about those it does a lot of thought put into those sorts of things or they don't, if they do think about it, then they can leave themselves open to criticism about what they're doing and stuff like in this sort of, you know, not, not wanting to get too detailed.

Chris: So that I think is too much around the behavioral side of impacts on changing consumer behavior. They're more thinking, we want to get to this target.

Warren: Oh look, they, they, they will. And now definitely talking about it and yeah. Yeah. That'd be 10 views on 10 different things up there at Martin place. But in terms of the ultimate thinking and what they've got to sort of use as their decision framework is what's the right level of change? Science-Based. Yeah. I mean everyone in the market, all the market participants who live and breathe this stuff day to day, they will come up with their own little stories. They will backfill. Yeah, make it interesting for people to talk about, but in the end it's just a decision. Can they go to a half a percent? I don't think that. Well, and I think that's dangerous territory. I mean the reality is is that our economy is growing in nominal terms in sort of between three and five depending on how you measure it and you know, the most basic measure of what your interest rate should be or your monitor policy should be as an interest rate basically where your nominal growth is.

Warren: That's pretty much what happened between 1990-2008 yeah, they was divergences. We're not trying to stimulate to hold back the economy since the crisis. Global monetary policy has been persistently easy and we've got even your harshest interpretation of nominal economic growth right now there's probably three, three and a half and we're going to cash right at 1.25 taking it to half. And there is the question about Ammo, although I don't think that plays into the RBA's thinking maybe it does, but I, I just think that there's danger in it. And the worst thing here is we get a bounce in the housing markets. That's really good because that'll show the economy's good employment so that the job jobs are there. But It's not great for the longer term stability.

Chris: There was a bit of a noise last month around that we are in a technical recession. If we didn't keep importing people and then we didn't keep growing our population. So from a per capita basis, our um, we're actually going backwards. Did you do that? That's obviously we are gonna keep importing people. So we are going to keep it trying to attract top talent around the world so it doesn't really matter. That went, they're only doing the numbers on that. We're not because we are going to, so yeah, it's, I felt like it was a bit of a pointless argument because it's, that's how that's been our story forever.

Warren: Yeah. I mean it's pointless talking about for a number of reasons. One is that sort of angle you're coming out there. And the other one is, is that all it's saying is that right of economic growth for a period of time is less than our population growth and everyone knows that economic growth is more volatile than population growth. It's actually what's a growth recession or mid cycle slow down or something like that. It's not an outright recession in the economy either. The economy is not going backwards. Yup. Um, but it's a soft patch and you, you need soft patches, you kind of boom periods without soft patches. You know, you kind of have strong periods of that week periods. They were fluctuations around the average and we were doing pretty well to reduce the volatility in the economy. But you're going to have some ups and downs.

Warren: So I think it's a silly, silly point. We the question migration's gonna continue to be a big one for this country we're one of the biggest immigrant countries in the world. The size is huge and we just had some data out in the last few days that showed the last year was 2018 was a massive year. And you know, to think that, you know, especially people who come in as refugees or from you know, less developed countries, they come in and have it big sort of positive impact straight away on terms of the economy. Um, he's not right because they, they've got a, they have a long term positive impact, don't get me wrong, but it just takes time. It's actually a bit of a cost. Um, I'm a big believer in, in immigration because sort of what Australia is, but there's definitely, we should always be talking about it or thinking about it and not see it in some sort of racial nationalistic frame. Um, it's just about what we can handle.

Chris: Yeah. From a congestion and a growth and managing the urban dynamics of all of it. Making sure we keep the livability, I guess, of this country. And the jobs ..

Veronica: And we don't build buildings that start falling apart.

New Speaker: Yeah. That, that, that one wasn't sort of hitting its intended lifespan. Um, and I think it would be good.

New Speaker: well did if you're a builder and you've only got warranty for seven years, we are referring to the mascot towers here, yes. And that's um, that's all that matters.

Chris: I'd love to just get your thoughts. You had done a lot of work within the banks. Um, you know, how banks think and you know, behind the scenes you did kind of talk about a topic that's, you know, kind of getting lost a lot a bit with this royal commission and it's kind of falling away, which is responsible lending. There is an argument that the banks are going to have to definitely take this a lot more seriously and verify actual living expenses for applications rather than customer declared living expenses. What's your view? Have you heard much of what's happening behind the scenes at the banks there ?

