Is it time to break up big tech?

This week in Talking Finance:

• Niki Savva, columnist for The Australian and veteran political commentator shares her thoughts on the Liberal Party under the leadership of Prime Minister Scott Morrison and whether he can beat Bill Shorten;
• Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital runs through the latest GDP numbers;
• Stephen Koukoulas, Managing Director at Market Economics checks out the market’s reaction to the week’s economic news;
• Steve Sammartino, Author and Futurist reacts to what happened with Amazon this week - joining Apple in the 1 trillion dollar club; and
• Tim Lawless, Head of Research at CoreLogic Asia Pacific checks the pulse of the housing market following the release of house price figures for August.

Hello and welcome to Talking Finance, I’m Alan Kohler and there’s a bit of ‘what just happened?’ about this week.  What just happened in politics?  The Liberal Party blew itself up and now there’s a new and very different Prime Minister, Scott Morrison.  Niki Savva, Columnist for The Australian and veteran political commentator, shares her thoughts on the explosion and whether Scott Morrison can actually beat Bill Shorten.  Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, runs us through the latest GDP numbers.  And Stephen Koukoulas, Managing Director at Market Economics checks out the market’s reaction to what just happened.

Steve Sammartino, author and futurist, reacts to what happened with Amazon this week, which is that it joined Apple in the $1 trillion club.  And Tim Lawless, Head of Research at CoreLogic Asia-Pacific, as usual at this time every month, takes us through the house price data for August.

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And now let’s hear from Niki Savva, veteran political commentator, Columnist for The Australian, about what’s going on and the new Morrison Government.  Well, Niki, when the dust all settles what’s happened is that the silver-tail rich Prime Minister has been replaced by the ‘bloke’ from Cronulla who’s a Sharks supporter and a Pentecostal Christian, who is perhaps more of a populist, isn’t that right? 

NS:  I think that just about sums it up, on one level.  He’s gone out of his way to paint himself as the ordinary bloke from the suburbs with a normal family, still got a mortgage, still in touch with what ordinary folk are thinking, which is all very well because that makes a contrast with what people thought about Turnbull or at least those who didn’t like Turnbull, thought about him, that he was ‘Mr Harbourside Mansion’, he didn’t have empathy with ordinary people and so on.  But I think, like I said this morning, you can overdo the ordinary thing because no ordinary person ends up being Prime Minister, it just doesn’t work that way…

Yeah, but you made the point that the last bloke who was like that was a suburban solicitor named John Howard.

NS:  And there was nothing really very ordinary about him, except for his appearance.  It’s a persona that is cultivated, which can work up to a point.  People like to think, yes, he is a little bit like me, but they also like to think there’s something more to him or her than that, and Morrison has got to prove that bit and we haven’t got to that bit yet. 

I suppose the bottom line question is, do you think that Morrison is remotely capable of beating Bill Shorten at the next election?

NS:  I can’t say.  Anything can happen between now and then, right?  But what we know is that two weeks ago the Liberal Party blew itself up into smithereens and now he’s the bloke who’s trying to put the pieces together again.  Whether he can manage it or not, I don’t know that he has either the authority within the party or the strength to be able to do it and that will be key to it.  Unity is always the key to success and if he can’t bring the party together, then I don’t think they’ve got a chance of a snowflake in hell.

The two things that are going on that you might call a continuation of the explosion in the Liberal Party are the Inquiry into Dutton’s au pair affair – I don’t know whether you’d call it a scandal or not but certainly this ongoing thing about his… 

NS:  Saga.

…Saga with his approval of the…

NS:  Soap Opera.

…of the soap opera of the au pairs and the other thing is the claims about bullying, which Julie Bishop is now kicking along.  Where do you think those two things are heading?

NS:  Well, they’re both damaging in their own way.  One, particularly for Dutton because obviously Labor is going all out to show he doesn’t treat people equally.  People on Manus and Nauru are being treated harshly, yet these beautiful young girls who want to come in and look after the children of his friends are given an easy entré in.  So that is quite an easy story to tell and it is damaging if Dutton can’t provide proper explanations for what happened.  The bullying accusations I think are quite dangerous I think for the Liberal Party. 

