Racing down the road to nowhere

08/10/2008 - 22:00

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A MID-DECADE housing industry boom in Australia, fuelled by an ultimately destabilising rate of population growth, diverts scarce resources, including funds, away from much more productive sectors of the economy.

Racing down the road to nowhere

A MID-DECADE housing industry boom in Australia, fuelled by an ultimately destabilising rate of population growth, diverts scarce resources, including funds, away from much more productive sectors of the economy.

Money spent on housing is not highly productive, since the end product provides only an ongoing service of shelter for its occupants. In the rest of the economy, funds used to build, say, a brick manufacturing plant, a liquid natural gas plant or a railway line provide much higher long-term returns from the sale of goods or services flowing from that investment.

In light of this analysis, you might ask why so much investment is directed towards housing stock in Australia. The main factor that makes housing so attractive to Australian investors has been an annual capital growth of between 5 and 15 per cent, again underpinned by population growth.

Briefcase sees this housing spiral as being ultimately destructive to an economy and to social fabric. In Germany, house prices have been steady for the past 15 years, as the German population remains stable. While funds are applied to the German housing sector to replace or upgrade accommodation and provide for new household formation, there is no pressing reason to over-invest in the sector, which only provides returns on the cost of accommodation and not speculative capital gains. German savings are thus freed up to move into more productive areas of the economy, which provide higher returns and boost the economic wellbeing of the community.

During the past four years we have seen an alarming rise in Australia's population growth rate, fuelled largely by net immigration. Skills have been imported from all corners of the globe. Geologists have come from South Africa, welders and hospital workers from the Philippines, miners from the US and Tanzania and taxi drivers from the Middle East.

Of course, this growth fuels its own feedback loop of housing growth, adding to the destructive speculative price rises in housing.

The notion that growth is always good needs to be examined carefully. In the past, Briefcase has spoken about the so-called Dutch Disease, named for the massive financial distortions and social dislocation that flowed from the development of North Sea gas in Holland during the 1970s.

During the early 1970s in Holland there was a massive investment in the petroleum industry, which led to a decline in its manufacturing industry and an unexpected fallout in the country as resources were sucked away from other areas and into the petroleum sector.

Briefcase believes that, during the past decade, Western Australia and other parts of our nation have undergone similar effects from the-so called resources boom.

When growth is unplanned and runs out of control, its impacts filter back into the community at large, putting pressure on services such as education, public transport and health, adding to traffic jams, creating more pollution and lifting costs for all of the community. Even though a booming sector of the economy may only directly employ a small portion of the workforce, it will create distortions affecting everyone.

Rising house prices don't favour everyone, as monthly rental or mortgage costs increase, putting pressure on family budgets. These sorts of stresses can be damaging for the fabric of a community, forcing breadwinners to work longer hours for example, so that they spend less time with their children and broader family groups and have less time to exercise and relax, leading to potential health problems.

In the midst of all this growth, newly arrived workers from ethnically and culturally diverse backgrounds and regions of the world face the challenge of establishing a life in Australia. This process can result in the formation of ghettos of one or other ethnic or cultural group, leading to unhealthy gang-type behaviour as the different groupings vie for space and recognition.

How do we pay for the social impacts of this type of unintended consequence? The problems of family breakdown, obesity and poor health, poor education outcomes and adolescent delinquency that are created eventually fall on the broader community and the public purse to address.

While development of Australia's resources is seen as a good thing, benefiting the whole community, overdevelopment is not. Just look at the Murray-Darling River Basin. Imagine the response in 1940, if someone like Briefcase had stood up and said development of massive irrigation systems along the Murray-Darling Rivers would lead to equally massive destruction of the environment. At that time, the creation of massive irrigation schemes was thought to be the right and sustainable thing to do, along with damming rivers to produce electricity and farming marginal land into dust bowls. Now, following many years of over-use of the available water, the regional ecosystem of Australia's 'food bowl' has been left severely degraded.

People are now losing their livelihoods and a massive adjustment has begun. Australia cannot feed as many people as it was once thought capable of sustaining, and in any case, why should we even strive to reach maximum carrying capacity?

As we currently stand, the Sydney Basin, with its 5 million inhabitants is in crisis, with the population choking in its own effluent. Pollution levels are climbing, unproductive commuter travel times are rising, access to public transport such as it is, is woeful, while accommodation costs have become unaffordable, resulting in Sydney becoming a very unpleasant place to live for ordinary people.

Here in WA, we see urban sprawl extending up to 200 kilometres along the coastline from north of Joondalup all the way to Mandurah and beyond. Areas of the Swan Valley and south around Baldivis, which used to provide food for Perth, are now being covered with tar and cement, while vegetable gardens and orchards along the escarpment are being converted into industrial and housing estates by the avaricious housing market. Food is now grown far away in Harvey or further afield, leaving consumers vulnerable to ever-increasing fuel costs.

Water shortages, resulting from a combination of overpopulation and climate change, have forced many of Australia's capital cities to embark on a program of setting up desalination plants to produce fresh water from the sea. This process sets up a loop, whereby water becomes scarce because of carbon emissions, so we build desal plants along our coast line to service growing populations, which increases the level of carbon emissions, which reduces the availability of rain water, which requires the building of more desal plants and, so on.

Surely Australia's population number should be set at the level that delivers the best outcomes for all inhabitants from a social, environmental and economic point of view and should not grow unchecked. We live here, it's our country and we do have a right to say how we want our society to develop and what sort of environment we want to bequeath to our grandchildren's grandchildren.

Setting aside land, designated for food production and close markets, is a matter for government regulation. That's why we have a government. Monitoring of Australia's population growth cannot be a bad thing. Development of Australia's resources needs to take a much longer-term perspective. For instance, if we have identified enough natural gas to supply our market and existing customers for 100 years, what will Australia do for natural gas after that?

We should try and find a way to ensure that scarce, valuable and finite resources such as fossil fuels are used responsibly, while we move our economy towards truly sustainable solutions to our energy and other resource requirements.

If the prime minister and Ross Garnaut want to reduce Australia's carbon footprint, a simple way of doing this would be to reduce Australia's population, thus reducing the number of emitters, but that solution seems to evade the policy makers.

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- Peter Strachan is an independent corporate analyst and author of www.stockanalysis.com.au

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