Grant Williams Podcast: Matt Barrie

Grant Williams:

Before we get going, here’s the bit where I remind you that nothing we discuss should be considered as investment advice. This conversation is for informational, and hopefully entertainment purposes only. So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now, on with the show.

Welcome everybody to another edition of the Grant Williams podcast. Joining me this time around is a gentleman from Australia. Matt Barrie, is the CEO of freelancer.com. I recently saw Matt give a keynote presentation in Sydney that took my breath away. Many regular listeners of this show and people who’ve read my writing over the years understand that I have a keen focus on Australia as one of the places that when the housing market there finally goes poof, we are going to see some real fireworks.

And so to see Matt lay out the story of Australia in really quite confronting detail was a fabulous thing for me to see. So I approached him, and he very kindly agreed to come and tell that story on this podcast, and I’m hoping that it brings some perspective to any of those among you who haven’t really been paying any close attention to Australia, other than the headlines. So without any further ado, please enjoy my conversation with Matt Barrie.

Matt, welcome to the podcast. I’m so pleased that we found time to do this with our timezone differences.

Matt Barrie:

I’m thrilled to talk you, Grant.

Grant Williams:

I intro’d this at the top of the show. I saw the speech you gave at the Sydney 2050 Day, I guess a month, two months ago now. And it’s a subject that’s near and dear to my heart. But even I was absolutely blown away by, A, the quality of that presentation, and B, just a broad swathe of statistics in there that brought a lump to your throat, and not in a good way. At the very beginning of the thing it just kept its grip around your throat the whole way through. We’re going to get into that shortly. But before we do, what I’d love for you to do, if you could, is just give a bit of a potted history of your career for those listening outside of Australia, where you’re not quite such a household name.

Matt Barrie:

I’m the chief executer of freelancer.com, which is the world’s largest freelancing marketplace for getting jobs done online. Anything you can think of, there’s about 67 million people in that marketplace. I run that business somewhat simultaneously with Escrow.com, which is a payments business for buying expensive and complicated items and a freight marketplace, called Low Shift. My career has been in technology, pretty much all the way through.

I’ve got degrees in engineering, computer science and physics. I went to Stanford, where I studied engineering in the dot-com boom in ‘97, ‘98. But briefly in venture capital and came back and started effectively a fabless semi company which ultimately sold to Intel before I started Freelancer. And I’ve also been an adjunct professor at the University of Sydney in entrepreneurship, and ironically cryptography for many years. I stopped a few years ago.

Grant Williams:

Timing is everything as they say. Well, listen, let’s talk about this Sydney Summit, because they obviously invited you to speak, and I’ve given plenty of these talks and they always like to know what you’re going to talk about and what the presentation is going to be around. How did that whole process go? Because you could hear a pin drop in that room once you actually got up to speak.

Matt Barrie:

It was very interesting. Fairfax is owned by Nine, and it’s one of the two major media companies in the country. They contacted me last year sometime and said, “We’re going to do a symposium on Sydney 2050.” So what are the challenges and the opportunities for Sydney in 2050, a number of years from now. And I thought, “Well, I run a tech company.” Occasionally I do write articles, I would bring back long form journalism, and once a year I publish a very long article on a particular topic, like the Australian economy or some other sort of semi political issue.

And they ring me up and said, “We’d like you to be the opening keynote.” And I said to myself, “Wow, okay. Let me think about it for a little bit. Why would I actually be relevant? It’s been a little while since I wrote an article on a particular topic.” And the organizer said, “Well, I’ve seen you do opening keynotes before a conference, and it’s good because you can just say what you think and you don’t hold back, and it gets people talking about the conference.

And this conference was a $1,300 a ticket conference where primarily consultants to the government, turned up to pitch for the business and so forth. But you had the productive of commissioner speak and the CEO of the Opera House and the ministers, and the premier and so forth. And I went away to think about it, and it was actually quite a funny situation because I usually work fairly late here at Freelancer, and it was about nine o’clock and I thought, “Oh, shit, I better go home and let’s see if I can get something to eat on the way home.”

So I went to Victoria Street, which is one of the great eat streets in Sydney, at least it used to be, near King’s Cross where the nightlife district was. And I walked into Tropicana Cafe at nine o’clock, they’re, “Sorry, kitchen’s closed.” And I thought, “Oh, okay, I’ll go to the next restaurant.” Went to the next restaurant, “Sorry, kitchen closed.” The next one. “Sorry, kitchen closed.” I was thinking to myself, “I swear these restaurants in Sydney used to shut at 10 o’clock, not nine o’clock.”

And I thought, “Okay, well I’ll go to the locals Betty’s burgers to get a burger.” And I walked in and they said, “Sorry, the restaurant’s closed at 9:11.” So I tweeted, “What does it take to get a meal in Sydney before nine o’clock these days?” And the replies came in thick and fast, and they’re actually quite funny. One was an alarm clock, so you can wake up earlier. Another was a sledgehammer, so you can break in somewhere. Get a taxi and maybe you’ll find a McDonald’s.

And the best response I thought was a time machine, back 15 or 20 years. And that hit me. I thought to myself, “Do you know what? This city has changed dramatically,” because back in 2000 we had the Sydney Olympics, it really was an electric time. The nightlife was amazing. We really thought that the city was emerging to be a international city. By virtue of that, the country in many different ways, getting on the world stage. And it really feels like everything has gone backwards in a long way.

So I agreed to give the keynote, and then the funny thing at the time was the Premier, Dominic Perrottet, who was from the Conservative Party, apparently said he said to the conference organize, “Okay, no problem, I bet if Matt’s going to speak, push it back to after the election,” which happened a couple of months ago. So they pushed back the conference to this year, and Dominic Perrottet actually lost the election, and then Chris Minns got in, and I got up and gave him a keynote.

