RBA may pause in April
This week we will catch up on the latest real estate figures, review the latest quarterly economic consumption data and compare the effect of interest rate rises between 1990 and 2023.
Demand for Perth property remains strong, with REIWA reporting 1,123 sales two weeks ago and 871 sales last week. The 1,123 weekly sales were the highest for nearly 12 months (before interest rates increased back in May). Furthermore, despite listings being at all-time lows, leaving buyers with limited choices, the demand has remained stable. The supply of dwellings for sale remained consistent over the past two weeks, with Perth recording 7,103 and 7,160 dwellings for sale. However, unlike weekly sales, the supply of listings has significantly dropped. The low levels of listings would indicate that higher interest rates are not forcing mortgagors to market or default, thereby increasing supply. The following two charts show the stability of weekly sales and the decline in listings over the past 12 months, even though we have seen ten successive interest rate rises.
When looking at the Perth Weekly Sales, Perth Weekly Listings charts above and the Perth Property Price Growth chart below collectively, 2023 has been remarkably consistent and stable. The consistent level of demand and the low levels of supply have contributed to Perth’s property price stability. Prices increased slightly over the past two weeks, with Perth recording a 0.01% rise. The Perth Property Price Growth chart shows a -0.36% price growth since the beginning of the year.
While dwelling prices have remained stable, rents have been increasing rapidly. According to the Real Estate Institute of WA (REIWA), from the six months between October 2022 and February 2023, median rents have increased by 10%, jumping from $500 to $550 per week. This increase correlates with the drop in rental listings in the second half of last year, as illustrated in the following chart.
While rental listings have increased marginally over the past few weeks, they are considerably lower than 12 months ago. The increase in migration, particularly overseas migration, will have significantly contributed to the decline due to migrants’ preference to rent when first arriving in a new location. Hopefully, the Australian Bureau of Statistics (ABS) should have released the latest population figures by next week.
Part of the reason for the consistency of weekly sales is the rental market vacancy rate of 0.5%. The vacancy rate has led to limited tenants’ options and rapidly increasing rents, incentivising homebuying despite reduced borrowing capacity from higher interest rates.
Last week, we reported that the Reserve Bank of Australia (RBA) believes a pause in interest rate rises may be coming in the next couple of months, citing the recent fall in inflation and the decline in consumption. The consumption decline is relevant because the increased mortgage repayments from higher interest rates affect household spending. If consumption drops, businesses and firms reduce production, which generally involves decreasing employment. As the unemployment rate rises, workers compete harder for jobs, decreasing the cost of labour decreasing production costs. The decreases in production costs are passed onto consumers through lower prices; hence we have lower inflation. This is why we use our Inflation and Unemployment chart to indicate the RBA’s next move. We will update the chart next week.
Consumption is the major component of Australia’s Gross Domestic Product (GDP), contributing approximately 60%. Household consumption grew by 0.3% in the three months to December 2022. There are two household consumption types: essential and discretionary (non-essential). The RBA will be pleased to see that non-essential consumption growth has fallen from 1.9% in the September 2022 quarter to just 0.4% in the December quarter, as illustrated in the following chart. If the February monthly inflation growth declines again and unemployment rises, it will incentivise the RBA to leave rates on hold.
To finish this week, we will compare the impacts of interest rate rises of 1989/90 and 2022/23 for a homebuyer entering the market and purchasing a median-priced dwelling with a 20% deposit.
In early 1990, interest rates hit 17%, and the average household weekly wage was $566; in March 2023, it was 6.0% and $1,769. The average price of an Australian dwelling in 1990 was $184,600; in 2023, it was $702,136. If we use an 80% of the dwelling value mortgage (allowing for a 20% deposit), then the repayments on a 30-year mortgage would be $486 per week in 1990 and $777 in 2023. Weekly repayments in 1990 were 85% of weekly income, while in 2023, it was 44%.