They are very much a part of what happened in the leadership coup.  The women particularly in the Liberal Party are outraged by what happened and they want to put an end to it and they want to put the spotlight on it in the hope that they can do something to change the culture.  Now, good luck with that.  I mean, there are already people who are out there saying either, ‘Toughen up!’, or, ‘Nothing happened.’  I think it’s just a bad look all-round for the Liberal Party given that it has been singularly unable to attract women to the party.  I don’t see how this is going to help them remedy that and I also don’t see how it’s going to help them unify in the lead-up to the election.

When do you think the election will be?  And I ask because of Josh Frydenberg’s situation, where obviously he had a good day yesterday with the GDP numbers, but the latest that a half-Senate election can be held is May the 18^th, so if they had it on that day then the budget would be during the caretaker period which presumably means there’s no budget.  Does it look like, if they lose the election, that Frydenberg actually can bring down a budget at all?

NS:  There’s nothing to say, firstly, that they can’t bring down a mini-budget in advance, maybe MYEFO at the end of the year will turn into a mini-budget type document, that’s happened before.  Even before Turnbull left though they were looking at election dates and they were going to see if they could stretch out the election timing to May 25, because I think the new Senate has to be in place by July 1, right?  So long as there is enough time for the count to take place and for the new senators to be sworn in, etcetera…  Their thinking then was to move the budget forward a bit, as they did last time, and use it as a launching pad for the election campaign. 

Now, it is still possible that that is an option, I’m sure it is an option but do we know that they’re going to last that long?  I’m not putting, at the moment, any money on anything.  I think there are still questions about Dutton and his eligibility to sit in the Parliament which Labor is also firing up again, so let’s see where all that goes as well…

And they could lose Wentworth as well I suppose.

NS:  They could lose Wentworth quite easily.  There’s a lot of good feeling about the change in the deep north, right?  They are glad to see Turnbull gone.  That’s not the case the further south you go.  People are still asking, what was the point?  Why did it happen?  We’ve had all these stories coming out of what was in the pipeline for Turnbull to do.  We’ve got those good economic figures that you mentioned yesterday, so why did all this happen?  There are still lots of unanswered questions and I think people are still a bit puzzled about what it was all about and I don’t think Morrison so far has given them any reason really to think that, yeah, it was a great idea to blow yourself up and do all this.  

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And now to talk about this week’s GDP numbers and the economy in general, here’s Shane Oliver from AMP Capital.  Shane, the GDP pretty good yesterday, 3.4%, but it was kind of boosted by a decline in the saving rate.  What’s your overall view of it?  Are we muddling along or is it fantastic as Josh Frydenberg says?

SO:  I think it’s somewhere in between.  There’s no doubt over the last 6 years we’ve just been muddling along.  Growth was sort of stuck between 2-3%.  We obviously perked up in the first half of this year and that along with some upward revisions to the latter part of last year has now meant the growth did 3.4% on an annual basis.  That’s a pretty good outcome.  The only problem is, as you say there, the savings rate has fallen to a 10-year low, in fact it’s the lowest level since 2007.  Australians are sort of keeping the spending going by running down their saving level which I think is ultimately unsustainable. 

I think they were happy to do that when their wealth was going up as the value of the family home went up and their property investments went up, but with property prices now falling in Sydney and Melbourne, I think it very unlikely that consumers will still want to keep writing down their savings rate and consequently that means that given continuing very low wages growth, that consumer spending will slow down, all at a time when the housing construction cycle is set to slow down as well.  Great numbers there but I don’t think it’s going to be sustained at that rate.  I think it will slow down to a back below the 3% pace.

Do you think that there’s any or much danger of a recession?