And it was kind of interesting because he had obviously had a room full of government officials and consultants to government, and obviously Fairfax. And to an extent I went off the reservation because I don’t think that the editor of the Sydney Herald kind of knew what I was going to say in advance. And I just laid a number of facts bare about what they were, we’re heading and so forth. And it was pretty much a stunned reaction, because it turned out that they ended up deep sixing the conference.

They didn’t actually publish very much on it. There was two articles that came out, and one which was the Premier saying that to get more housing supply in the country you’ve got to build apartment blocks. And the other was that Sydney was overlooked for food, and the food here is fantastic, although a bit overpriced. And that was it. And after that it became a bit of a cult hit, and a number of interviews kind of followed, and it’s now sort of bubbling up in terms of what I said.

And I think the things I talked about in that speech hit a nerve with a lot of people. Because it’s very hard today in a world of 500-word articles in the media, driving the Google Ad click machine, to really construct a okay narrative about what is going on. You’ll see one article and one topic and another article, another topic, in 500 words you can only get one idea across, and to actually string together a very complex issue is very difficult. So I think I’ve brought a few of those things together in my speech.

Grant Williams:

Well, as I said, you could hear a pin drop in that room. And I was blown away by what you did, because I followed this very closely, and still I’ve sat there mouth wide open at just how bad things had got. I left Australia back in 2009. So all that period of change has happened in my absence, and I think that makes it all the more noticeable when I go back. I’ve got a daughter down there so I go down to see her every year. And so I notice it because you have these big long gaps between visits, and the change happens to a much greater degree when it’s not incremental every day.

So your speech is called, The Great Australian Scream. And what I’d love to do is just give you the floor to lay out as much of that speech as you’d like or you think is poignant, or you remember, because it must be a bit of a blur. It’s been so kind of popular since then. And then once you yield the floor back to me, I’d love to dig into it with you, because there’s just so much in there, and rather than have me trying to guide you to little places of it, I’m sure it’s so clear in your mind right now that the sensible thing is to just let you tell us about it.

Matt Barrie:

So The Great Australian Scream is a riff on the Great Australian Dream, which is a very common narrative in politics in Australia about owning your own home, and how it’s become incredibly unaffordable in this country. Now, this country is very much a very simple economy, in terms of exports we export dirt into China, which is in the form of iron ore, to build apartments over there. Some of which are unoccupied for some periods of time because they’re driving GDP.

We export dead trees in the form of coal to power the construction of those apartments, and to power the power in Japan in the wake of Fukushima, while nuclear reactors were left idle. We export gas from those dead trees in the form of LNG and gold. And these are commodities for which we are price takers, not price makers. And generally speaking, they’ve been trending up over time, although recently a number of them have come off the boil quite significantly.

And outside of that, and a wing and a prayer, Australian politicians have basically driven the economy for a decade since through successive governments, through a very form of lazy, and I like to say easy, relentless growth, which is just ensuring that house prices go up. And those house prices have just drifted up year after year after year. Over 60 years, it’s been one of the biggest booms in house prices really anywhere around the world, where we’ve seen house prices go up effectively 86 times in 60 years.

And they’ve gone up so high right now that they’re at astronomical levels, where a house in Sydney, the average house is unaffordable by the average person. I mean socio economists say that if housing is affordable, take the median house price and you divide it by the median household income, and if it’s three times or less, housing is affordable. If it’s three to four times it’s unaffordable, more than five times it’s severely unaffordable, and five times or greater, it’s extremely unaffordable.

And currently Sydney is 13.3 times, and Melbourne is 10 times. Sydney is the second most expensive housing market in the world outside of Hong Kong. And Hong Kong’s a tiny little island. It’s very beautiful and very dense of the most populous country in the world. And you got to think to yourself, “How can Sydney, which is a very beautiful city, the people are great, the food is great, the culture is great, it’s a great place in many respects to live, but how on earth would Sydney have the second most expensive housing in the world?”

In fact, today’s newspaper said that the forecast, the house prices will go up 9% in the next year. So 14 and a half times. How can that possibly make sense? And if you look at the country, it’s not because we’re having more babies, I mean there’s a thing, and there’s the replacement rate where every female on the planet needs to have 2.1 children to maintain the population. Australia, like many Western economies, it’s got a low birth rate, about 1.6 and haven’t been above 2.1 since 1975 or so. It’s not because wages are growing rapidly. It’s not like it’s Silicon Valley where Facebook goes public and seven and a half thousand people become millionaires simultaneously, and everyone rushes out and buys a house.

Wage growth is actually, it’s in reverse gear, the fastest it’s been in history at the moment. The official inflation rate at 7% and wage growth at 3.3%, when everyone knows inflation’s actually not at 7%. If you look around you, your rent’s going up 15 to 25%. The energy bill is going up 25, 30%. In fact, in some places 50%. Australia Post is increasing prices by 10%. I make a joke about the state down the pub index, which is, I got into my local pub and the beers now cost 12, 13, $14. Last year, I remember the steaks cost $38, and I wrote my article in preparation for the speech, and they were $48.

And then a week after I kind of gave the speech, a pepper steak was $56 and they charged me $2 extra for the sauce. And then I was down at the sheaf the other day, and it’s now $70. So everyone knows inflation’s not running at 7%. So you’ve got all these costs they’re inflating across the board in terms of inflation. So we’re not having any more babies. Wages are firmly in negative gear. So why would Sydney have the second most expensive housing in the world, and why would Melbourne be up there?

And in fact, all of the major Australian capital cities and areas in fact are somewhere around the top 20 of the international housing affordability survey that Demographia publishes for unaffordability. And the answer is because the path of relentless growth that Australian politicians have taken over successive governments as being, is to have the world leading immigration. And to give you a feeling of where that is in terms of world leading, in the last 12 months we brought 400,000 people, and 400,000 people is about the size of the city of Canberra, which is the capital of the country.

