China Debt

Australia, The Smashed Avocado Economy

A national argument over avocado toast could send the Australian dollar tumbling.

By Samuel Lee and Aaron Timms

May 30, 2017
avocado toast

DAVID BYRNE once quipped that the national dish of Australia is toast. For the past year, politicians and pundits throughout the great southern land have done that description justice by engaging in an earnest and at times quite vicious public policy debate about the effect of avocado toast on young Australians' savings habits. Avocado toast is, of course — along with the flat white — Australia's great contribution to 21st century urban culture. 

Amid a property market bubble that's given Sydney and Melbourne some of the priciest real estate on the planet, various baby boomers and business types have stepped forward to suggest that Australia's millennials would stand a much better chance of breaking into the property market if they kicked their penchant for sitting in “hipster cafes” and eating “smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop” and used that money to save for their first homes instead. 

Those words came from demographer Bernard Salt, writing in The Australian in October last year. Two weeks ago property developer Tim Gurner reignited the debate after telling Australia's 60 Minutes, “When I was trying to buy my first home, I wasn’t buying smashed avocado for $19 and four coffees at $4 each.” In each case, the fury of the social media masses was as swift as it was predictable. 

If scrutiny of millennials' dining preferences is now a legitimate driver of public outrage throughout Australia, that's because the debate over house prices is approaching something close to fever pitch. In last year's federal election, the opposition Labor party proposed a policy solution to the problem. This involved placing restrictions on negative gearing and capital gains tax discounts introduced in the late 1990s. Used to reduce income tax, these discounts were directly responsible for a surge in property investment and house prices that has continued to this day; restricting them, the opposition argued, would curb the speculation feeding the country's housing affordability crisis. But Labor lost the election, and with their hopes of government went any near-term hopes of negative gearing reform. 

Prime Minister Malcom Turnbull has not, however, remained deaf to the need to increase the tax base that provided the secondary motivation for Labor's calls for restrictions on negative gearing. In the budget unveiled earlier this month, the government introduced a bank tax as well as an increase to the existing healthcare levy; together, these will raise close to $15 billion annually (though this number is disputed; see the bullets below). In the process, however, the government has dropped the ball on demand-side reforms to cool the property market. 

Turnbull's budget was very much in the big-spending, big-government mold of his occasional phone buddy Donald Trump. Former PM John Howard, a Liberal Party hero, called it a “highly political” document divorced from conservative ideals, while Corey Bernardi, a renegade Liberal MP who has broken away from the government, said his newly formed “pure” conservative political party has seen a surge in memberships since the budget was handed down. 

Turnbull, a social liberal who's never been popular with the hard right faction of the Liberal-National coalition, now faces attacks on multiple fronts: from the opposition; from a younger generation waiting for the federal government to “do something” about housing affordability; and from within his own party. It's no wonder, then, that the opposition is surging in the polls. 

aud fx 5/30
aud yields 5/30

Post-budget polling dynamics have been a major focus in recent days of the discussion among the sources in Predata's anticipatory signals for moves in benchmark Australian assets. These signals (above: link to FX signalslink to yield signals) point to a major drop in AUD/USD and a big move in Australian 10-year government bond yields over the next two weeks. (The first prediction is directional; the second is not.) The other two big themes driving the signals higher are — no surprises here — the domestic property bubble and China's gathering debt crisis, which could have a devastating effect on Australia's heavily China-dependent economy. 

These stories are moving quickly. Last week S&P downgraded the credit scores of almost all of Australia’s financial institutions on the back of fears of a property market downturn, while on Monday a respected Australian asset management firm liquidated its Australian shares funds and handed “hundreds of millions” of dollars back to clients, citing an “imminent correction” to the local property market and the high likelihood that China's property-and-debt bubble will burst “later this year.” The unholy marriage of abused avocado and toast might be the least of Australia's worries.

Aaron Timms is Predata's Director of Research. Contact: aaron@predata.com. Sam Lee is a Predata financial analyst. Contact: sam@predata.com.