SO:  I’d say a recession is a low risk.  I do think growth will slow down but there are some positives out there that we have to allow for, the mining investment collapse that has been a big drag on the economy over the last few years, that’s pretty close to the bottom.  There are some positive signs regarding non-mining investment picking up, export volume growth is probably going to remain strong and of course we’ve got this ongoing boom in public infrastructure spending, so I think those things will help keep the economy going, so I think the risk of a recession at this point in time – maybe several years down the track, but at this point in time the risk of recession is very unlikely. 

I suppose the thing that you highlighted before and that is the low wages growth, I mean do you think there’s any sign that that’s going to pick up?  I mean, is there any future in that?

SO:  Well, I’d like to think so but at the moment I still can’t see it.  We still have relatively high unemployment compared to the US.  I mean, the US had to get their unemployment rate down to 3.9% and all they’ve managed to do is get their wages growth up to around 2.7-2.8%.  We’re still a fair way behind the US, we’ve got unemployment at 5.3% and recently it’s come down but underemployment is around 8.5%, which is way, way above US levels as well.  So if America’s only managed to get their wages growth up to, recently, 2.7-2.8% because of a very tight labour market, we’ve got a very long way to go before that happens here.  Maybe if we continue with decent growth then several years down the track we will see wages pick up but I can’t see it happening any time soon.  If growth settles back into that 2.5-3% range which I think it will, that’s just enough to sort of use new resources coming into the economy, use up new entrants into the workforce.  It won’t be enough to get unemployment and underemployment down such that wages growth accelerates. 

Which I presume means that the Reserve Bank will leave interest rates where they are for quite a long time?

SO:  I think rates are going to be on hold out to 2020 and then they’ll probably raise rates some time in the latter part of 2020, but that’s a long way away and a lot of things could happen between now and then.  I think you also can’t rule out the next move being a cut.  I don’t think the Reserve Bank wants to cut again, I would hope that they can avoid that, but if this housing price downturn accelerates, threatening consumer spending and threatening inflation on the downside, then the Reserve Bank would have to respond to that with another cut in rates.  But my base case is no move from the Reserve Bank for at least another couple of years. 

But a reasonable chance of a rate cut?

SO:  Yeah, there is a chance of a rate cut.  I know the Reserve Bank sort of repeats the mantra that the next move is more likely to be up than down and that’d suggest a relatively low probability of a cut, but I think the probability of the cut is still significant and can’t be ignored.

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And now here’s Stephen Koukoulas, our mate and Managing Director of Market Economics, talking about the market reaction to the GDP numbers and what’s going on in interest rate markets.  Stephen, the GDP number did okay for the Dollar yesterday, it went up, then it went down again and now it’s up again this morning.  It’s all over the place, the Dollar, at the moment.  Firstly, can we just focus for a minute on the market reaction to the GDP number?  What was behind that?

SK:  Look, it was way above expectations, not just the quarterly result which was a touch above expectations, but our friends at The Bureau of Statistics revised up each of the prior three quarters, so when the market saw the 3.4% year over year increase in GDP, which was about half a percentage point above expectations, the Dollar did jump about a third of a cent, bond yields backed up, the stock market sort of took that in its stride and we had this reaction that, well maybe the economy is as strong as the RBA’s been portraying and their rhetoric about the next move in interest rates will be up, that was a short term reaction. 

Well that’s right, but within 12 hours it was back to well below 72 cents – 71.5 – so it went back below where it was well before it came out. 

SK:  I know and as we speak we’re a little under 72 cents.  It just goes to show that global developments can and often do dominate domestic news, that we’ve got this ongoing issue of the US, the Federal Reserve meets there in about 3 weeks’ time and even though we had our nice data on GDP here, the US economy is still powering along, there’s inflation risks brewing there.  The GDP numbers that they saw for their second quarter data were remarkably strong as well.  The Fed’s going to be hiking interest rates and so when that went back into the equation, the US Dollar got a shot in the arm.  In fact, the US Dollar rose against currencies, so that spike in the Aussie to about 72.3 US cents was short-lived and we’ve dropped back below 72 cents.  So it’s really a global story.  There was a little bit of softness in some commodity prices too.  Really important for the Australian economy and the Aussie Dollar.  They both are impacted and I guess went back to square one. 