And we’re at a population of 26 million people. So it’s actually an extreme number of people coming into the country. And that has set up a bit of a cycle in terms of keeping house prices relentlessly trending up, because we’ve been nowhere near able to build as many houses. I mean at the moment it’s something like 1300 people per day is the level of which the population is growing, and that’s mostly migration’s about well over a thousand per day coming in through now overseas migration. And that requires us to build somewhere around 340, 350 houses a day. And Sydney is struggling to build 70, and this is a city which has been on a multi-decade boom in house building.

In fact, in the lead up to the 2000 Olympics in Sydney, we had a massive housing boom for building apartments and so forth. And there’s a funny index out there called the Rider Levett Bucknall Index, which tracks cranes around the world, and in Australia right now, over the last quarter there’s something like 868 cranes operating, with 365 of them operating in Sydney. And if you look at a Sydney like New York, there are 10. And I think Chicago’s got 14, and I think San Francisco’s about 17, but they had been on a ridiculous home building binge for a long period of time, with the 4th highest country in the OECD for home building.

And we’d been flat chat, and in fact the rate at which we’re getting approvals through and actually building houses are starting to drop, yet the response from the government is to keep bringing in more people. And in fact, the current government under Albanese, has recently just turned every single tap open to increase the numbers as much as possible. Because I think what they’ve done is, they’ve looked at kind of where the banks are, and ostensibly the banks are pretty good results and so forth, but they’re completely up to their gills with residential mortgages.

I mean when the GFC came around, you had bubbles being blown into the U.S. market, the UK market, Spain, Portugal, Ireland, and so forth. And there were some housing bubbles that burst around the world with the GFC. Australia, we doubled down, we increased the number of incentives to really keep the market afloat. In fact, there was an emergency note I think from treasury, the RBA that said you have to do it at all costs. So we’re at the point now where Australian household debt is somewhere around 211% of the GDP, and we’re twice as indebted as the Americans, which sounds really funny from an Australian’s perspective.

When you normally think of America, you think of a country awash with debt and credit cards. But we are well beyond that, and we’re reaching right now effectively a logical conclusion of all these costs. Because what actually happened is, the root of all evil in this country is basically extraordinary high price, and that feeds into the cost of business. It feeds into requiring extraordinary high wages. We actually have the highest casual wage in the world, which was $21.38, which is now been raised to $23.23. And even at the highest casual wage in the world, workers can afford less than 1% of listings that are currently available on the housing real estate classified sites.

So you’re at this point now where you’ve been on this incredible run with land costs that feeds into wage problems, and it also feeds into the cost of everything around, and as a result, if you look at the household budget, it’s really a breaking point. 62% of renters in the country are in rental stress, which is defined as net outgoings greater than incomings. 48% of mortgage holders in this country are in mortgage stress. In New South Wales, 70% of renters are in rental stress, and in young families 86% of young families are in rental stress.

We’re at the point now where the math doesn’t work out anymore in terms of the ability for the household to afford anything. And one thing that struck home, I watched The Big Short not so long ago, and there was a point, and the moment they mentioned that, where Steve Carell’s in a strip club, and he’s talking to a stripper, and it’s obviously about the GFC, and she says she’s got five houses and a condo. And that was kind of a pivotal moment in the movie where these loans were written at typically what’s called an ARM, adjustable rate mortgage, which were written at 2% or 3% during the GFC when they kept the rates down, and they exploded two or three times higher.

That was a pivotal moment where the committee walked down and said, “Let’s short it.” It was Eisman making $7 billion. And you just look at the Australian market, and the parallels are very, very, very clear. Almost every day in the media, either Fairfax Media or all the New Zealand Media, there’s an article about a train driver that has a property portfolio of $15 million across 20 homes, or a McDonald’s worker, or someone who’s unemployed or what have you. And just the parallels are just so stuck, because during COVID, 394 billion, from memory, mortgages were written at a fixed rate, at the rates as low as 1.95%, 350 billion of them are coming off this year.

In fact, the big quarter is this quarter, the June quarter is 17% of the 350 billion are being reset, not being reset at 3 or 4%, they’re being reset significantly higher. In fact, the mortgage rates coming out right now are kind of sevens, eights pushing nines or higher, depending on what type of borrower you are. And I just think the parallels are so clear that adjustable rate mortgages coming off in 2008 in the U.S., and likewise in Australia with a lot of fixed interest rate mortgages combined with inflation kind of out of control.

And the RBA’s raising rates, Australia’s at 4.1%, it’s behind the UK, it’s behind Canada and it’s behind the U.S., which are up to five, five and a quarter, and rates are going to keep going up. I think we’re at the point where we’ve got the explosive lift in costs through both mortgages increasing as well as inflation increasing. And I think you’re reaching a point where the math doesn’t work out anymore, and it’s only been propped up by immigration. And the demographics thing of immigration have changed quite dramatically, because for a long time it was dominated by China. Well, China’s still a very high percentage of migrants coming into the country.

Demographics are now turning to more emerging markets, like Nepal and Columbia and so forth, where the people coming in, I don’t think have the financial wherewithal capacity to be able to prop the market up as much as the Chinese were. Although ironically it’s been illegal for some time for the Chinese to own property overseas, and also send more than $50,000 a year, or that’s been skirted everywhere from here to Auckland into apartment blocks and so forth. So there’s quite a big picture here in terms of what’s going on. And at the same time we’ve let manufacturing fall apart.

I mean, manufacturing is a percentage of gross value added is about five and half, 6%, which is on par with the financial haven like Luxembourg or Botswana, where you can go see cheetahs. In 1995, Australia used to do things like make cars and steel and so forth. Now it ranks 91st in the Harvard economic complexity scale, which is a measure of how complex or sophisticated the products that your country produces are. It’s dropped 40 places since then. So we’re behind sort of Guatemala and Laos and Kenya, and so forth, and it continues to drop.

