We caught up with an old friend from the United States last night. He was last in Australia in 2001. He couldn’t believe how expensive things in Australia had become. Even taking the massive swing in exchange rates into account, on a one-for-one basis the price difference is huge.
We were drinking beer, so that’s where the comparisons started. A six-pack of decent beer in Australia costs anywhere from $15-17 dollars. In the States – where you can buy beer from just about any convenience store without a 1000 per cent mark-up – you’re looking at a price of US$9-10.
To borrow an American saying – you do the math. (For you lazy types, beer’s up to 70 per cent more expensive here in the lucky country.)
He’d been to Perth, where the price of just about everything blew him away. The east coast was merely ‘outrageous’.
The strong Australian dollar is only part of the problem for the tourism industry (and many others). It’s Australia’s vastly inflated cost structure that is the real issue. Australia is simply an expensive place to visit and do business.
The only big investments happening at the moment are those designed to exploit our vast mineral wealth. And a good proportion of that investment is due to the false price signal sent out by China’s massive credit boom – which is now slowly subsiding.
A big contributor to Australia’s cost structure is housing. The more than a decade-long housing boom provided a ‘wealth’ boost for many. But the creation of this wealth depends on a constant and growing flow of credit into the sector to maintain high prices.
Each new marginal borrower and buyer of property has a much higher household ‘cost structure’ than someone who bought 10 years ago. To pay for ridiculously priced property, people demand higher wages. To pay for higher wages, businesses increase their prices.
The result? A higher cost of living. While not evident in the massaged inflation numbers released by the statisticians, it hits a returning tourist in the head with the force of a baseball bat.
So where to from here for Australia? Satyajit Das attempts to answer that question in his follow-up analysis from yesterday. Das’s essay appears below. If you want to join Das, the Port Phillip Publishing editors and others at our inaugural investment conference in March, do so now because we’ve just opened it up to the public.
for The Daily Reckoning Australia