Just looking at the charts this week, it feels like the Australian Dollar really wants to fall and keeps getting dragged up a bit by data.  But does it look to you as if the trend for the Aussie is lower?

SK:  I think so.  I think if you’re having a punt on which way the Dollar will go over the next three to six months, so a slightly more medium-term view, it does appear to be down.  As we just mentioned, the US Fed is on track to hike not just one more time but probably two or three more times over the course of the next six to nine months.  Their short-term yields will be sort of 2.5% to 2.75% conceivably by the early part of next year.  Even though we’ve got better numbers here, we still have a low inflation climate, we still have concerns about household debt issues and the fact that household savings were very low in the June quarter.

The RBA here is not about to hike.  If you think about the fact that come early 2019 the interest rate gap between Australia and the US will over 100 basis points, then it’s going to be very, very hard for the Aussie Dollar to keep kicking higher.  If anything, there could be that break below 70 cents, which isn’t that far away.

When do you think the Australian RBA is going to hike?  Do you think we’re talking 2020?

SK:  I think we’re talking something like that.  Gosh, forecasting a year-plus into the future is always hazardous.  I’ve been burnt and learnt from that over the last couple of years.

In fact, you’ve been calling for a rate cut, haven’t you?

SK:  I’ve been calling for a cut – look, I think they’re probably on hold, yet yesterday’s numbers were important, but the rate cut scenario, the rate hike scenario, they’re both lacking credibility at the moment because if you look at the rate cut scenario, the one that I’ve been banging on about, with growth at 3.4% they’re not going to cut rates so I’m going to have to revisit that call on rate cuts.  But the rate hike scenario is also quickly disproven when you look at the inflation and wages dynamic.  You put all that into the melting pot of monetary policy considerations, give it a stir and you come up with no change for quite a long time. 

You’ll either need the inflation and wages dynamics to pick up before the RBA are willing and able to pull the trigger, or you’ll need something like the housing market which is still pretty soft – if that actually translates into a sustained period of weak consumer spending at some stage then of course you’ll get the RBA cutting rates.  But for now, I think the safest bet’s on hold for many, many months. 

Meanwhile, the yield curve has been flattening for a while and that is the difference between the 10-year bond rate and – I don’t know, pick a number – 180 day bill rate has come down from just this year from 1% down to 0.4%, so I just wonder what you’d make of that?

SK:  Yeah, look, that’s a really interesting phenomenon and I think it’s more being driven by the long end yields because we know that the short end yields have been unchanged, well certainly from the RBA perspective.  The long end, the 10-year bond for example is driven by a couple of pretty basic things.  It’s driven partly by expectations for rate hikes and as we said, they’ve been pushed back and back and back since the start of the year.  The other thing that feeds directly into long-dated 10-year government bond yields is inflation risk, that you’ll hold these bonds based on your estimates of inflation and the fact that inflation in each of the last two or three or even four quarters has surprised on the downside, means that the pushing up in 10-year bond yields hasn’t been sustained, a little bit like the Aussie Dollar, it sustained the move so here we are with the 10-year bond just around about 2.5% here in Australia, it’s remarkably low and the reason is that we’ve got inflation well and truly entrenched around about that 2%, plus or minus a few tenths.

The long end is the one that’s causing the yield curve to flatten because the short end yields are sort of hanging in there but the long end yields are starting to fall because inflation is so low.  That’s the interesting question.  Again, the RBA do look at that when they consider monetary policy and again, and again, it sort of in a roundabout way feeds into the sort of scenario of rates on hold because they’re not going to hike rates when the bond market is so antsy about the risks of inflation. 

To be honest – this is just an aside – I can’t see why anybody would hold a 10-year bond at 2.5% yield, I mean it just seems to me the risks are so skewed.  I just think it’s an absolute no-go area.