And I just think we’re at the point now where the country is really going to get into crisis, where you look at the banks, and the financial results that have come out quite recently are good. Ostensibly they’re better run banks than many banks around the world. But when you look at a bank like the Commonwealth Bank, which is our largest bank, which has a larger market capitalization than Goldman Sachs, you’ve got to wonder yourself, “Does that actually make sense?”

And then you look at the Commonwealth Bank and the numbers are pretty good. They’ve got $639 billion of residential mortgages. They’re far more exposed to residential mortgages than the American banks. I mean back in the GFC, the Australian banks are twice as exposed to residential mortgages than the American banks. Three times the British banks, four times the banks in Hong Kong, and that’s for the most expensive property market in the world. And the Commonwealth Bank is $639 billion worth of mortgages.

About 150 billion worth of business lending and about 17 billion worth of consumer finance. And you go, “Okay, well there are also a lot of parallels here between Silicon Valley Bank and the Australian banks, because if you look at a Silicon Valley Bank, which was the dominant banker to the U.S. technology sector, they’re banking about 50% of the U.S. technology industry. Business was pretty good. I mean in about three or four years their deposits went from 60 billion to about 190 billion. They were awash with cash. And so they had to figure out ways, and that’s obviously on the liability side of the balance sheet. So they’ve got to figure out, “Okay, where can we lend the money to?”

And there’s only so much you can lend to cash burning startups or the technology industry. So they decided to take 80 billion or so and stick it into mortgage backed securities, and another 10 billion and stick it to T-bills, 10-year T-bills. So that 92 billion, so 10-year securities with a average yield of about 1.56%. And then what happened was over a couple of quarters, since May of last year, you had the crypto crash in the U.S., and then you had the tech wreck. And so venture capital funding pulled back quite strongly.

It’s actually, we’re running Escrow.com, we sell a lot of domain names. We do about half a billion dollars of domain names, which is kind of a forward indicator of U.S. venture capital economic activity because a startup will get funded, and the first thing we’ll do is get a good domain. So they’ve got a free kick forever with their marketing cost being cheaper. That venture capital funding really withdrew, I think it dropped about 35%. So it’s a very quick retraction happened about May or June.

And as a result these cash burning technology businesses, because even if you probably listed the model is to earn cash and try and knock the lights out for revenue growth. They drew down the cash balance margins of Silicon Valley Bank a little bit deeper and a little bit longer than expected, and it just led to a bit of a solvency crisis where they had to sell off parts of their at core securities for a $22 billion loss. And then that led effectively to a bank run when a couple of the VCs panicked and told their portfolio companies to withdraw.

Now, I think there are a number of parallels here with the Australian banks in the fact that while business is good, and there’s 400,000 people a year coming into the country, and all of them need a bank account. And so they bring some money in, not the $60,000 they’re supposed to bring in, but they bring some money in on themselves. And that’s capitalized in the banks, because business deposits have been dropping a little bit sometimes, that it could be heading into a recession. I know that two is tens curved in Australia is a convert. There’s twos, fives and so forth.

So catering for a recession globally, and people pull back on their spending and defaults go up, and so forth. So while we do look good right now, the Australian banks, very good. And we do have a bit of a flywheel here. I mean there’s something about our economic architecture that probably listeners don’t know about with Australia. And that’s we’ve got compulsory superannuation. So this is the mandatory pension scheme, and that’s running at about 10 and a half percent. So what actually happens every month, 10.5% of the Australian wage bill compulsurally gets paid by the employer into super.

Now of that superannuation, 16% of that gets directly invested into property, and about 23% of it gets invested into Australian stocks. Now the Australian stock market is pretty thin in terms of diversity. The big four banks, and Macquarie Bank, making it five banks, are about 23% roughly of the stock market. So what actually happens every month is that 10 and a half percent of the Australian and wage bill flows into superannuation, and effectively that results in 5% buying out bank stocks of the big five every month. So capitalize them, and that’s why we’ve got these very, very, very large capitalized market caps for Australian banks.

So that increased their ability to lend, but there’s not much to lend to in this country. As I said before, 91st in the world in terms of economic complexity. So what are they lending to? They’re lending to more mortgages. And while things are good right now, because immigration so far has kind of kept things afloat to an extent, and governments have been fully prepared to throw the kitchen sink and everything else out, immigration to keep it up, there could be a situation where maybe the demographic nature of people coming in changes and they’re not as wealthy as the Chinese were when they’re coming in. And things go into tough times, and the house prices are so astronomically expensive.

I mean, the average house price here at the moment is about $1.2 million. The average wage in Sydney is about $94,000. So it’s mathematically impossible for the average person to pay for an average house. And in fact, just lately there’s been what looks like a bit of a blow off top happening in house prices with people, it’s getting so high that people are panicking. And what I mean by that is, there was a house that sold just recently in the last two weeks, three weeks in a place called Erskineville. Now Erskineville is a working class suburb. It’s not an affluent suburb by any means. It’s a working class suburb.

It’s close to the city, it’s about six kilometers from the city. But that house sold for $4.2 million on a 203 square meter block of land. That’s not a very big block of land and it’s in a working class suburb, and that’s something like 46 times gross average wage. How could that possibly make any sense? And then you look at Bellevue Hill, which is a very affluent suburb. It’s not the wealthiest suburb, but it’s a very affluent suburb. It’s a suburb where you might expect a doctor or a lawyer to live.

And a house sold there last week and for 15.2 million on a 700 square meter block. And the house did not have fantastic build quality, it wasn’t a fantastic house by any means. It was just an average house in the middle of Bellevue Hill for $15.2 million, which is 160 times the average wage. So you look at this and you go, “The math isn’t working out anymore.” So the banks might have a problem where they’ve got default correlation, which is exactly the drivers of the GFC in the U.S., where you’ve just got, it runs up to their gills in debt. Households at 211% to GDP in terms of household debt.

