Simon Kuestenmacher
Ultimately, migration solves more problems than it creates, and so, given the harsh reality, the Treasurer will not allow the Prime Minister to cut migration. But before an election, you still need to talk about cutting migration. So we're in this kind of silly political theatre at the moment.
Kathryn House
That's Simon Kuestenmacher, a leading demographer, who ranks as one of the world's top 10 influencers in data visualisation, using data to explain how the world works. And I'm Kathryn House, your Talking Property podcast host, and for our next two episodes I'm going to be bringing you insights from the Property Council of Australia's annual Property Congress. I travelled to Townsville last month to attend the conference to find out what's top of mind for the property industry's decision makers. It was a chance to get under the hood to hear what some of the future market drivers will be, and I was particularly fascinated by a presentation from Simon. Simon co-founded The Demographics Group in Melbourne, is a columnist for The Australian newspaper, and is a prolific commentator on demographic and societal trends, whose social media posts reach over 35 million people each month. I was lucky enough to nab Simon straight after his Congress presentation, so please forgive any background noise. He shared his insights on why the property sector shouldn't be too pessimistic, why global capital still wants to come to Australia, why migration isn't going to slow down, despite what both major political parties are saying, the longer-term outlook for interest rates, Australia's skill shortage, and why politicians aren't interested in cheaper housing, despite the rhetoric. Here's my conversation with Simon.
Kathryn House
To kick us off. Simon, you talked about the bucket load of negativity in the market. Why do you think that's broadly misplaced?
Simon Kuestenmacher
Well, you still want to remember what Australia is and if you put yourself in the position of global capital, a global dollar that wants to be invested into the shoes of a global migrant that looks for a nice place to call home, and you find it very, very hard to create any kind of top 10 ranking where you could possibly kick Australia out of. No matter how you twist it and turn it, there are precious few countries in the world that see population growth, that are a sizable economy, that are highly developed, that are a democracy where the rule of law is guaranteed. That's rare. We are a rare bunch. And the more pessimistic you are about geopolitics, for example, all of a sudden you find that the tyranny of distance that Geoffrey Blainey wrote about in the 60s, meaning Australia is too far away from all the fun developments around the world, is actually just the opposite. We have a very helpful moat protecting us. We are a country that can forever onwards decide how many migrants come into the country. We do not have what demographers would call unmanaged population flows. We dictate our migration policy. It's a privileged position to find yourself in.
Kathryn House
So migration, it is a pretty curly topic right now and I know you have a particular view, well from listening to you today as well, on why it isn't going to slow down despite what we're hearing in the lead up to the next election.
Simon Kuestenmacher
Exactly. I beg anyone to ignore major politicians when they talk about cutting migration. Talk is cheap in politics. You can always be so sure that people will talk about cutting migration because they pretend to talk about housing affordability. The argument is simple. Cut out 50,000/100,000 migrants, they don't need to be housed. All of a sudden that means more housing available for local voters. Sounds easy and true enough. Unfortunately, it's incorrect. During the pandemic we saw an outflow of migrants, negative net migration. All the while we saw the highest increase in house prices in history. They're like, hmm maybe that's not it. But as a politician you do need to talk about housing affordability because there is a big bunch of people that think that this is an issue in their lives. So you do need to tackle it. You then say, "I tackled it" because I talked about migration, cutting migration. Therefore, a politician does not need to talk about all the ways where they are implicitly increasing house prices. We are talking about things like first home buyer grants - they only drive up house prices by wasting public money. The only thing dumber than a first home buyer grant is a super for housing policy where you waste your own money on driving up house prices. The market knows when there is more money available and adjusts prices. This is a given. Also stamp duty, that drives up prices. But the governments are addicted to it. You could introduce over many, many years by grandfathering in existing agreements a land tax instead of a stamp duty. But it is a very unpopular move because the majority of voters still live in a house that they own or have a mortgage on. So that is difficult. So, you just talk about wannabe, pretend policies in terms of housing rather than actually tackling the issue. Because ultimately politics or the major parties want high house prices. They are not allowed to say it, but the vast majority of the voters want rather higher than lower house prices. So, we need to constantly now beat around the bush here, so to speak.
Kathryn House
Yes, well, that was one of the really interesting things I found from your presentation and around that view on why political policy is actually made not for renters, it's actually made for that percentage of your population that are homeowners or mortgage holders. And they don't want house price prices going down.