SK:  It is, but then if you stop and think for just a moment, our 10-year bond yields are still relatively high compared with the rest of the world, it’s an interesting sort of issue here that we know the US yield’s around 2.8-2.9%, so in a strange way they’re the high yielding economy at the moment, the US – we’re at 2.5%.  You then have a look at what’s happening in Canada, in the UK, throughout Europe – well, not the peripheral Europe, but Germany and France and the like – their 10-year yields are about 1.5%.  Japan is at zero.  We’ve got yields that are higher than a lot of similar industrialised economies, much higher.  The only exception is the US, as I mentioned. 

The question there is that with some of the regulatory changes that have been imposed on banks over the last five to 10 years, they’ve got to hold government securities as a risk-free benchmark against sort of bad times coming along.  There’s natural buying for these bonds whether the yield’s 2.5%, 3.5% or 4.5% and I think that’s the – as an investor, yes, I’d be inclined to shy away, it’s not a great return.  But as a bank, you’ve got to hold these things because they’re liquid, they’re safe, and in the case of the next crisis that comes along you can liquidate them quite quickly and have cash to meet your banking obligations, so the banks have to buy them. 

Fair enough, so the only people who are buying them are those who have to and that’s understandable. 

SK:  Exactly right!

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And now let’s get Steve Sammartino, futurist and author on the blower to talk about Amazon and Apple being worth $1 trillion each.  Steve, I noted on the news last night that Amazon and Apple are now worth quite a bit more than the entire Australian share market at $1 trillion each.  What are we going to make of this?

SS:  I think there’s a real risk for investors given the size of big tech.  If we think about the fact that Amazon didn’t exist 25 years ago, in 1999 Apple was almost broke and now what we’ve got is two companies worth over $2 trillion US, and in fact the top five tech companies in the US now take up 30% of the share market.  Personally, I feel there’s a very big risk for investors for a couple of reasons.  The first one is I think we’re going to see some serious look at anti-trust violation from these companies.  If we look at the price earnings ratios that they have and if they do get split up, then what happens for investors is that the price of these stocks goes from fantasy PE ratios to reality PE ratios.  We’ve got the share market coming in at 25% as a price earnings ratio but if we look at Amazon, it’s 181 times price earnings ratio and Facebook’s 23 and Google’s 31, so that will have a really big impact on the market if they start to get looked at as monopolists that are in violation of anti-trust.

Is anyone actually talking anti-trust?  I mean, it surely isn’t just a matter of size, it’s got to be that they are monopolies in some way.

SS:  Yeah, there is quite a narrative happening now, both on the left and the right side of politics in the USA, hasn’t so much hit here, it’s certainly the case in Europe as well.  Europe are calling for YouTube to spin off YouTube.  But the thing that’s interesting about these is that they are global monopolies and they’re essentially now the digital infrastructure of the 21^st century nervous system and the way that they are monopolies is very interesting.  I mean, if we look at smartphones alone, you’ve got two companies operating 99% of all operating systems on smartphones.

You’ve got Google and Facebook buying any competitor before it looks like a real threat because they can actually spy on them through the data that they accumulate.  They know who’s growing.  If someone’s doing particularly well, they buy them out before they have a risk.  One of the things that Google has done – I mean, we know that they’re over 90% of search, even though they’re only a smaller percentage at 15% of advertising – what Google do now is they have their little information cards that happen on a search. 

Once upon a time you would look into a search engine for flights, you would go to a flight company, now they’ll have Google Flights, they’ll have Google Weather, Google Hotels in that first search option where they’re abusing their market power to direct people into their own versions of the sites that they used to send people to, now they’re aggregating that data and using it.  In real terms, they’re using their powers as absolute monopolies and I actually think it puts investors and the economy at risk.

I suppose the point you’re making is that if the anti-trust regulators in the US come after them, then that’s going to have an impact on the entire market, isn’t it? 

