Dan Denning made this comment from The Daily Reconing.The retail...

Dan Denning made this comment from The Daily Reconing.

The retail sector is more complicated. Job losses in Aussie retail are also related to the strong dollar. It's cheaper to buy goods online from America. But as Greg has been asking, why are retail prices so high in Australia? The answer is also related to credit growth.

Retail prices are high in Australia because property prices are high in Australia. The credit boom that made property investors rich has also led to much higher rents for small and medium-sized retailers. A retailer has to charge high prices just to pay the rent. Thus, Australia's property boom is indirectly responsible for the high prices you pay for books, music, clothes, food, and gadgets.

CBRE, a global commercial real estate firm, reckons that rents on Chapel Street here in Melbourne increased by 6.1% in the last half of 2011. It will cost you from $600 to $1000 per square metre to rent a shop along one of Melbourne's trendiest shopping districts. We assume that's per year.

Now we don't know much about running a retail business, but we can imagine that the only way to make a buck when your rents are so high is to charge high prices. This is probably why the shops on Chapel Street are increasingly filled with expensive clothes that only those with bad taste would buy.

High retail rental prices also explain why only large, boutique international brands can survive on these premier city shopping strips. And even these companies are not surviving by charging high prices. Their stores are big billboards for the brand, and probably don't have the obligation to turn a profit for the corporate Mother Ship. It's much easier to stay in business when making a profit isn't required.

No one ever connects high retail prices in Australia with the property boom. But the two are joined at the hip. And as night follows day, unemployment will rise across the economy as high rents eat into business profit margins. Higher unemployment is not going to be good news for the banks and their big mortgage books, either.

Regards,

Dan Denning
for The Daily Reckoning Australia