NOT FULL, BUT NOT FUNCTIONING: Why Australia needs to start talking about its population growth

Crowds pack into Flemington train station on Derby Day. (Photo by Matt Blyth / Getty Images / File)

Earlier this year Australia brought up an economic record, logging its 103rd quarter without experiencing a technical recession, the longest stretch of uninterrupted growth for a developed nation ever seen.

It created plenty of headlines at the time, deemed by many to be an example of good economic management, especially among politicians.

Just look at the chart below. Who could possibly argue with a run of economic growth like it?

Sure, past reforms such as industrial relations changes and the floating of the Australian dollar certainly aided Australia’s economic run, but they weren’t the only factors at work.

China, for one, played an important role, seeking out raw materials from around the world to help modernise its own economy. As a nation with vast mineral resources, Australia was in the box seat.

However, while reforms and China’s emergence as a global economic superpower all helped, another factor played arguably a more important role in powering the Australian economic miracle: booming population growth.

It’s particularly the case over the past decade. Just have a look at this chart showing population growth since Australia’s last recession in mid-1991.

Source: Commonwealth Bank

Population has soared, increasing by 7.1 million, or 41.1%, driven by both natural increase and surging immigration. When real GDP is measured in volume terms, it has certainly made a difference. More people means more demand, allowing headline GDP to flourish.

In 2016 alone, population grew by 373,000, or 1.55%, significantly higher than comparable growth rates seen in other developed nations such as Japan, the US, UK and Western Europe.

Over the same period, real GDP in Australia grew by just 1.7%, underlining the importance that population increase has played in boosting economic economic growth, not only in 2016, but in the years since the global financial crisis.

According to analysis from UBS earlier this year, population increase contributed around two-thirds of total economic growth in the post-GFC period, adding on average 1.6% each and every year, doubling its average contribution in the prior 15 years.

As RBA governor Philip Lowe said less than a month ago, “our strong population growth has also flattered our headline growth figures”.

So it has been a major force behind Australia’s record-breaking economic run.

But has it really been of benefit to those living in Australia, especially from an economic sense?

To Gareth Aird, senior economist at the Commonwealth Bank, that’s an open question. He points out that while headline GDP has been boosted, booming population growth has also brought with it plenty of problems.

“Strong population growth continues to boost Australia’s aggregate growth rates which paint a more positive picture on the economy than what most households are experiencing,” he says.

Just think about some of the more pressing issues facing households in 2017.

Housing affordability is one that garners plenty of attention, as does the level of household indebtedness. So too does weak household income growth, suppressed by elevated levels of labour market slack. And then there’s the strain on public services such as transport, healthcare and education, a bug-bear of many Australians.

All have been impacted in someway by population increase, often negatively.

The jobs equation

Take the labour market, for example.

With population growth rattling along at over 350,000 per annum, and accelerating, that means that around 200,000 jobs need to be created each year in order to prevent unemployment from rising — just shy of 17,000 new jobs each and every month.

While the economy has generated that and more over the past three months, it hasn’t always been the case in recent years.

Aird explains this has contributed to the elevated levels of labour market slack.

“Labour market underutilisation is high in Australia because the supply of labour has exceeded the demand for workers,” he says.

“If the economy is not generating enough jobs to cover the lift in the population then labour market slack will increase which keeps a lid on wages growth regardless of the rate of productivity growth.

“This has been the case in Australia since the mining boom ended.”

While the Australia’s unemployment recently fell to the lowest level since early 2013, other measures of labour market slack remain at elevated levels.

Underemployment — largely those who have a job but want to work more hours — currently sits at 8.8%, just 0.1 percentage point below the record peak struck late last year.

Underutilisation — including both underemployed and unemployed workers — also sits at 14.4%, near the highest levels seen since the late 1990s.

The figures for younger Australians are significantly higher than the national average.

Supply of labour is abundant and demand is struggling to keep up and it’s leading to continued weakness in wage growth.

“The lift in the underutilisation and associated increase in spare capacity in the labour market has contributed to a slowdown in wages growth, both in real and nominal terms,” says Aird.

“Since mid-2010, wages growth has eased and is currently running at its lowest annual rate since the 1990s recession.”

That slowdown corresponded with a sharp lift in population growth, which was partially driven by the second wave of Australia’s mining infrastructure boom.

Whether measured in hourly rates or average weekly earnings, employee earnings have been steadily decelerating ever since. If inflation is taken into account, both measures have actually gone backwards,

As Aird notes, this is simply adding to the financial pressures that households face, and probably helps explain why consumer sentiment and consumption has been so weak of late.

Housing cost pressures

And no more have those pressures been felt in housing costs and the question of whether to buy or rent. Yet another concern that has been exacerbated by high population growth.

Property prices have increased rapidly over the past decade, doubling in both Sydney and Melbourne since early 2009, according to data from CoreLogic. Unsurprisingly, population growth in these two cities has far outstripped that seen in other capitals over the same period.