Warren: yeah, I'm look, I've only seen what generally just having been, you know, haven't been working at the bank for a while.

Chris: You might have some friends still?

Warren: Well look, I think it's about the mix. You know, these are all private institutions or we're a civil society where people are left to make their own decisions, but this clearly, you know, issues are in when it comes to debt and this is where the responsible lending comes in. You know, a lot of people are talked into dreams of, you know, wealth and stuff like that and they take on debt and you know, it's been going on forever. So yeah, big institutions, and this is the whole point of the Royal Commission particularly, the big four but all the banks. We've got a bit of a responsible bill ability to the broader community and not to sort of pander to that and put no aside.

Warren: Look, I think we've got to find the right mix. I think in any society, all three time when things have going really well, lending standards, ease and you know, everyone wants to push the money out and that's human. Yeah. That's great. Yeah. Both in terms of the people who are borrowing the money out of the market's going up lets gets in and the people lending the money and let's make some, you know, let's hit our targets and then get, you know, get our bonuses. I think the message is loud and clear. I think the banks, the banks, like any big organization have their shortcomings, but Geez, they invest a lot in this sort of stuff around culture, around behaviors, around leadership. Um, and I think they'll find the right balance with working with the regulators around this. I think there was an overreaction.

Warren: One thing I can tell you from working in a bank, you know, um, when I was at ANZ there were 48,000 people, um, yeah, these are big organizations and, when you, when you're operating a business at the coalface, even a big retail business, um, there's gotta be some discretion there. You know, and that's what you want in any business. You want people and people want to be able to make some decisions. And then when that comes down the pipe from the very top, you know, we do not want to, you know, get on the front pages for you know, lending this or that. And then the whole risk incentive for someone at the coalface lending either to small business or, mortgages or something is just like, I can't stuff up so they just shutters us up. That's what happened. That's what happened last year.

Warren: And all your discretion goes, I think we're going to go back to a point where, you know, the, they've recast what responsible lending looks like and you've described that situation with Westpac they're all doing it and we'll find a new space but can't tell banks what they shouldn't do, you just got to try avoid them doing stuff that's really sort of system systemically while systematically threatening in terms of stability, the economy and the financial system, but systematically ripping, you know, taking advantage of, well people who don't know better. I mean, you know, it's the reason none of the institutional banking stuff was ever brought to the royal commission is a level playing field. It's ANZ versus JP Morgan. It's Westpac versus City group. That was the markets I was involved in and you know, big boys, you can all fight it out, you know, play by the rules.

Warren: But at the retail level, there's massive information asymmetries the reason we want trust, we actually want trust. In our Telecommunications provider, energy provider, our insurance provider, our bankers. Because none of us really care know have the ability to make those kinds of calculations, if those institutions, which are at best oligopolies if not duopies. With a lot of government protections in many ways are they're taking advantage of everyday Australians. Well, they can only get, people are going to get upset eventually. And that's what we saw at the Royal Commission. The rip off stuff that people didn't know. Interestingly, because is it the Hilda Hilda,

Veronica: Hilda report? Hilda, yeah, the really detailed database on what kind of living, yes, yes, yes. But all, sorry, there's been surveys done on average Australians. I wish I could be refer to exactly what it is, but something like four out of five don't even know how to calculate percentages. Yeah. So are we, look the individuals we need to take responsibility for if we're going to go and buy a house for God's sake and you're going to go and borrow $500,000 or $1 million of whatever, I think it's actually the responsibility of the individual to also understand what the hell they're doing. But you can see how a situation, how the, how the banks, if they've had targets and how it is systematically.

Warren: Well it's also individuals. Yeah. Not just to the banks, but mortgage brokers or whatever who, yeah. You know the lines crossed when you know, people know when it's going from taking advantage of someone who doesn't fully understand and you then convincing them to do so. Right. And there's a v and this is the whole point of what? Yeah. but in every business, there's a fine line between the hard sell and the rip off. Yeah. And then when you're talking about future wealth, when you told me when people say it on the news every night and read in the papers on see it on the internet that you can make a hundred grand.

