RBA minutes suggest more rate rises
This week Perth property prices recorded a relatively small decline after two previous weeks of positive growth. The 0.18% price fall has resulted in Perth prices increasing by 3.57% for the year, and although price growth has fallen from its peak of 4.23% in early August, the trend illustrated in the chart below suggests price growth has flattened more than it has declined as most other capital cities are experiencing.
The low supply and consistent demand levels for Perth property continue to support prices. This week’s sales, listings for sale and listings for rent are all consistent with the previous week. Perth recorded 888 transactions, 8,250 properties for sale, and 1,763 dwellings for rent. We have reported the undersupply of dwellings listed for sale and rent for an extended period, but it is also worthwhile to note the consistency of demand over the past three years. The following chart reveals that after mid-2020, Perth’s weekly sales have been remarkedly consistent, and this consistency has continued in 2022 despite the increase in interest rates.
The Reserve Bank of Australia (RBA) recently released their latest board meeting minutes. After cutting through most of the jargon, the RBA’s message was clear: inflation is too high and driven by not only supply chain issues but strong domestic demand due to the very healthy employment figures and tight labour market. As a side note, the minutes mentioned that the low rental vacancy rate is also impacting inflation as increased rents feed into the Consumer Price Index (CPI).
Remembering that the RBA has an inflation target range of 2-3%, the RBA has forecast inflation to be around 7.75% for 2022, 4% for 2023 and 3% for 2024. The RBA left no doubt in the minutes that interest rates will continue to increase until we start to see a loosening In the labour market and a reduction in domestic demand along with a return to typical supply chains and energy prices.
The current rate of increase to the cash rate is comparable to the previous fastest rate of increase in 1994 demonstrated in the chart below. However, if the RBA’s inflation forecasts are accurate, the cash rate will undoubtedly increase further to be the fastest and most significant increase since the RBA used monetary policy (cash rate) to target inflation in the early 1990s.
The decline in property prices around the country is continuing as interest rates rise. The recent rate increases have had the most significant impact on Sydney, down nearly 9.5%, Melbourne 6% and Brisbane nearly 5%, since rates started rising, as indicated in the chart below. While Perth and Adelaide have been flat, if the RBA forecast for inflation over the next two years is correct and they adjust interest rates accordingly, we should expect some falls in Perth. The falls in Perth would be greater if not for the increases in migration, an undersupply of dwellings and Perth’s relative affordability. However, they will be less than the five-capital city average, already down 6.25%.