According to Australia’s latest census, an average of 1,859 people per week moved to Melbourne over the past five years, 200 more than than Sydney which averaged 1,656 per week over the same period.

As Australia’s Productivity Commission noted last year, “high rates of immigration put upward pressure on land and housing prices in Australia’s largest cities”, a problem that it said was “exacerbated by the persistent failure of successive state, territory and local governments to implement sound urban planning and zoning policies”.

We’ll get to public infrastructure investment — or the lack of it — shortly.

As a result of rapidly increasing house prices, it’s made it harder for many younger Australians to enter the housing market, making it increasingly harder to save for a housing deposit in an era of low interest rates, elevated youth unemployment and weak incomes growth.

This chart from the Commonwealth Bank shows the proportion of household disposable income required to have a 20% housing deposit, the minimum level required to avoid lenders’ mortgage insurance.

Source: Commonwealth Bank

From a national perspective it has risen sharply in recent years, and would be significantly higher in Sydney and Melbourne, Australia’s largest cities, given the gap in prices between these cities and others around the country.

While sharply higher prices have benefited those who already owned a property, as Aird explains, it’s made it significantly more difficult for those relying upon savings rather than equity to enter the housing market.

“The winners are those who own property and the losers are those who aspire to own property,” he says.

“The latter are generally younger in age and are now faced with the task of needing to save a much greater share of their income for a deposit — generally considered the first hurdle to overcome in purchasing a property.”

While lower mortgage rates have allowed borrowers to take on more debt to fund property purchases, contributing to the recent lift in prices, there’s little doubt that population increase has also been factor.

Underlining that point, like Australia, population growth in other housing hot spots around the world — New Zealand and Canada — grew significantly faster than the OECD average last year.

Source: Commonwealth Bank

As a result, many potential home buyers in Australia have had to settle with renting. And while growth in weekly rental rates has fallen steadily in recent years as new housing supply came online, even that trend has reversed over the past year with strong gains recorded in Australia’s southeastern capitals.

Source: CoreLogic

Again, with more population comes more housing demand, both to buy and rent.

Stretched infrastructure

Keeping with the demand theme, the last concern impacting many Australians at present is stretched public services such as healthcare, education and public transport, something that few will disagree is a major issue in Australian cities as population growth increases.

While some state governments have started taking action to address mounting concerns, particularly involving transport, it’s merely taking action after the fact.

The horse has already bolted.

The current rates of population growth suggest even with new infrastructure investment on the way, it may not be enough to alleviate the existing problems.

As Aird points out, if current population growth is maintained, more will need to be done.

“The policy decision to run a relatively high immigration intake should be accompanied by commensurate growth in public investment. If not, in addition to the capital stock ageing, the existing stock of public infrastructure gets diluted which ultimately lowers living standards, all else equal,” he says.

“Public investment should at least be sufficient in size to both replenish the capital stock and match the lift in population. If the population is growing rapidly then underinvestment in the number of schools and hospitals, as well as public transport and a host of other vital public facilities, leaves households worse off.”

Think traffic congestion, or struggling to enter the train carriage or bus on your way to work. Or that familiar scene when you first enter an emergency department at your local hospital to a sea of faces that have already been waiting hours before you arrived. Or, in terms of education, the playgrounds that have been overrun by de-mountables because the existing buildings are full.

These are consequences of both previous underinvestment by governments and increased population growth.

Whether in terms of gaining employment, buying a house or receiving public services that are anywhere near the standard that they were in the past, these are all areas at the heart of the population debate.

To be clear, population growth is not the only reason why these concerns have come to prominence. Global economic conditions, slower productivity growth and other factors such as tax settings and interest rates have all played a part.

This is not an attack on immigration which has been the major contributor to recent population growth. It’s about the level of population growth that is acceptable in order to maintain or improve living standards.

As with anything this complex, population increase has had both its positives and negatives.

More people means more demand which helps to create jobs and make Australia more international as nation, but the question that must be asked is whether the current rate of population growth is delivering more negatives than positives right now.

Essentially, is it helping to improve the quality of life of those already living here?

There’s sure to be differing views on that, but that’s why a debate has to be had. Is it really worth having a high immigration intake if it means that those already living here can’t find a job, buy a house, or use basic public services?

Aird is not convinced that it is.

“Per capita measures of the economy suggest that growth in living standards has stagnated and for some sections of the resident population, in particular younger people, it has gone backwards,” he says.

“The issues point to the need for a comprehensive and open discussion around the policy direction Australia is taking.”

Is it worthwhile having a potential GDP growth rate of 2.5-2.75% if it requires continued strong population growth to do so, pushing aside productivity reforms to improve output per capita and the general well-being of Australians?

As RBA governor Lowe said less than a month ago, “it is important that we have a sharp focus on the reforms that can make a real difference to our living standards. If we don’t do this, we will fall behind”.

It’s a discussion that needs to be had.

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