Red flags

There seems to be much less fear that “the bridge” will run out before we reach the other side. But what if the chasm we are crossing is not the same width for everyone?

One thing we know for sure is that income inequality was already elevated in Australia and New Zealand, by most normal measures, ahead of the pandemic. The first research to emerge covering the COVID-19 period specifically suggests that direct government support measures were the only thing that prevented a further deterioration during 2020. Meanwhile, the recovery so far has once again been characterised by asset values – in particular housing – rebounding way ahead of wages.

Taken together, we are looking at an economy that was already experiencing high and growing inequality, in which temporary measures were the only thing that prevented a dramatic worsening of this picture during 2020, and where the future looks set to reinforce divergent prospects for asset owners and those locked out of asset ownership.

Income inequality in Australia was on a worsening trend prior to the events of 2020, according to research published by the University of New South Wales Social Policy Research Centre (SPRC) and the Australian Council of Social Services (ACOSS). Using Australian Bureau of Statistics (ABS) data, the report Inequality in Australia 2020: part 1 – overview says the top 20 per cent of income earners made more than six times as much as the bottom 20 per cent in 2017/18, up from five times just two years prior.

The UN publishes a similar figure on a top 10 per cent-bottom 10 per cent of income earners basis. Australia and New Zealand both recorded multipliers of around 12 for this measure before COVID-19, compared with around five for Japan, six for the Scandinavian countries, seven for Germany, nine for France and Canada, 14 for the UK and 19 for the US. The closest major economies to Australia and New Zealand on this measure are Italy and Russia – not obviously ideal company to be keeping in this context.

The situation is if anything even more acute when it comes to asset ownership rather than income. The same SPRC-ACOSS research says the average wealth of the top 20 per cent of Australians was 90 times that of the bottom 20 per cent in 2017/18, at A$3.3 million (US$2.6 million) compared with A$36,000.

The good news is that the COVID-19 pandemic does not appear to have worsened the situation in the near term. Research published in September 2020 by the University of Canberra’s National Centre for Social and Economic Modelling (NATSEM) found that Australia’s Gini coefficient – another standard measure of income inequality, calculated on a scale of zero to one – actually fell by 0.03 in 2020, meaning income inequality dropped slightly.

This research attempts to provide insights with much less lag than traditional economic data allow for. It uses “nowcasting” economic simulation techniques based on “near real-time data” from the Australian Bureau of Statistics (ABS), monthly labour-force survey results, weekly payroll statistics for February-June 2020, and biannual income and housing surveys.

NATSEM also analysed the impact of JobKeeper, JobSeeker and the COVID-19 childcare-subsidy payments. The paper’s lead author, professor Jinjing Li, concludes: “The story behind these figures is that without government intervention, disposable incomes would have plunged considerably, with severe consequences for income inequity and poverty levels.”

There can be little doubt that the pandemic disproportionately affected people in lower-income and less secure employment. The government-support measures helped most of this group through 2020. The open question is whether the rebound will be sufficient to offset the withdrawal of these measures.

I have been struck by how easy it is effectively to ignore non-asset-owners in our capital-market world. A particularly stark example was last year’s Australian Securitisation Forum (ASF) virtual symposium, at which the local structured-finance industry repeatedly noted – with some not unreasonable pride – just how much better loan performance had been through the pandemic than was expected going in.

An article by Natasha Vojvodic, senior director and head of Australian and New Zealand structured finance at Fitch Ratings in Sydney, published in the ASF’s biannual publication, ASJ, following the ASF event sums up the situation.

Vojvodic writes: “Normally, unemployment affects individuals from a diverse range of industriesÉ This pandemic-led recession has mostly disrupted customer-facing industries that are directly affected by the lockdown and social distancing measures, namely tourism, hospitality and the arts. These industries have a disproportionate number of casual and younger employees, who typically do not have a mortgage.”

In other words, the impact of the pandemic has been greatest on people who do not own property. When the temporary support measures disappear, the ongoing benefits of stimulus – primarily cheap credit – will primarily accrue to people who do.

Of course it is true that rising house prices have other benefits and that these produce positive economic gains, for example by promoting housing construction and its consequent impact on employment.

But this seems a curious transmission mechanism for economic stimulus. According to the ABS, there were 173,000 new dwelling starts in Australia in 2019 – a number that fluctuated from a floor of about 150,000 to a peak of around 230,000 over the past decade. There are, meanwhile, about 10.4 million total dwellings in Australia. A minimum-to-maximum impact on housing construction might be expected to see a little less than 1 per cent added to local housing stock in a year, in other words.

Fundamentally, the benefits of rapidly rising house prices come down to the wealth effect. But there is every sign that this increasingly reinforces inequality and that the proportion of Australians and New Zealanders locked out of its warm embrace is growing.

A report published in May last year by Swinburne University’s Australian Housing and Urban Research Institute (AHURI) – Australian home ownership: past reflections, future directions – found that the relatively consistent rate of home ownership in Australia from the mid-1970s to mid-2010s was largely the product of an ageing population. The coming decades are likely to see deterioration.

The report predicts that Australian home ownership will decline to around 63 per cent by 2040, from 67 per cent in 2016 and 68 per cent in 1976. It also forecasts that the rate will fall to not much more than 50 per cent – down from 60 per cent in 1981 – for households in the 25-55 age bracket by the same point.

“Declines in ownership seem likely by virtue of attributes of the Australian labour market, continued issues of affordability... the proliferation of building forms (apartments) more suited for rental than ownership and the growth of the private rental sector, underpinned by favourable tax provisions and a housing industry now increasingly path-dependent on the private-rental sector,” the AHURI report concludes.

I am using housing here as a proxy for wider economic inclusion. But I do not think this is unreasonable given housing’s significance as a store of wealth – one to which our tax system drives investment – and the fact that other indicators are pointing in the same direction. Wage growth has been sluggish for well over a decade, for instance, and automation hardly implies a positive outlook.

It is hard to imagine that a growing cohort of society being locked out of our primary retail asset – home ownership – in an increasingly uncertain labour environment will have a positive impact on political outcomes. At the risk of drawing too long a bow, we were repeatedly told that the 2016 US election result was the product of ‘economic uncertainty’. While I am inclined to suspect this is not the only driver behind grievance politics I am also happy to assume that this type of outcome would be much less likely in a more secure and equitable economic environment.

It is interesting and potentially positive to see developments like the New Zealand government attempting to incorporate housing affordability more fundamentally into monetary-policy formation.

This move, and the government’s housing policy more broadly, have not been entirely positively reviewed, to say the least. However, I feel the capital-markets world owes the concept at the very least a fair hearing rather than just defaulting to old arguments about the wealth effect and housing construction that are increasingly being rendered obsolete by the factors identified by the AHURI report. If we do not take inequality of income and wealth into account we will, sooner or later and one way or another, be made to do so.