Population slowdown to start inflation

Underpinned by strong overseas migration, the population grew at its fastest rate for 20 years in 2009. At the same time, the number of dwellings construction, at just over 145,000, was around 20,000 lower than five year earlier. This combination ensured the undersupply of dwellings reached around 200,000; the largest on record and still growing. Not only this, rental vacancy rates hovered around historically low levels. It is these underlying factors which provide the long-term support for housing demand in Australia.

However, in the short term, this demand is being tempered by both rising interest rates and house prices, resulting in deteriorating affordability.

Earlier this year the ensuing mining boom meant, due to capacity constraints, other parts of the economy would need to grow at a slower rate. This is simply because interest rates would need to rise to ensure the economy did not breach its productive potential and housing is probably the most interest rate sensitive part of the economy. Less dwelling supply, in conjunction with the strong underlying demand, would continue to keep the pressure on property prices.

It seemed as if the proposed resource super profit tax (RSPT) would alleviate these pressures as it was likely to result in less investment by the mining industry. Consequently, output would be more balanced, while the dichotomised economic performance between the resource and non-resource states would be less stark.

Indeed, the resource companies took the view the proposed tax would crimp mining investment and started to announce spending and employment cutbacks.

The message from the Reserve Bank indicated there may be some advantageous side effects if the RSPT resulted in some weakening of mining investment. Assistant governor Philip Lowe suggested at an investment forum the mining industry's return to boom-level activity was not healthy, stating "It is obviously neither in the individual resource company's - it is not to their advantage or the advantage of the economy as a whole - if all of this investment is trying to take place at one time."

Around the same time, deputy governor Ric Battellio, highlighting capacity constraints and the pressures on both labour and capital resulting from another resources boom, reportedly said “from the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over".

Needless to say, the subsequent culling of the RSPT meant the possibility of weaker mining investment and more balanced economic growth quickly dissipated.

Not only this, but the demise of Kevin Rudd as Prime Minister and the elevation of Julia Gillard, has resulted in other changes which could have far reaching implications on other parts of the economy, not least housing supply and prices.

In April this year, then Prime Minister Rudd appointed a Population Minister to develop a comprehensive population strategy for Australia which would consider the social and economic infrastructure needs to support a growing population, including the roads, housing and service delivery network. There was little doubt Mr. Rudd was a strong advocate of rapid population growth, stating he supported a "big Australia'' and, furthermore, did not believe growth has to be a bad thing. In devising the strategy, he said the Population Minister needed to be "acutely mindful'' of the positive implications of population growth on the economy. These positive implications were a boost to economic growth and assistance in paying for the aging population.

Even though the Rudd Government did not have any specific population targets it never distanced itself from the Treasury (Intergenerational Report) estimates of a population of 36 million by 2050, based on a net immigration rate of 180,000 newcomers every year.

A population projection his magnitude translated into an annual growth rate of around 1.2 per cent and was seen as a way of boosting the rest of the economy, outside of mining. Since current population growth is closer to 2 per cent, this would represent a dramatic slowdown. Put another way, without a significant paring back in immigration, a population of 36 million by 2050 was likely to be a bare minimum outcome.

Prime Minister Gillard has moved away from the “Big Australia” agenda to one of sustainable population growth. To drive home this change of direction, the Population Minister’s portfolio was renamed as the Minister for Sustainable Population. While the Government has not announced immigration targets, the indications are these levels will either be reduced or shifted towards more skilled (and less family) immigration. Needless to say, past immigration ceilings bear little resemblance to the final outcome.

Irrespective of the rhetoric, the potential to reduce the immigration intake is severely limited. As a starting point, the monthly labour force statistics suggest the growth of the civilian population accelerated through the first half of this year. Consequently, any moderation in the population growth will be coming from a higher rate.

This is not a problem except the current unemployment rate (of 5.1 per cent) is very close to what is perceived to be close to full employment; a rate below which inflationary pressures start to rise. According to Dr. David Gruen of the Australian Treasury it has been ''a long-standing practice'' to believe full employment was around 5 per cent, although there was “some uncertainly around that [5 per cent] number”. Indeed, “we cannot really tell whether it is 5 per cent or anywhere in the range, say, from about 4.75 to 5.25 per cent”.

Needless to say, the national unemployment rate disguises a significant variation among the states. In the NSW and Victoria the unemployment rate is 5.2 per cent and 5.4 per cent respectively, while in Western Australia, the epicenter of the mining boom, the unemployment rate is currently 4 per cent; well below any notion of full employment.

Placed in perspective, at the outbreak of the previous resources boom the unemployment rate in Western Australia was closer to 6 per cent, from which it declined to average around 3 per cent from 2006 to 2009. So, with the labour market already tight and pockets of labour shortages starting to emerge, the demand for employees is again likely to be rapid, especially in the resource states.

The Mining Resources Rent Tax means investment in the resource sector (and the Western Australian economy) will be stronger than under the proposed RSPT. To accommodate this, housing construction will need to be weaker. Less housing supply will keep the pressure on property prices. Not only this, the mining boom will ensure the demand for employees will strengthen, especially in the resource states where significant labour shortages already exist. So, unless there is a sizeable migration from the non-resource states, avoiding severe bottlenecks will necessitate continuing rapid population growth. The alternative is simple; interest rates will need to move higher, further extenuating the deterioration in housing affordability. In the short term at least, irrespective of the rhetoric, rapid population growth may simply be unavoidable.

A variant of this article appeared in "The Australian" 20th July 2010