Veronica: Rife in the property industry,

Warren: that people cannot save those kinds of gains. And I mean, that was the, that was the problem. And that will remain a problem for a little while longer I think with property is that people see riches and wealth positions that they'll never generate through their own hard work.

Chris: I think the good thing that I'm noticing is that the banks, um, while some banks are still proving if you're a good customer, you've got good credit. You know, you've got your deposit, your jobs are fine, but banks are still lending. I think what they're not, and they're actually making, you know, smart risk assessments now and they're looking at things and going, actually there's something that you're doing this upsetting us. You know, maybe it's gambling or Ebay, uh, you know, after pay or there's, you know, maybe it's three jobs in the last two years or something like that. They're looking at things a bit more than, you know, the soft facts within an application.

Veronica: A bit like the olden days. Yeah. A little bit. Yeah. And um,

Warren: well it 10 years ago and it's a distinction because essentially what happened in the wake of hane in those first two, you know, sections where it was about responsible lending to small business and mortgages and the banks just went whoa. And they tightened up effectively for everyone. And now what they're doing is it's easing back and then they're focusing in on areas where they probably should been focusing anyone's, yeah. Riskier lending. So marginal. Yeah. The, the basic model, the best sort of simplest model, which isn't pereniel, but yeah, you are maybe in your mid to late twenties, maybe early thirties, take out a mortgage, which is just eye watering for you and your partner. Um, and you're gonna, it's such as wage growth, you're going to get promoted, you're going to, yeah. You get bigger wage increases. Sure. And you know, especially in a service based economy, I mean, we get better and better until the age of sort of 50 and calculative and wisdom and stuff.

Warren: So in a service based economy, you get them always, then it's eye watering. But you know, he probably not gonna be paying it off over 30 years because you're going to get, your pay will probably double in the next 10 years, not because of wage inflation, because you get promoted. So that, that's, that's a basic model. It's been around forever. Um, it's the, it's the person with five investment properties who's on a hundred grand a year. It's the person who's taking out a mortgage who's, you know, 61 for 30 years. It's, there's a variety of where we've eased things up and become more flexible. It's those peripheral things where there's got to think about it. Well, it's common sense, but that's where there's a contract between a bank and an individual to work it out. And of course, the other thing about banking, which we've completely lost sight of, including by some bankers, is that their job is to take risks.

Warren: If every single loan they may come as good, then they've stuffed up because they're not providing enough risk capital to our economy. And especially small business. They are there to pool, the risk of the community and you know, I take a certain amount of heat, it's not stupid amounts. And of course that's where things like monetary policy and financial stability coming in. Cause you know bankers have to do that in the context of not having wild swings in asset prices and stuff. So anyway, I mean I think, I think we're getting, it sounds like from what you guys are saying and from what I'm reading and hearing is it way getting back to a more, a better space, but it's definitely tighter than it was in 2016,2017 it was it was cowboy stuff.

Veronica: Needed to be tighter.

Chris: Especially those decks as you mentioned, you know the old, you know the big investment properties, the big borrowing capacities, it's like 14, 15 you could borrow 10 times income, which is crazy. So couple only $300 grand could borrow $3 million lot to buy investment properties. Now it's like, you know, six times. So that's $1.8. And I don't think it's going to go back to your 10 times. I think they've stopped. And that will stop the big spruikers out there that you know, you can go and build these huge portfolios and things like that basically. Well they'll probably just have to change their message. There is always cheaper, cheaper properties.

Chris: Every week, we hear incredible stories that the dumb things, property buyers do, dumb things that ended up costing a whole lot of money or creating a whole lot of stress mistakes that can be avoided. So Warren, can you give us an example of a property Dumbo, we can all learn what not to do from these stories

Veronica: Property, dumbo. Um, well putting his side, um, the very, the person who bought their third, fourth and fifth investment property in Sydney or Melbourne in 2017 and 18 ie. They should have known better. Um, and that was just greed. So bad luck. Um, speculators. My personal experience having lived on the northern side of Sydney from the lower to the upper all through my life is the greatest done by for me is rendering a house we invented brick because it might not look pretty well, that's bad. Um, is it that way as well and you don't have to wash it and then paint it and paint it or anything. You just leave it and it's really smart. It was great technology and uh, rendering a house just re-introduces ongoing maintenance costs and that's assuming you do a good job on it. So I think the property Dumbo for me is the desire of everyone in Sydney to render their house in the last fifteen years .