SS:  That’s right.  We know the common tropes that when the US sneezes everyone gets a cold, but I think that it will have a big impact across markets.  The US is at its highest price in the last 10 years and had a rabid bull market now.  Given the size that these companies take now in the total share market, that would have a wide impact.  But I honestly can’t help but think that countries like Australia and Europe need to regulate more heavily against these organisations because they’re now the infrastructure. 

Infrastructure used to be something that was nationalised and owned.  There was roads, waterways and energy, but now information and the spread of information is really the most important form of business infrastructure and we don’t own any of it in Australia.  We have nothing when it comes to tech companies.  If you look at what China did, they were the smart ones and some people say that they let these companies into their country long enough to learn from their IP – and I’m being generous when I say the word ‘learn’ – and now they have their own versions of that because they understand that the critical infrastructure of this century is information.  

They have JD.com, they have Alibaba, they have Tencent that has all their social platforms and Youku which is their version of YouTube.  We need to get a little bit wise and potentially regulate against this, even though it would shake up the share markets and what happens in global finance.  I think it’s what we need right now so that we can have a competitive environment going forward.

I don’t think Australia’s in any position to regulate them, don’t you?

SS:  Yeah, I do.

I mean, for us it’s way too late, what can we do?

SS:  Well, absolutely we can regulate, just the same way that GDPR regulates.  We can say that within this marketplace there are certain things that you’re not allowed to do.  You’re not allowed to spy on competitors or take data on someone’s phone.  We could have regulations on our terms and conditions that are more looking at the things that Google and Amazon and Facebook do so that the way they interact with consumers in this market is different.  It might mean that they’ll need to have a separate set of code for dealing with this market. 

But absolutely, we can regulate against it.  Just because they’re operating in a different market, it’s the same as having food regulation or energy regulation here or car regulations on cars having a safety belt.  Just because you’re from overseas it doesn’t mean you can’t regulate against it…

I suppose what I meant was that we can’t do what China did, which was to establish their own versions of the same things, basically forcing the companies to hand over the technology.  It’s a bit late for that.

SS:  Yeah, look, we certainly can’t do it that way, but I think that if we protect consumers from some of the things that they’re doing with their information and the way they’re taking people’s data and not rewarding us for it and obfuscating how the data is used, that would be a first step in the right direction.  Again, it would be much tougher to I guess second the IP and create versions of it here at a nationalistic level.  That’s not something we can do but to regulate against it, I think would enable a more competitive environment, because ostensibly if you want to connect with your consumers, now you almost have no choice but to go through the big tech companies and we haven’t really seen it on a retail impact here. 

I mean, we’re still under 10% of retail happens in e-commerce and potentially as Amazon builds out an infrastructure, which is what they’re doing, they’re a global logistics and infrastructure company and they’re running more than 10 757 jets themselves at the moment and their biggest growing source of revenue is for their customers to advertise on Amazon to sell things on Amazon, if that’s not monopolistic behaviour I really don’t know what is.

Also, a third of the value I think is based on their web services, the cloud computing business, and as you say that is basically a utility.

SS:  That’s right, it is a utility.  In fact, 42% of all internet traffic now goes through Amazon on their web service providers, that’s very significant.  If Amazon web servers go down the internet goes dark, it’s almost as if the lights went out.  I just think that what we need from a commercial perspective and an investing perspective is greater knowledge within investing circles and certainly within our government to understand the breadth and the tentacles of these organisations and they get away with it because there’s a little bit of chicanery in a lot of the stuff they do, it’s almost like it’s hidden underground, its infrastructure. 

It’s almost the dark side of the internet that people don’t see and that’s because we don’t have the knowledge.  We only see the interface that we have on our laptop or our smartphone, but their tentacles go very deep.  I think part of the business narrative needs to be looking at how deep those tentacles go.

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And now for our monthly chat about house prices, here’s Tim Lawless, Head of Research at CoreLogic to tell us about the August house price data.  Tim, another decline national house price median in August, 11^th month in a row.  Are we just going to continue to see this gentle soft landing, do you think? 

