Interest rates increase 0.25%
This week’s big (unsurprising) news was the Reserve Bank of Australia’s (RBA) decision to raise the cash rate again by 0.25% to 3.35%. This increase makes the current cycle of nine increases the most severe since monetary policy brought inflation into the RBA’s 2-3% target range in 1991. The following chart reveals just how historically sharp the cycle has been.
There is a time lag between increasing interest rates and reducing inflation, and many economists are concerned that the RBA is not allowing enough time for the rate rises to work their way through the economy. There are signs that the increased rates might be working; for example, according to the Australian Bureau of Statistics (ABS), retail spending declined in December by 3.9%. However, as the following chart shows, the fall is not relatively excessive and will not contribute meaningfully to bringing down inflation. Furthermore, unemployment is not increasing either, which is another sign that the increased cash rate is not slowing down the economy and reducing inflation.
So, unfortunately, as we alluded to last week using our Inflation and Unemployment chart, interest rates will keep on being adjusted upwards, and the RBA confirmed this on Tuesday;
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”
The markets agree that further interest rates are coming our way. The next chart shows the markets are predicting rates to keep rising until August this year and for the cash rate to be above the current levels in July next year.
While the increased interest rates have been hitting property prices over east hard for eight months now with no real signs of easing, as illustrated in the following chart, we expect their markets to worsen over the next 12 months.
Perth prices are now witnessing a minimal decline starting this year after holding firm in the second half of last year and increasing marginally in December. However, to put this into perspective, it is a minor 0.5% decline to start the year, and if we compare to Sydney and Melbourne, which have dropped 1.3%, Brisbane 1.4%, and even Adelaide, which performed so well last year, dropped 0.8%, we can see Perth is performing relatively well. The following chart uses CoreLogic’s daily home value index and illustrates the trend over the previous two months.
The concern is that despite WA’s strong employment, limited supply, affordable housing and healthy migration, Perth’s downward trend might gain momentum. There are two primary reasons for this concern. Firstly, many fixed-interest-rate loans will convert to variable rates this year, leading to an increased number of mortgagees being unable to service their loans, increasing supply. Secondly, borrowing constraints will tighten and reduce demand as interest rates keep rising. However, the lack of rental options will leave many homebuyers instead buying in a more affordable suburb than entering the rental market, which should see prices hold or even increase in those suburbs.