The firestorm sparked by Tim Gurner speaks to growing tensions about inequality. Investors are starting to take notice.
It’s almost 16,000 kilometres from Sydney’s Hilton Hotel, site of The Australian Financial Review Property Summit this week, to the Flats Fix taqueria in New York’s Union Square, where firebrand Democratic politician Alexandria Ocasio-Cortez used to work behind the bar.
But when you go viral on social media, distance means nothing.
A staggering 3.6 million users of X (formerly known as Twitter) have viewed Ocasio-Cortez’s post that featured a video of property developer Tim Gurner’s appearance at the Summit, on top of a total of more than 25 million that saw the original post.
“Unemployment has to jump 40 to 50 per cent in my view. We need to see pain in the economy,” Gurner told the summit. “We need to remind people that they work for the employer, not the other way around.”
Gurner later apologised for his comments. But they were incendiary, not so much for what he said – the Reserve Bank, after all, has said it would like to see the labour market deteriorate to help contain inflationary pressures – but because they were so callously delivered, by an entrepreneur worth more than $600 million.
While Gurner’s comments obviously go to the eternal power struggle between capital and labour, the property Summit highlighted several other tensions.
In commercial property, debt holders (lenders) are enjoying big returns while equity holders (borrowers) struggle with falling valuations. In the residential market, older savers are being pitted against younger mortgagees. Skirmishes are also being fought between landlords and tenants; in housing, the former are all-powerful, but in office property, it’s tenants who have the whip hand.
These power struggles reflect the new realities of a post-COVID world, including shifts in the way we work (less in the office, more at home) and live (smaller households, larger homes).
But the biggest shift is the sharp rise in interest rates over the past 18 months, which brought to an end a three-decade period where rates steadily moved lower.
We shouldn’t be surprised that the property sector’s adjustment to this new rates reality is far from done. As Gurner himself said, he’s gone from 50 competitors six years ago to just four; that suggests no small degree of pain in a sector that’s had a golden run for the past decade.
Of course, the main reason Gurner’s comments went around the world was because they spoke to the oldest power struggle of them all; between rich and poor.
As surging inflation adds to cost of living pressures, and sharply higher interest rates deliver pain for borrowers and fat returns for savers, the gap between Australia’s haves and have-nots has come into sharper focus.
On the day before Gurner took the stage, Greens leader Adam Bandt and housing spokesman Max Chandler-Mather celebrated extracting another $1 billion from the Albanese government for affordable housing, and promised to continue their campaign for rent controls. This week there was also a revival of the debate about inheritance taxes in Australia following reporting on a speech given by incoming Productivity Commissioner Danielle Wood.
Even Commonwealth Bank has helped stoke the debate over generational inequality, using its annual profit announcement last month to highlight the disparities between how older savers and younger borrowers are coping with higher rates. Bank chiefs are now frequently calling out the deep problems with Australia’s housing market, which has become unaffordable for many households.
It is tempting to write off debates about inequality as well-trodden territory. But just hours after Gurner lit up the Hilton’s ballroom, a billionaire hedge fund manager was delivering an unusual message: soak the rich.
Jeremy Grantham, the co-founder of Boston-based fund GMO, is well known for his bearish predictions of financial bubbles. But it was notable that he used his virtual appearance at the Live Wire Live event in Sydney to suggest that governments needed to reduce inequality.
“If you want to have a healthy society, it is easy to do – all you have to do is move income equality in the right direction. Now, you can do that through taxes, you can do it by having the unions become a little stronger, you can do it many ways,” Grantham said. “And we need to – the pendulum has swung a long, long way.”
Grantham is not the only investor thinking about this. Head of Australian equities at Schroders, Martin Conlon, who also appeared at the Live Wire event, believes threats to social stability need to be seen as market risks.
“Any economy has to rest on a relatively even spread of wealth and we’ve really pushed that to extremes.”
There are two risks here. First, Conlon pointed out that most companies rely on that broadly even economy to keep growing. But secondly, there are risks to investors in the way that governments respond to inequality.
The rent controls and inheritance taxes put on the table this week are clearly part of this. But Conlon sees companies facing more direct attacks. The antitrust case that started in Washington this week against search engine giant Google is also a good example, Conlon says.
But it is also notable that super profit taxes on energy firms and banks have been pushed by both conservative and left-leaning parties around the world; the potential for hard right and hard left soak-the-rich policies to converge in a populist free-for-all is a risk investors should not ignore.
“I think it’s far more likely that we are going to see a lot of change in that area where profits need to be taken from those over earning companies … all of those things to me would suggest that a lot of policies are going to be about chopping down some of those tall poppies,” Conlon says.
“The expectation with investing in super profitable companies that they’ll go onward and upwards will end up being wrong.”
Tax changes that promote the relocation of wealth might help defray the costs of attacking inequality, but as market strategists such as Bank of America’s Michael Hartnett have argued, it may well force bond yields higher, given already indebted governments would need to keep borrowing to afford social programs.
More borrowing would occur against the backdrop of a slowing global economy, and central banks reversing their pre-pandemic bond buying programs (known as quantitative easing). T Rowe Price’s head of global fixed income, Arif Husain, expects higher yields could cause a very hard landing if governments are actually unable to rescue households because their fiscal firepower is exhausted. “I frankly believe a soft landing is an almost impossible outcome,” he says.
A hard landing would certainly deliver the spike in unemployment that Tim Gurner is after – but whether there’s much demand for his apartment projects is another question entirely.
Perhaps Gurner’s comments spoke to a hope that the world will go back to the way it was before the pandemic, when rates were low, inflation was a distant worry and labour markets were better balanced.
Indeed, this was a sentiment expressed by many of those at the Summit, including Darren Steinberg, the chief executive of office property giant Dexus, who believes the sector is 12 months into a two-year grind.
Maybe. But the big challenges facing the sector that were discussed at the Summit – the work-from-home debate, how to improve housing affordability, where commercial property valuations should settle – remain a long way from being settled.
This is not just a property sector problem, of course. The events of the past three years have compounded deep issues with the global economy, from inequality to indebtedness and climate change. There are no easy solutions here, and while investors, politicians, regulators and households are hoping the world can muddle through and stick a soft landing, there are no guarantees.
Great adjustments often bring great volatility, and sometimes great pain. Just ask Gurner.
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