Simon Kuestenmacher
Exactly. So, the way that I dissected the Australian population is you want to think about who is policy made for? And you can ignore all the temporary visa holders in this country. You can also ignore all the people that are not citizens, that are permanent residents, but are not citizens. That means they're not allowed to vote. While we're cutting out people, you're also allowed to cut out all the citizens that are below 18 years of age because they don't vote. That means we, at least in the best case scenario, we make policy favouring the 64% of the population that you know are still left. But then if you take these remaining 64%, meaning the Australian citizens, 18 and older, 26% of them, which is a big chunk, they are renters, but it's a minority. And so that means why bother about them? There's no incentive to do anything for them. Because if you favor renters, want to be homeowners, you are in a sense disincentivising mortgage holders because they just want their price of the property that they hold a mortgage on to go up. So that's tough. But you can't say it. You can't say like, well, "screw you renters, you're done with it". You do need to pretend to care about them. So you introduced first home buyer grants. Then you introduce something like a narrative about cutting migration. But no Prime Minister in our future would actually cut migration intake because we are running a tax system that relies heavily on income tax. 52/53% of our tax income is income tax. We have a bucket lot of baby boomers retiring. As you push those high earning baby boomers out of the income tax stream, who's going to replace them? You do need workers to replace them, otherwise you need to get money from somewhere. And yes, if you were a government, you could theoretically cut spending, you could cut NDIS spending, you'd find ways where you'd want to cut money. Again, politically unpopular. So ultimately you will not do it. You'd rather bite the bullet and import more people. Because ultimately migration solves more problems than it creates. And so, given a harsh reality, the Treasurer will not allow the Prime Minister to cut migration. But before an election, you still need to talk about cutting migration. So, we are in this kind of silly political theatre at the moment.
Kathryn House
And house prices going up buys you votes, or buys you into office ultimately, is your view.
Simon Kuestenmacher
Exactly. This is, you know, we can quote good old John Howard. He said he "never had any voter complain about his house going up in value". So that's going to continue. That is a truism here. So, Bill Shorten learned it the hard way when he essentially introduced policy that said, "hey, your house could become cheaper, so we have more homeowners." And people looked at this and were like, "yeah, let's remember that. Let's not pull a Bill Shorten and let's actually become Prime Minister." And so, I think we're not moving much there. And you'd go like, "whatever that's just a thing that happens. That's politics and the big two parties always operate like this." Potentially not, because this will get you into Prime Ministership in the short term. It is. If I was to advise Peter Dutton right now, I'd say do just that because that will get you into the job. Well done. What it will not do is save one of the major parties from political irrelevance. We have already seen over the last three plus decades the share of the votes in each Federal election since 1987, that goes to third parties. So, everyone from Labor to Pauline Hanson mushed into one fundraiser third party, those votes have gone up. They were 2% in 1987, they're now over 31%. They are the highest that we've ever seen. Even in times of a Great Depression, times of world wars, we have not seen that many votes for third parties. And that trend will continue because the people, the voters that you alienate, they are young voters, they're young renters. And they're not going to shift their loyalties back at the rate to Labor and Liberal parties as we lose voters at the older end, people who vote for the same parties all the time who have certain loyalty to party politics. That is not the case with young people. You're losing them, or not all of them, but a lot of them forever. It's quite plausible to suggest that a Liberal party, a Labor Party, in five, six elections scores significantly lower shares of the votes. It's not a given that these two parties will be the two biggest parties in this country in, let's say, 15 years. This might well change. So, in the long term, the parties are maneuvering themselves into a corner and potentially out of political relevance. There are international case studies, I'm looking at the German Labor Party, the SPD, for example. So, they scored votes of 40% plus in the 80s and 90s, they had the same stock standard decline. They're now polling at 14 to 15%, and they're the third to fourth largest party.
Kathryn House
That's a big drop.
Simon Kuestenmacher
Exactly. And it can happen here.
Kathryn House
Absolutely. I mean, what does that mean for the property sector?
Simon Kuestenmacher
Well, what it means for the property sector is first and foremost, that the third parties, overwhelmingly the Greens and the Teals, will increasingly be setting policy, housing policy, because they are the balance of power in government. So, what this might look like, we are seeing at the moment, and with the Greens blocking, you know, you could call them, from their perspective, positive Labor housing policies, because they are saying, this is not far enough, we need more. And a party that is purely in opposition can be that strong and strict and should be that strong and strict, because this will be a winning strategy. The Green votes will increase, by how much depends on how many Teals we'll throw at the next, next election. But I'm very certain that we'll see an even higher share of third votes going to the Teals and the Greens and all other third parties in the next election as this disillusionment with the major parties continues, and the Liberal and Labor parties have noone but themselves to blame for this. If you wanted to stay relevant in the long term, you would need to do something really weird right now. You would need to make policy for young renters, for the exact people that you can easily ignore to win an election because you want to make sure that their loyalty gets won over permanently. And, at the moment, you're alienating permanently. So that speaks for a very tough decade ahead for those two big parties.