TL:  At this stage, I think so.  We aren’t seeing any signs that the markets about to flatten out or for that matter, turn around.  Remember the primary factor really driving the slowdown is tighter credit and we aren’t seeing that changing at all.  In fact, we’re now of the prospect that mortgage rates are going to be edging just a little bit higher with the big four announcing a 14 basis point rate hike last week.  With that in mind, there could be some further downwards pressure on prices.

It really remains to be seen.  What were the things that stood out for you from the August data?

TL:  I think there’s a couple.  We’re obviously seeing Sydney and Melbourne continuing to decline, that’s becoming old news now I guess in many ways.  But some of the more recent events were that we’ve seen Hobart, which has been absolutely the standout best performing capital city has now seen two months where values have slipped a little bit lower.  I think this is probably sending a signal that affordability constraints and the tighter credit regime is starting to slowdown the Hobart market as well. 

Another really interesting turn of events is that Brisbane’s unit market which has also been the focus of a lot of negative movements because of the oversupply of apartments has actually moved back into positive growth territory and actually tracked two months now where values have risen on an annual basis.  We are seeing some momentum gathering in Brisbane’s unit market, even though unit values remain about 11% lower than what they were 10 years ago.

Give us a bit of detail on what’s happening in Sydney and Melbourne.

TL:  The Sydney marketplace peaked in July a year ago and we’ve seen values fall by 5.6% since that time, but we are seeing this growing trend where the premium end of the marketplace is certainly leading this downturn.  In fact, we’ve seen Sydney’s top end, so the most expensive 25% of the market, has seen values fall by 8.1% over the past 12 months.  Very similar trend in Melbourne where we’ve seen the most expensive quartile was down by 5%.  The most affordable quartile in Melbourne was actually up by 6%, highlighting I guess the surge of first home buyers into the marketplace in both Sydney and Melbourne as they chase stamp duty concessions.  It’s really supporting demand across that more affordable spectrum of housing prices. 

Is that likely to continue, do you think, that the expensive houses are going to keep falling more rapidly than lower priced houses?  I mean, what does the history tell you about that?

TL:  Short term, I’d expect that trend to continue but I think over the medium to long term, I wouldn’t be surprised if we see this trend actually turnaround.  We’re already seeing the first signs that first home buyer activity is starting to slow down a little bit.  Those concessions with stamp duty have been inflationary, so we are seeing properties that are at the more affordable end of the pricing spectrum have actually become less affordable.  Even though we’re seeing prices falling, first home buyers which are very price sensitive, are actually facing higher prices and those stamp duty concessions have large evaporated since the prices have risen by more than what they’re saving.  The other side of course is that the premium end of the marketplace generally does show scarcity and I wouldn’t be surprised if we do see that underlying scarcity of housing in that sector start to shine through and hold values up around the inner city markets and the coastal markets which we’re currently seeing values falling quite rapidly.

I suppose that particularly is true if immigration continues at the current level.

TL:  That’s a big wild card.  We’re seeing migration from overseas has actually slowed down a notch, particularly in those markets like New South Wales and Victoria, they were the primary beneficiaries of overseas migration.  Then you’ve got the other factor which is interstate migration which is clearly slowing down in New South Wales as we see more residents leaving to Queensland.  But also, it looks like it’s peaked out in Victoria as well, it’s going to be high levels.  So we might be seeing migration just starting to ease off a little bit, another factor just making the whole environment a bit more complex is that lenders are really scrutinising borrowers where their debt to income ratio is more than six times, and potentially this could have an impact on funding or credit availability for those properties at the higher end of the marketplace.

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And Happy Birthday Roger Waters of Pink Floyd, who turned 75 today.  Now, I was always on David Gilmour’s side when they split up and had a legal dispute and I still am – Roger’s a bit of a dick, really, but it must be said his lyrics are very fine and in particular, ‘The Wall’, which he wrote entirely was a very fine double album.  Here’s one of my favourite songs from Pink Floyd and Roger Water’s pen, ‘Wish You Were Here’.

[Music]

That’s it from me this week, have a great week!