Episode Details

Australia's economy and our property markets don't operate in isolation, and Inflation is occurring all around the world, so that's why each month I take time out to have a look at the big picture, the macroeconomic factors affecting not just Australia's economy, but the world economy, to help us understand what's ahead for us, and I record these Big Picture Podcasts with Pete Wargent once a month.

Will inflation send interest rates sky-high?

Australia's inflation rate has predictably increased sharply again over the March quarter to the highest level reported since the introduction of the GST impacted prices back in 2000.

So, what does this mean for interest rates, property markets, and their economy in general?

Inflation

We really must start the discussion today with the high inflation number - headline CPI increased 2.1% over the last quarter giving us an annual rise of 5.1%.

This came in to be higher than what most market commentators expected.

• The primary driver of the inflation outbreak was related to increases in the price of fuel and housebuilding costs.
• Supply constraints are struggling to match demand from Covid stimulus policies
• The Ukraine war raised the price of oil to record levels in the March quarter
• Is it time for a rate rise?
  • Interest rates will start to go up because of the inflation rise.
• It's not surprising that some commentators are looking back at the 1970s and 1980s when the Reserve Bank used interest rates to stop rising inflation which eventually led to a recession in the early 1980s and then again in the early 1990s.
  • Interest rate hikes should be considered and gradual, the Reserve Bank has learned from the past.
  • Interest rates will need to rise to keep Australia's dollar stable
  • Inflation is a feature, not a bug. It's there by design and it's useful for those who own assets

This is what will reduce the fall in house prices

While it is well known that falling interest rates stimulate our housing market and push property prices up, and in time cash rate hikes have a negative impact on housing prices, that does not mean that cash rate hikes always cause a fall in housing prices.

• Strong employment and wage growth outlook will cushion the fall in house prices.
• Indebted households have very high savings levels which will limit the possibility of mortgage stress.
• Stronger regulation has reduced financial stability risk.
• A small percentage point increase in rates will have a relatively stronger impact on interest payments than when the cash rate started higher.
• Residential property borrowers have squirreled away a record $232 billion in offset accounts in the past 12 months

The property boom is cooling down

• House price growth across the combined capital cities is 10 times slower this quarter compared to last, suggesting the property boom is on the cool down.
• Despite a slowing market, combined capital median house prices are at a new record high of $1.07 million.
• Units across the combined capital cities declined (1%) for the first time since June 2020, recording a median price of $616,942.
• Regional Australia is outperforming the cities for house price growth as the regional median house price increased by 3.1% over the last quarter and 20.8% annually.
• House prices in Melbourne and Canberra fell 0.7% and 0.9% from last quarter's record high. This is the first quarterly fall since the June 2020 quarter for Melbourne and the March 2020 quarter for Canberra.
• Perth has achieved a new record high house price for the first time since 2014.
• Brisbane and Adelaide are the only cities to have record-high unit prices, while Sydney, Melbourne, and Hobart units fall from the record high achieved in the previous quarter. This