Veronica: Do you know this from personal experience?

Warren: I rendered my last house and then I sold it because I didn't want to repaint it and built a brick house. It looked great I must say.

Chris: One of our biggest sponsors is a rendering company. There's definitely some silliness there. I mean, but I think red bricks coming back in fashion. If you look at the youngest generation, those, those, you know, middle suburb, red brick sixties, mid century, modern style, they back don't render over those cause you're devalued your asset plus, getting all your maintenance, maintenance costs. And that's a good one. I like that.

Veronica: So thank you so much for coming and joining us. We've had, a wide ranging conversation, which we often do on these podcasts. And um, a lot of these, you know, I love the conversations with economists because we are looking at it's global, you know, and there are things and leavers that impact on us. And to understand that and put it into context is, is great. So thanks very much we appreciate you sharing your, your expertise and wisdom with us.

Warren: Thank you. It's been great to have the conversation and, uh, good luck and I hope you continue to get a good, forthright analysis from you guests.

Warren: Thank you very much.

Chris: We want to make you a better elephant rider. And this week's elephant rider training is,

Veronica: Let's talk a little bit about, you know, the responsibility of a buyer to buy a good asset, right? This boot camp came to me when we were talking with Warren about the idea that banks are starting to ease up and borrowing money is becoming a little bit easier again, right? Yeah. And we talked about serviceability. That's what banks are interested in, right? They want to make sure that you can repay that loan and then want to make sure also that they're not exposed, overly exposed in the event that you can't pay back that loan, that they will get their money back. So if they perceive a property to be risky, for instance, they might say, well, we're not going to lend you 80% of that property. We'll lend you 70 for argument's sake. So really what that means is prices could 30% and there's a forced sale and they'll still get their money back. So that's the bank protecting their risks. But as a buyer, you have to protect your risks. Okay. So being able to borrow a certain amount of money's great. Being able to service that loan or pay that loan back is great or make the repayments is great, but you need to be factoring in the ID that you need to buy an asset that's going to go up in value over time. You know, that not is going to fall in value or not is going to or isn't gonna just stay the same. You want it to go up. Otherwise why bother buying a property? So I just want to reiterate the importance of uh, you know, particularly this is a, an issue certainly that we've had in recent times around new apartments and off the plan apartments where people have actually seen that valuations are coming in a lot less than what the agreed purchase price is.

Veronica: So that, that's a situation when people are starting off with negative equity. And if they bought a property that is not very scarce, ie. part of a huge complex and there's lots and lots of other properties exactly the same. It's gonna take years, maybe even decades for them to actually get their money back. So that's a responsibility in a risk that is born completely by you, the buyer. And so once again, when the banks ease up and make it easier for you to borrow money again, take your eye off that serviceability for a moment and really looking at what you're buying and take responsibility for buying a quality asset.

Chris: It's really good. I liked it a lot. Okay. I'll use that. I might use that actually in clients. Oh good. Brilliant. That's really good. That one, because people think that they think, oh, the bank's going to lend on it, so it must be good, right?

Veronica: Yeah. No, the bank doesn't give a shit about you. No one wants to give you the money. Yes, and they just want to make sure they get it back. If you've failed to pay it

Veronica: Tune in next week when we interview with demographer, mark McCrindle, now demography, what is that? It's the study of who we are, what we do, where we live, where we go, what we value, all those things. And as a society. Obviously these questions are important for us to understand when we're looking at where we live or where we invest, what is happening with our cities, who you know, what will population growth do? We'll gen z and Gen Alpha by property the same way we have. It's all going to be answered in our next episode, so please join us.

Chris: Don't forget we're on all the social channels. We're on Facebook, we're on Linkedin, we're on Twitter.

Veronica: Or you can connect with us on the elephant in the room.com.au, the links are all there for you.

Chris: Please connect and send us a message we'd love to hear from you.

Veronica: The Elephant in the Room Property Podcast is recorded at the Sydney Sound Brewery. This week's podcast was recorded by John Rhesk, editorial by Gordy Fletcher.

Chris: Until next week. Don't be a Dumbo.

Veronica: Now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.

Veronica Morgan