You’ve got a changing mix in immigration. You’ve got in Sydney, 62% of household income, which is two people, is required to service a mortgage. And that’s with interest rates where they are now, which where the policy rates are at that 0.1. Back in 1982, when interest rates were 17%, it only took 44% of household income to service the mortgage, when interest rates were at 17%. It’s the policy rate. And rates are going to keep going up. And 44% is still pretty high because I think it should be about 20% for housing.

So you kind of look at it and you kind of go, “Could there be a situation where you’ve got default correlation on residential mortgages?” And there’s a very, very high concentration risk in the loan book for these banks. Now at the moment they are reasonably well capitalized in terms of deposits. I mean Commonwealth Bank for example, 75% backed by deposits, which is a very different story from the global financial crisis where effectively the banks were completely and utterly reliant upon foreign funding, that effectively became insolvent.

The government had to come and guarantee them to live with their triple A credit rating at a cost. But there could be a situation where just like Silicon Valley Bank, things go a bit deeper and a bit longer than expected, and balances get drawn down, and gosh, the Chinese students see all these articles that are going online about how for $300 a week, the only place a Chinese student could find to rent near the university was a place where she had to pitch a tent in the living room, in a share house.

There was this ad actually the other day in the paper for a place to rent. The bond was $520, it was $130 a week and it was a picture of a backyard where you could pitch a tent. And the owner said, “Well, we can negotiate wifi and power and access to toilets.” It’s 56 kilometers from the city. So I just look at it, and there’s so many parallels. Now, government intervention can kick the can down the road a very long time it turns out. I mean 2017 I wrote an article, The Australian Economy is a House of Cards, where I looked at this and I said, “The numbers just look like don’t… They’re starting to not add up. This is extreme.”

It’s all very much in the same narrative I’m talking about today, but that was six years ago, and things now, it kind of feels like we’re past overtime and we’re well into injury time. And you just wonder that, how does it all add up if 62% of the household income is required to service the mortgage? And last week it said in the paper that 15% goes into transportation costs, and then you got to pay for healthcare and school fees, and what have you. At some point it’s all going to break. And I just get this feeling it’s going to be fairly soon.

Grant Williams:

Matt, that was beautifully done. And I have to say, have a drink of water my fiend, you’ve earned it. It’s funny, listening to that, the hardest thing to do is to not interrupt, because there’s all these places I want to take you down, and you did a phenomenal job of actually answering just about every question I had along the way before I got to it. So kudos to you. But let’s dig into some of this, because like you, I’ve been talking about this for some considerable time, and the numbers have been unworkable for a number of years now, they’ve just gotten more unworkable.

Obviously the thing that we didn’t have on the other side of this holding the RBA’s feet to the fire, was inflation. They could maintain what for Australia were extraordinarily low rates. We came into the GFC with rates in Australia in sort of the 7, 7.5%. People forget that that was a much more common rate of interest in Australia. So it makes sense that if you take a group of people who are used to having the base rate at 7%, and you take it down to essentially zero, you’re going to see exactly what happened, happen.

But I think you’re right, I think we are at the point where the rubber meets the road, and these 800,000 mortgages that are resetting this year are resetting and will incorporate some 10 rate hikes. So what does this look like, when this does start to fall over, because there’s been a few kind of false alarms before, and as you say, the government have always come up with something. I noticed yesterday, I think it was the CBA have cut the interest rate stress test for borrowers from 3% higher to 1%. The banks are equally desperate to find people to lend to, to keep this thing going. But when this wobble starts to become something more dangerous, what do you think that looks like?

Matt Barrie:

Well, spending is obviously going to pull back, and there’s been a whole bunch of numbers on the papers about that already happening. I think there’ll be a lot of government intervention. I mean, I think the serviceability offer that Commonwealth Bank where it’s cut it from 3% to 1%. I mean what could possibly go wrong there? I mean it’s heading to full certainly, ninja loans at this point. They’re kind of setting themselves up to say, “Well, look, we’re doing something to help with affordability by not making it so hard for people to borrow.

And then that’s kind of a good preface to trying to get the government to do something. There’s a question of how much capacity the government will have this time around, because the numbers are pretty astronomical. There’s $1.5 trillion worth of mortgage debt in this country. And the federal government’s got a trillion dollars of debt. The state government to link up houses for example in New South Wales have been this huge spending binge, building a metro line, and they’re currently now $187 billion in debt, which at the current last report they said they’re paying the debt out at 5.2%, and paying $6.8 billion in interest in a couple of years per annum.

Which is more than what they collect from property taxes, land taxes, casino tax, pokies tax, healthcare levies combined. So there are still a number of things they can do with intervention. They can still try and tap that immigration lever as much as they can. They can really start winding back a number of the controls on new land availability, and various incentives to build by allowing overbuilding.

And last week they said that they’re going to allow building much smaller apartments, like social housing and student housing and so forth, so that they can really cram it in that density. And they’ve increased the accessibility for subsidies to government housing programs, such as deposit schemes and so forth. It’s actually quite comical. One of the latest things they’ve done is increase the group of people that can apply for a subsidy to be not just the family, not just the extended family with the cousins, but also two friends. I don’t know to which two friends, but two other friends.

Look, I don’t know, we’ve had such a long, easy path for renters growth in this country. We’ve had just, it was a hundred and something quarters of economic growth. Nobody in this country actually knows what tough times look like, in a way. When the global financial crisis, I think we were one of the only economies in the world that was up, where I think we were about half a percent or something, where everyone else had the ability to deflate the housing markets and they kind of did. We just continued. And so nobody knows what it looks like in this country. Not the politicians, not the last government, the government before, nobody knows what it’ll look like.

But if you draw the parallels and you just kind of look what has happened in the U.S. and the UK and Europe and so forth, we think that it probably a good chance it’ll look a lot like that. It’ll look a lot like default correlation. Mathematicians can carve up those mortgage backed securities anywhere they want, tranch them up and log them off in CDO’s or whatever, and try and prove that they’re good investments.

