Australia: Banana Or Mining Republic?

Australia’s housing and tourism industries have suffered greatly from the mining boom. They are intrinsically much bigger employers than mining, but have shrunk in the face of a spiralling Aussie dollar and the re-direction of bank lending away from housing and into mining. The high Aussie dollar is the direct result of foreign investment in mining, and it affects our international tourism industry in particular.

Australia’s mining boom has occurred due to rising global commodity prices, for no other reason, not increased operational efficiency, not improved product quality or value adding, nor improved infrastructure other than for use by the quarrier itself.

The boom has caused enormous dislocation in the Australian economy (the so- called “two-speed economy”). It has caused large transfers away from the traditional uses of capital and labour, leading to higher unemployment and reduced availability of funds for investment in new housing and tourism infrastructure.

The history of mining in Australia is dominated by very generous industry assistance to BHP mainly, who pioneered Australia’s mining, oil and steel making industries from 1883. The industry assistance was designed around building a vertically integrated steel industry to elevate Australia to an advanced first world economy.

BHP asked and received Federal assistance such as cash advances for exploration, delayed tax payments until returns on investment became “commercially acceptable”, and free fuel excise of 20%. This was seen, rightfully, as an investment by taxpayers in Australia’s economic future.

But then in the mid 1990’s, BHP reverted to quarrying at the expense of steel making. But the old array of tax deductions remained. Steel making is a substantial employer as a percentage of capital outlay, with many ancillary industry multipliers. Quarrying is highly mechanised, and a low employer as a percentage of outlays.

For example, Fortescu, an Australian owned iron ore quarrier formed in 2003, and already the forth largest in the world, employs a mere 2500 people on a turnover of $3.2 billion (one hundredth the size of Australia’s economy). In 2010, Fortescue made a net profit of $580 million, but paid no income tax. Why? Because all of the tax incentives used to promote Australia’s steel industry still apply to quarriers, who do no value adding. But they continue to receive the 175% research and development allowance and 20% concession on all diesel fuel. To Fortescue, everything is ”research and development”.

These tax concessions deprive Australians of funds which should be used to promote other value adding industries like housing and tourism. Priorities for Federal funding should be employment numbers and growth multipliers. The Housing Industry receives very few tax incentives, in fact the opposite is true. The Tourism Industry, which employs three times as many people as the mining industry, receives no tax concessions and a paltry handout of $150M a year for a bureaucracy and international promotion from the Federal Government.

Australia advanced from being a “banana republic” when BHP vertically integrated our great wealth of natural resources into steel making, with all its associated industry and trade multipliers.

But when Australia ceased making steel, the quarriers retained all of those tax incentives that were designed to promote a national value adding steel making industry. And that has been to the detriment of higher employment industries such as housing and tourism, the fundamental employment drivers of the once great state of Queensland.

Bill Morris

Author

Midwood Queensland Investment Report

www.midwoodaustralia.com

The RBA and Interest Rates

The Treasurer and the press seem to think that the banks should automatically pass on all of the 50 percentage point interest cut.

But they don't understand the way it works. The "cash rate" has nothing to do with mortgage or small business rates. It is the overnight or short term cost of lending or borrowing by the banks. So it is firstly a domestic rate and secondly does not reflect the true cost of funds, which includes offshore sources and different costs.
Pre-GFC the cost of offshore funds was lower than rates on retail deposits, therefore the whole of the of the cash rate was passed on. But now things are different. The availability of cheap wholesale funds has dried up since the GFC hit in 2008.

Effect of Carbon Pricing on Housing Costs

Depending on the carbon price per tonne adopted, and its rate of increase, there will be some radical changes to the range of materials used in residential housing. High net carbon emitters such as asphalt (roads), clay bricks, steel roofing and timber flooring and framing, will be replace by concrete roads, concrete bricks, composite board roofing, flooring and framing.

House prices are dictated by affordability and supply/demand, not by “cost plus” factors. So, higher cost materials affected by the carbon tax will ultimately be replaced by materials not subjected to the tax.

There is a high demand for inflammable sheeting for walls and floors, and this technology will improve and become more competitive in price over block work and render. A high cost contributor to housing is roads, and asphaltic concrete (AC) will become user-competitive as the carbon tax increases, it being a derivative of coal.

Concrete roads will need to become more cost effective, with innovative construction methods such as polystyrene infill (known as “waffle” slabs) to compete more effectively with asphaltic concrete.

Direction of Interest Rates Critical to Property Markets

With the property market Australia-wide on its knees, we have the Reserve Bank talking up interest rates. And at the same time we have bank lending margins at record highs coinciding with record profits.

The concentration of bank power, exacerbated by the Global Financial Crisis, has allowed the banks to collude on lending margins because there is virtually no second tier bank lending.

The current level of mortgage rates is working against investment in rental accommodation because the spread between borrowing rates and net returns is too high. We have not seen any significant investment in rental accommodation in Queensland since 2003, which has seen rents driven up at the average rate of 10% per annum.

So what is needed is a reduction in interest rates of at least 1.0% over the next 12 months.

The housing industry is a much bigger employer than the mining industry (with all its multiplier effects), but it is depressed due to unrealistic bank lending margins in a mega-bank profit environment.

Australia Simply Riding a Commodity Boom

Preliminary budget “leaks” and announcements contain no joy for the property development or tourism industries in Queensland or Australia.

The property investment industry, particularly residential investment has recently seen a cutback in the NRAS scheme (National Rental Affordability Scheme,) which has not worked because the incentives to developers were not there. There needs to be tax benefits available for developers of rental accommodation under a certain value, say $400,000.

Tourism is being strangled by the high Australian dollar and needs more funding for promotion overseas, but we have the car industry being rewarded for inefficiency instead. The car industry nationally employs 150,000 people compared to 500,000 in the tourism industry.

The Government is basking under the low unemployment numbers, but the savior has been the mining industry which has soaked up many workers from the building industry. This has been the result of unsustainable commodity prices, rather than structural economic drivers to sustain and create employment opportunities.

Australia is simply riding a commodity boom, which inevitably ends abruptly and without notice.

Tough banking killing 'spec home' market

See today's Gold Coast Bulletin article on our latest Prodap Report figures for Gold Coast vacant land and new packaged housing supply and demand here.

New QLD Land Value Act is Discriminatory

The Queensland Government will on 30 June 2011 enact a new method for valuing residential land within the state based on “site value”. This replaces the system used since 1944 where the land valuation was based on “unimproved value”, where the raw land value was calculated without any improvements, such as land fill, drainage, revetment walls or retaining walls. The new system applies only to residential land, not to commercial, industrial or retail land.

The new “site value” system is not a blanket increase in values as the Gold Coast Mayor, Ron Clarke, suggests, but a selective increase if you happen to own canal-front, lake-front or steep residential land that has been filled and/or revetted. I doubt whether Council will be applying varying rates in the dollar to compensate such property owners. This is a typical State Labor move without an election mandate to alter the “unimproved” land valuation system to increase taxation, but the cost of administering the new system could well offset the additional revenue.

Valuers employed within the State Government’s Environment and Resource Management Department will need to obtain engineering advice to determine the value added to any block of land. This will require individual assessment of properties “en masse”, particularly in the Gold Coast where canal and lake-front properties are most common.

Local councils do not have to roll over and accept this change from the State Government. In fact, councils are not compelled to use the State Government’s valuations. Councils could just index last year’s valuations by say 3% (or CPI) across the board.

We have until 30 June to stop this. What was wrong with the old system which has stood the test of time for 67 years?