Kathryn House
Yes. So, if we turn back to migration, you were saying at the conference that one of the things that makes you the most nervous is the skills shortage, or the looming skills shortage. Can you talk me through your views on that?
Simon Kuestenmacher
The skills shortage is just a quick way of saying there are not enough workers of a specific occupation for the economy as a whole. And yes, the pandemic kind of helped to create this because we told temporary visa holders that they wouldn't be getting any financial assistance, so they buggered off. That created a dip of 300,000 people in a workforce of 14 million. That had an impact, but why is everybody still complaining about the skill shortage now that the pandemic is over, for all intents and purposes? Well, because the skills shortage is not going to get improved since it is baked into the demographic pie. What we shall be seeing over the coming decade is we see the entire Baby Boomer cohort entering retirement, big cohort, leaving the world of work. At the other end, we have a relatively small cohort entering the world of work. There's people that are in their early 20s that don't contribute to the workforce scale, there are international students in there. There are so many young people in there that hang out in the educational system for just one more degree, one more degree, one more degree. So they're not helping us. Plus, for the next 12 years, Millennials, the biggest generation of them all, continues to make babies. That means they go on parental leave. They leave the world of work, at least temporarily. So, there's a skill shortage there and that is not going to improve. So any kind of business, the first thing you want to remember is to be nice to your staff. Retention is the name of the game. It also means that all those fun buzzwords, your AI, robotics, automation, your modern methods of construction in the property sector, that these are our friends. They will not create desperate groups of unemployed people roaming the streets. Far from it. This is our one chance that we got to make sure that we have enough workers in the system.
Kathryn House
But it is going to be difficult to change the way that we do build, was one of the things that you said today. How we bankroll that is the really difficult part of the puzzle.
Simon Kuestenmacher
Yes, exactly. So you could imagine a technological solution where we say, yes, the renovations that need to take place, these small infill developments, you know, where you bulldoze a house and squeeze in two townhouses, that will need to be done by individual tradies doing it the way we're doing it right now, because it's too hard to operate at scale there. Cool. But we are building high density, we're building medium density. We're building on a greenfield site. These houses, if you look at them, are we building them in the best possible way that you could theoretically imagine? No, surely we could build heaps of these individual builds in a factory with robots. Meaning we have much fewer labour costs, much fewer labour requirements. You have no bad weather interrupting you. You have almost completely eliminated material wastage out of the system. And you then just build those elements. Not cookie cutter stuff. This would be highly individualised stuff and then you lego it together on site. That would be one way of rethinking this. The problem with this approach is that these factories don't exist. That means you need to develop them. It means you need to fund them. It means you need to have some investor with very, very deep pockets and a very long investment horizon with an appetite of making potentially a loss for eight, nine, 10 years before these things work really well and at scale. And I go, well, that's a tough ask. And you're asking for this type of money. I think theoretically super funds have a long-term investment. They are beside themselves with what to do with their wealth. They're freakishly rich and growing. So, I think that might be an option or government could help to subsidise these kind of, you know, modern method of constructions. But you can't just turn on a switch. You do need to literally develop the robots, the whole integrated system. You go, oh, that might even theoretically completely change the role of a developer. Do you need a developer? Is this just the builder then? Who's funding this? What's the role? And I think as a big business, as a big developer, I want to rethink, I want to at least strategise in my boardroom. Could I theoretically be pushed out of business by this kind of model? If some sort of like, you know, crazy tech billionaire comes along, completely develops a new way of building greenfield and medium density high housing, are we still relevant? And that's the kind of tough discussions that I think are needed right now. And ultimately this will lead to a better future because we do need to push our workforce to be more productive. Early on today, Peter Costello, the old Treasurer, doubled down on his remarks how about how important it is to increase productivity. And I'm fully in agreement with him there. The construction industry, property industry does need to become more productive. And that's easier said than done because the workers in the traditional tradie sense that are on site right now, they're not being unproductive. It's just how much more productivity can we squeeze out of them? It's like not so much. Unless there's a paradigm shift.
Kathryn House
Yes. So, another thing I was particularly interested in, and you talked about it briefly, but it struck a chord with me, you talked about interest rates and obviously the view that they are going to go down at some point, but you have a particular view on the longer-term outlook for interest rates. Can you talk me through that?