And in fact, I’ll tell you a funny story actually about that. A funny story is, there’s a private wealth guy that’s been kind of hounding me in the last couple of weeks to try and become a client of his. And he sent me this investment actually last week, and it was a private debt. It pays 12%. I said, “What’s in it?” And he said, “It’s 48% private equity, and 52% residential mortgages.

And I said to him, “Hang on a sec,” I said, “First of all, how’s it paying 12%? Because I presume your bank is making a fee on this, and the originator’s making a fee on it. And it’s residential mortgages, and then it’s private equity. I mean, how bad are these mortgages? How much are they paying?” And private equity, obviously they can’t IPO their companies because the market’s closed, so they’re trying to find someone to buy it off. And then going to high net worth for residential mortgages is kind of weird. I mean it’s a very, very big market.

It’s not typically a market I think you’d go to, you’d go to the sort venture funding or something where it’s domain expertise or some operational or relationships that, okay, I guess this because I know the industry. But I don’t know, I mean the Australian market is a bit different from this market, and the fact that in any circumstance and you can hand back the keys, in Australia you can’t do that. But I think on a practical basis, they’re going to have to let people. The banks can’t evict people from their homes because politically that’s very untenable. So there’s going to have to be something, but I don’t know.

I don’t know where it’s going to end up, but I think it’s probably going to end up with a lot of money printing and a lot of deterioration of the credit rating of the country. And I think there could be some form of banking crisis, and I don’t know the capacity of the RBA to bail that out, given the fact that the RBA is effectively in negative equity already. Because they lost $50 billion in Australian government bonds, which went the wrong way with the government hike. So I don’t know, but I just think you just draw the parallels around the world and just think something… It’s not going to be good here. And I think because we’ve kicked cans so much further down the road, I think it’s going to be significantly worse than in other places where this has happened.

Grant Williams:

The interesting thing when you look at Australia is just how tied to the same mast every stakeholder in this thing is. It’s not the same as other countries, because obviously you’ve got the mortgage holders and they’re underwater. And if you’re a Macquarie banker, you’re earning a really good salary and living on the North Shore, you are outstretched in your mortgage, which is not the way it should be, because if you want to live on that North Shore near all the good schools, you’re going to have to take a mortgage out that’s much bigger than you really want to, or in many cases can afford.

So this is not just people on that extremely high minimum wage who are going to struggle. This is everybody, because everybody that has bought a house, this great Australian dream, is way over their skis. Then you’ve got the banks who are completely hostage to this situation, and as you’ve laid out so beautifully, their books are an absolute time bomb waiting to happen. But then you have the government who cannot possibly allow the housing market to fail, or at least have to do everything they possibly can to avoid that.

So they’re all strapped to the same mast, and ultimately the only real thing that one might think has a possibility of saving them, is to magically find some true organic growth, is for China to come roaring back and pay an awful lot more for some of the things that Australians dig out the ground and stick on ships to them. The more I look at this, the more I don’t see a way out of it, and the more you understand that when Australia does get its first recession in 30-plus years, you realize it’s going to be an absolute catastrophe.

And so, I’m bewildered when I talk to friends of mine in Aussie that, two things, one, the understanding of this is so scant. So few people seem to get this. And two, the idea that she’ll be right. Property always goes up, and people have been warning about this for such a long time, and look where we are. House prices are much higher than they were. There’s just a sense of whistling past the graveyard that nobody wants to even entertain the idea, that all it’s going to take is that recession, and volumes of people losing their jobs, who are absolutely unable to pay their mortgages. And this whole house of cards comes tumbling down.

Matt Barrie:

Well, one third of people in this country own their own home. So they’ve been really unaffected by mortgages going up, and they’ve been feeling pretty good about themselves, and they’ve become multi-millionaires. In fact, Australia has a very high concentration in millionaires have capital around the world, it’s very, very high. And then one third in this country have a mortgage. And for many years we felt very good. I mean house prices continually went up, and then rates kind of came down. I’ve been lectured so many times at the pub by all sorts of people about, “You should pick this house and that house,” or whatever.

And you just go, “This doesn’t make any sense.” I mean I remember this, I was at the dentist, it was a couple of years ago, but it wasn’t the dentist. And there was an old People Magazine there. And I opened it up just sitting there waiting for the dentist, and I’m flicking through the pages and it said, “John Travolta has extended his $3 million mansion to park his Boeing 707.” I thought 3 million to park a Boeing jet, because he lives on a runway.

I just thought that would buy in Australia a two-bedroom apartment. Or Erskineville, a working class suburb by a 200 square meter house. I mean it’s just unbelievable. And so, one third of people also rent. Then you look at, you mentioned it’s affecting everyone. The average wage is $94,000. A lawyer or an accountant or a GP might make… A good job. This is a top job, 200, $300,000 income. They can’t afford these houses.

Grant Williams:

Right. Right.

Matt Barrie:

The only way you can afford to buy one of these houses is by trading up in a way. But transactional costs are very high. Stamp duty is very high. And so, I mean a lot of it actually is coming in from overseas, and a lot of it’s hot money. There’s been quite a long-running scandal globally around the hot money coming out of China, where the original hot money was going through Macau, then it was going through the British Columbia casinos and the Australian casinos, and it was going through Bitcoin at 1.98% of volume in Bitcoin was money getting out of China. There was a wonderful website called fiatleak.com where you could watch where the on-ramps and the off ramps for Bitcoin, and then China cracked down on that, and then it went to smurfing.

So you have multiple families sending $50,000 to a bank in Hong Kong and they’re getting the money out, and so on. So there’s this Australian property in a way, just like Vancouver property, just like all property has been in a Swiss bank account. In fact, transparency international rates in Australia are the worst money laundering market in the world, because there’s very little transparency. Unlike many markets in the world, if you want to try and buy a house, the average price in Australia’s contact agent. Like they if they advertise the house they don’t have to say what the price is.

