Has Australia reached the end of the Great Economic Ponzi Scheme?

For decades, Australia has been known as the lucky country. Yet luck is not an economic strategy.

In recent years, structural weaknesses that were once masked by growth have been exposed. Australia is currently the only G12 economy to have resumed tightening monetary policy amid persistent inflation, a signal that the underlying pressures are deeper than many care to admit.

Recent OECD data showed Australia recorded one of the largest declines in real household disposable income per capita among advanced economies. Real wages have lagged inflation for several years, meaning Australians are effectively working more to afford less. On a per-capita basis, national income has stagnated, and in some periods, gone backwards.

For a generation, Australia rode an extraordinary wave:

• A once-in-a-century mining boom driven by China
• A banking system expanding credit into housing
• Rapid population growth through migration
• A property market that rarely corrected

Between 1991 and 2020, Australia avoided recession, one of the longest uninterrupted GDP expansions in modern history. This built enormous wealth on paper. Median household wealth ranks among the highest globally. But much of that wealth is tied to property values, approx 67% of our wealth, which is inflated by leverage and demographic growth.

The economic model has worked so far. But the supply side of the economy has been unable to adapt as it has in the past. Has Australia reached the end of the Great Economic Ponzi Scheme?

The illusion of growth

For years, GDP growth and low unemployment were treated as proof of sound economic management. On paper, Australia still ticks those boxes.

But GDP growth driven primarily by population expansion is not the same as productivity growth. When output rises simply because more people are added, living standards do not necessarily improve.

Per capita outcomes tell a different story.

Australia has been absorbing one of the highest net migration rates in the OECD. Historically, the supply side of the economy expanded to accommodate this growth. Today, it appears constrained:

• Infrastructure projects are competing with residential construction for labour and materials
• Housing supply is lagging population growth
• Rental vacancies sit near record lows
• Construction insolvencies are elevated

We are at or near full employment, yet productivity growth has stalled. Since around 2016, labour productivity growth has averaged close to zero, in some years, negative. That means we are adding hours worked without meaningfully increasing output per hour.

In simple terms, we are running faster but not making any further progress.

Structural pressures converging, before the Middle East war

The Australian economy now faces simultaneous, converging structural challenges that have been brewing for over a decade, and both sides of politics are equally to blame. 

The uncertainties of war in the Middle East will conveniently provide politicians with an excuse to lay blame for higher inflation, higher interest rates, higher living costs, and energy costs when these issues become more critical and apparent in the coming months.

Record public debt, spending, and inflation are all linked

Australians will wake to a $1 trillion government debt this year. Government spending represents 26% of GDP, the highest it has ever been. Spending has grown faster than tax revenue for over 20 years. The difference has been fuelled by debt.

There has been no better economist in our history than the late Milton Friedman, whose life's work was to understand better inflation, famous for saying, “The only way to finance government spending without taxes is by creating money, and that produces inflation.”

We need to appreciate that the RBA is independent, and its instrument to control inflation is interest rates; however, the other equation in our economy is fiscal spending.

It is exceptionally rare for an ex-RBA governor to comment that “Government handouts have contributed to higher interest rates,” call out the government, and provide such open criticism of government spending, resulting in higher interest rates, weaker wage growth, and slower economic growth.

So where is the “Ponzi”?

The uncomfortable question is whether Australia’s economic model has relied too heavily on three reinforcing forces:

1. Rising property values
2. Expanding credit
3. Population growth

When asset prices rise, households feel wealthier. They borrow more. Banks lend more. Governments collect more stamp duty and GST. Migration adds demand. GDP grows. Confidence builds.

But if productivity stalls, and debt continues to expand faster than real income, the system becomes increasingly dependent on continual growth in asset values and population inflows to sustain itself.

That dynamic begins to resemble something fragile.

Not a fraud — but a structure that requires constant expansion to remain stable.

Housing supply vs demand

The National Housing Accord sets a target of 1.2 million homes over five years (240,000 per year).

However, ABS Building Activity data show annual dwelling completions currently below that level, at just under 184,000. With building approvals falling further, the issue will only be exacerbated over the longer term.

Meanwhile:

• Rental vacancy rates are near record lows 
• Construction insolvencies have risen sharply 

Record infrastructure spending (federal and state) has exceeded $120 billion in pipeline projects nationally, competing directly with residential construction for skilled labour and materials, which is contributing to housing construction inflation of well over 5% pa.

But it is a model that requires perpetual expansion to maintain stability.

The latest CPI data shows housing as one of the largest contributors to inflation. In January, housing costs rose approximately 6.8% year-on-year, driven by rents, construction costs and utilities.

The private sector is responsible for generating new property supply, comprising an army of mum-and-dad property investors and developers, as well as institutional-sized developers. With construction costs being so high, red tape, and high land values, the numbers at present do not stack up. 

The result is that the growth corridor areas where supply is supposed to be delivered via decades of infrastructure and planning are not feasible, with more projects stalled until it becomes profitable, the only mechanism available being higher property prices.

CGT discounts and negative gearing

We recently had a 3-day Senate enquiry, listening to economists, on the relationship between high property prices, affordability, and the stability of our housing market.

There is no doubt that tax incentives have contributed to property values over the past two decades, drawing additional demand from property investors; however, the flip side is that without these incentives, fewer properties would have been delivered. Sometimes we need to accept that we cannot fix the problem retrospectively.

The government is seeking to raise further taxes to plug the hole in our budget. My concern is that removing incentives for private sector development will exacerbate the housing crisis further. As an unintended consequence, property prices may go down in the very short term, but then artificially inflate as the supply shortage deepens.

In this scenario, we can expect higher inflation, particularly as rental property supply dwindles and our growth relies on sustaining high levels of migration. Not to mention, it undermines people’s aspirations to work hard and build wealth, since property has long been a tangible, straightforward way to build wealth.

The optics of Robin Hood politics look great, but economically, we all end up suffering if we exacerbate the housing crisis.

Keep in mind that 71% of property investors have one property; these are not ultra-rich people, but regular, hardworking Australians who managed to save enough money to buy an investment property.

It seems reasonable to do the opposite

From an economic perspective, it seems reasonable to provide incentives to increase the supply of property and attract much-needed capital investment.

As we enter a new economic phase, Australia’s future prosperity will not come from rising property prices or population growth alone. It will be both economically and politically suicidal to drastically interfere with the property market. Therefore, I believe property will remain stable, with private credit given a strong foundation to remain a solid and reliable asset class, as long as the manager maintains a high level of discipline.

Our prosperity will come from producing more value per person, not simply adding more people or more debt to the system.

The question is not whether the lucky country can remain prosperous.

The real question is whether Australia can transition from a model built on expansion to one built on productivity, innovation, and sustainable growth.