Simon Kuestenmacher
Yes. So, if I'm looking at the next decade in Australia, we are seeing the biggest generation millennials moving into the highest spending phase of the life cycle. That means Millennials, that's the mid-40s. Millennials spend every dollar they earn. They draw high incomes, they're dual income households in the highest income earning phase of the life cycle. They already have all the kids that they will ever have. They have a big fat mortgage. Every penny that a Millennial gets in their mid-40s is going to be spent, be sent back to the economy. It's fun for all those businesses that help you to fill your house with crap, your Bed, Bath & Beyonds, your Barbecues Galore, your Bunnings. It's great for them. It's not so great for the Reserve Bank because they want us to stop consuming money because they see the interest rate as being too high. They have one tool, cash rate, that creates into the interest rates and they go, well, we increase that thing. And then you and I and everyone here who's listening is not spending money anymore. And that has deflationary impacts. You cannot make the Millennials stop spending money. And you can't even bet on poor penny-pinching pensioners at the other end because the Boomers, the new code of retirees, they are all asset rich. They own their own home. That leads to what they call the wealth effect. That means your property is worth a lot of money, you feel rich and you spend money accordingly. So that is also tough to do. And of course, Boomers earn the vast, vast, vast majority of cash savings that they have, all the cash. So high interest rate rates and rising house prices are good for them. So the biggest generation, Millennials, and the richest generation,, Boomers are definitely going to spend money like crazy in the coming decade. That means, structurally speaking, the coming decade wants to see interest rates that are higher rather than lower. I'm not saying that there will not be an interest rate cut, but when we look back at the next decade compared to the last decade, in 10 years’ time, we'll see that the interest rates, at least from the demographic perspective, will have been higher rather than lower in the decade before.
Kathryn House
Not being a Boomer or a Millennial, I'm a little bit upset about these higher interest rates in the future, Simon.
Simon Kuestenmacher
You're just stuck in the home owning Gen X phase.
Kathryn House
Yes, I picked the wrong decade.
Simon Kuestenmacher
It's a tough decade to be stuck in at the moment.
Kathryn House
It is a tough decade. I don't like it. And it sounds like I'm going to have to be working a lot longer as well. So, you talked about the wealth effect. It's probably a really good segue to talk about something that you didn't touch on today, but I've seen you speak about previously. And it's the great wealth transfer. What is the great wealth transfer and how is that impacting the property sector?
Simon Kuestenmacher
Yes, theoretically we should all transfer wealth from one generation to the next while everybody is still alive. The bank of Mum and Dad would be a way of doing this, paying for your grandkids childcare fees would be a way of doing this. But these involve awkward conversations about money, about mortality with your parents, with your kids. These are awkward conversations and en masse we don't like them in Australia, we just transfer wealth when the last parent dies instead, just to avoid these awkward conversations. And that's mum who's going to die last because she is four years younger than dad. She has four years longer life expectancy. And all that means for me as a demographer, I just need to count the number of Baby Boomer and older women in my data sets year after year and I see how this declines. This could be called instances of death of Baby Boomer women, but that's a bit morbid. So we call them instances of intergenerational wealth transfer. And these wealth transfer cases, they get bigger year after year. This year until 2041, it will stay elevated throughout the 2040s. This means that the wealth that sits there, overwhelmingly sits there in the shape of a family-sized home. We are going to sell those family-sized homes. Once we mourn mum for a week, we're going to sell them either to cashed-up investors who buy the house as is, but ultimately will bulldoze most of those Baby Boomer homes. And we will put townhouses on top of this. These homes are overwhelmingly located in the middle suburbs of our big cities. What that means is that throughout the 20, 30s and-40s, when the wealth transfer occurs, ultimately we will finally densify the middle suburbs of our big cities. At the moment, all the actions at the city centre, big apartment towers, and on the urban fringe where we create greenfield housing. That is a shift, a fundamental shift, that happens to occur throughout the 20, 30s and 40s. And ultimately this will going to massively benefit the millennials who right now move to the urban fringe, because this is where they find family-sized housing. And when they then think about upgrading, they will come back to the middle suburbs because the next cohort that makes babies when the Millennials want to move back to the inner city, they don't have the money, the cash to buy into those more expensive suburbs. So, there'll be a lot of churn in the housing market. On average, we will stay in our homes for shorter periods of time. On average the 20, 30s and 40s promise to be the most lucrative decade in the housing market ever. So, anyone invested in, you know, property transactions, for example, building, renovating those houses, building medium density dwellings, they would have an absolutely marvellous decade in the 20, 30s and 40s. Don't retire before that.
Kathryn House
Well, it sounds like I shouldn't retire anytime soon. Thanks for joining me today, Simon. We've certainly covered a lot of ground today.
Simon Kuestenmacher
Oh, it's been an absolute pleasure to be on your program.
Kathryn House
And to our listeners, thanks for tuning in and make sure to follow Talking Property on your favourite hosting platform so you don't miss our next Property Congress podcast and an upcoming 2025 Property Predictions series. We'd also love it if you could rate or review Talking Property to help spread the word. Until next time.