Grant Williams:

Why set a low number, hey?

Matt Barrie:

Well, there’s a whole thing about underquoting and they’re trying to make it illegal. If someone says a price and the price ends up being higher, which is kind of weird in a market economy, but then when the house sells, you’re not required to actually publish what the price was, although a lot of the prices do get out because of various gossip columns and the other, and some people just do make it public. But also the beneficial holders of property are not required to be kept in registers, and the participants in a real estate transaction are generally not required to KYC people.

So it’s been a fantastic place to park money. And that’s been a big driver at the top end of price action. But truly, it is crazy, and you just look at the cost of everything, and you just try to add it all up and figure out how it works and how much further it can continue. There’s a guy called Martin North from Digital Finance Analytics, he publishes wonderful charts on mortgage stress and rental stress.

20 years ago, both mortgage stress in the country and rental stress, which is defined as outgoings greater than incomings, they were both less than 15% of households were in either rental stress or mortgage stress. And now in New South Wales, it’s 70% are in rental stress in New South Wales/ 86% of young families in the country are in rental stress. And ironically, of the migrants coming in, that the government’s using to kind of prop everything up GDP, not the per capita basis, but prop up GDP, 69% of new migrants in this country are also in rental stress.

I mean, basically what’s happening is, the average Australian can’t afford to work in a cafe or hospitality or so forth, on minimum wage, even the highest minimum wage in the world, $23.23. And so what we’ve been doing is, we’ve been importing a lot of people, 40% of them go into accommodations, beverages and so forth. We trick them for a while to work in a cafe. They figure out they can’t make it work either, and then they go flee to another country. And then we’ve been on a massive home building binge to try and bring that housing cost down.

But because costs have got so astronomically high, what’s actually happening is we’ve been unable to increase the number of tradesmen. In New South Wales, the number of laborers have been 300,000 for about a decade, unable to budge. Because every time the costs go up, the tradesmen flee to Queensland or the country or some other place, which is cheaper to live. So we haven’t been able to increase the number of builders. And now we’ve got insolvencies that are fairly high numbers. 1700 construction companies have became insolvent in the last 12 months, that’s going up. All these home builders going to bust because they get into these fixed price contracts to sell the houses, and then their materials costs have gone up, and labor costs have gone up. And yeah, it’s crazy times.

Grant Williams:

Well you’ve got the Olympics too, which is obviously sucking tradies up to Queensland.

Matt Barrie:

It’s exactly right, because the government pays more money to build up the stadiums.

Grant Williams:

I mean the other thing, obviously, which we haven’t talked about, which is a similar phenomenon just about everywhere else in the developed Western world, is car financing. Because everybody in Australia’s got a nice car, and cars are expensive in Aussie. I remember when I moved down there from the U.S., I couldn’t believe the prices down there were probably double what they were in the U.S. then. But everybody had a nice car, and obviously that’s because they were financing them. And I suspect there’s going to be an enormous amount of used two, three-year-old Mercedes and BMWs, and all kinds of really nice cars up for sale at crazy prices fairly soon, given the way the rates are going.

Matt Barrie:

Whilst cars in Australia are extremely expensive because we’ve got all these taxes that protecting an industry that no one where exists. So we’ve got all these tariffs and luxury car taxes and so forth that the government introduced many, many years ago to try and keep Holden afloat. Back in 1995, we’d make cars and other things, and it just became too expensive due to input costs primarily being land, which drove wages. So wages became too expensive, and had China competing and everyone else competing. But we still have the taxes. So we no longer have a car industry, but cars were incredibly expensive here with car taxes.

I think it’s about one and a half billion a year that I think the government generates in these taxes, protecting a industry that no longer exists. And it’s quite funny, because one of the wealthier classes in this country are tradesmen. You try and get a plumber out to fix something in your house, they might be charging you $185 an hour, and they all drive really high-end utes. All the extras are on them. It pays more than potentially being a software engineer, in many circumstances, it’s a very, very strange economy from that perspective.

Grant Williams:

So mate, let’s talk a little bit about the reaction to that speech, because it did go viral. I couldn’t share it fast enough or often enough. I just thought it was fantastic. But let’s talk about the reaction you’ve had to it, both from the general public and perhaps from policymakers, or anyone within the kind of… Because you know if there’s a story like this out there, at least the opposition would want to get ahold of you, because this is a great story for them.

Matt Barrie:

Well, yeah, so it is kind of going viral. I mean there’s been a couple of podcasts and other interviews that happened off the back of it. Ironically, News Limited carried it three times on the homepage. It was there for short periods of time as the banner story. But I think before the editors looked at and kind of pushed off the top of the website pretty quickly.

So I think what it’s done is, I think a lot of people in the world, you’ve got a very narrow media in this country, you’ve got two dominant media sources outside of Twitter, which is now becoming increasingly a very valuable source of actually cutting through all the narrative, and figuring out what’s really going on. It’s very, very hard to string together what’s going on. And I think it has clicked, it’s certainly going viral.

I actually checked out YouTube, I did with a up and coming online media company. The average views in the videos are 200 to 300 to 400, and mine was 78,000. And the comments go off the page, a hundred thousand comments. So it’s certainly hit a nerve and it’s certainly resonating. And I think this is going to become an albatross around the current Albanese government’s neck, because Albanese has just doubled down to the extreme. And it’s kind of funny, you’ve got the RBA has its foot firmly on the brakes, lifting interest rates.

And those rates we’re lagging New Zealand, which is over five. We’re lagging in Canada, we’re lagging the UK, we’re lagging in the U.S. So they’re going to go up. And Philip Lowe, who’s the governor of the RBA, has kind of been a bit of a scapegoat for all of this, because he said back in COVID, that interest rates would stay effectively at zero until at least 2024. Went into this big hiking cycle chasing the U.S., because we had to.

And he’s on his way out. In fact, there’s been a review that’s just been completed of the way the RBA runs, and it’s very clear they’re not going to renew his contract. And increasingly they’re doing things like running polls in the media. They’re saying, “Do you think that Philip Lowe should lose his job?” And of course everyone’s saying, “Yes.” And so, he is increasingly becoming a scapegoat, and I think on his way out to retain some level of credibility he’s going to keep raising.

So the RBA has got its feet on the brakes, and then you’ve got the government who’s got its foot on the accelerator with immigration. And also on the brakes in some regards, because it’s doing less restructuring of how wages and superannuation and so forth work. So superannuation’s going to 12%, and they’ve just increased the minimum wage. And they’re also now pushing this labor reform to stop labor hire companies, which is going to drive up costs quite significantly for a number of companies.

I think BHP came out just this week and said that their costs are going up by one and half billion dollars this year, which is about 5%, because they’re going to try and restrict industry sub-contractors or labor hire firms, et cetera and so forth. It’s not exactly clear what their policy is intended to do. I mean, I interviewed a candidate this week for a job, who works at a certain place, and he told me one of the largest delivery networks in this country is going to shut down.

It’s for a tech company, it is going to shut down their delivery division, because the costs to do package delivery is going to triple under these reforms. And so they’re going to shut down effectively 75,000 drivers, because they can’t make it work. So it’s kind of strange. You’ve got one foot on the brakes of the IBA, one foot in the accelerator, and with the government, and government sort foot on the brakes. So I don’t know what’s going to end up, but they call it the burnout economy because there’s car spinning in a circle with the accelerator and the brakes on.

Grant Williams:

Right. And you touched on this earlier, but we saw the numbers out of David Jones a week or so ago. And for people overseas that are familiar with Australian kind of department stores, David Jones, I don’t know, you may correct me, but it’s kind of a Nordstrom, Neiman Marcus type level. It’s a high end department store in Australia, and it’s been going gangbusters. But they had some results out this week that were absolutely terrible. And I think they were so bad so fast, that also seemed to catch a lot of people’s attention, that maybe now this thing is actually starting to unravel in places, and at a pace which people weren’t prepared for.

Matt Barrie:

Well, I mean the funny thing about that is that David Jones is the high end Nordstrom’s equivalent in the country, and it’s the place where you walk in, there’s a white gloved gentleman playing on the piano, and supposed to feel special and you really treat yourself and so forth. But over the last decade or so, in all the high end retailers, not just David Jones, but across all the high end retailers, it really feels the quality of goods is deteriorated.

If you go into Walmart in the U.S., for example, they’ve got contracts where they’ll supply you a lower grade of cotton in the fabrics that they produce, so they get the cheapest price. The laundry detergent would be a little bit cheaper grade. I mean, everything’s just a lower grade. And for example, if you’ve got Argentina, and you go into a store and you want to buy a phone, there’s no iPhones there, because no one could afford them.

And this is kind of anecdotal, but I have felt going into a number of the high end stores in Australia over time, that just the quality of goods just seems to be a lower, reduced grade, because it’s cheaper and it’s more affordable. And it’s very stark to when you go to the U.S. When you go to the U.S. and you walk into a hardware store and you pick up the tools and so forth, it’s significantly higher quality in terms of the build than you would find in Australian retail.

I don’t really have any hard data on this other than anecdotal, but it does feel like the quality of product sold is falling away because people can’t afford it anymore, because the household budgets is tied up with everything else. And David Jones is a classic example of that where you go in there now and really… I’ve got a friend, actually an ex-girlfriend of mine who supplies cosmetics to David Jones. She goes, “It used to be very special and so forth.” She feels now that you go in there, you buy the same cosmetics you can buy in a service station. And it’s happening across the board, everyone.

Grant Williams:

Well, Matt, we’ve kind of hit the hour and it’s been a fascinating conversation. But before we wrap it up, I know my audience, and I know how interested a lot of them are in what’s happening in Australia, even if it’s as a canary in a coal mine. So let people know, I’ll include a link to your terrific, Great Australian Scream piece in the notes for the show, but please let people know how they can follow you, how they can get in touch with you, how they can read any of those articles you talked about. Because this is a story that is probably more important than Australians would like it to be, frankly, because there’s an awful lot of people now starting to keep an eye on Australia as maybe the first domino of the topples.

Matt Barrie:

The easiest place is to follow me on Twitter. It’s matt_barrie, B-A-R-R-I-E, on Twitter, and you’ll find everything there.

Grant Williams:

Fantastic. Beautifully done. Matt, listen, I can’t thank you enough for doing this. I just sat back and bathed in all those data points again, like I did the first time, and the impact wasn’t lessened for it being the second time I heard it. So I know this is going hit home to a lot of people. So again, thank you for taking the time to do this with me, I really appreciate it.

Matt Barrie:

Thanks for having me.

Grant Williams:

Well, hopefully you enjoyed that conversation as much as I did. The story is a remarkably compelling one, and it’s really quite frightening for any of us who have followed the Australian real estate story over the years.

As Matt said, you can follow him on Twitter. You’ll find him at Matt Barrie, thats matt_barrie, M-A-T-T_ B-A-R-R-I-E.

And the piece I referenced, The Great Australian Scream, there will be a link to it in the transcript, if you download that from the website. But if you go onto medium.com and search for Matt Barrie or The Great Australian Scream, you’ll find not only the text for the speech, which is fantastic, but also a video of Matt delivering it at the Sydney 2050 Summit. And I warn you, the silence is deafening.

Well, thanks to Matt for joining us. I’ll be back again with another guest in the very near future. Thanks for listening.

Nothing we discussed should be considered as investment advice. This conversation is for informational, and hopefully entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets.