Interest rates on an all-night bender while property gets depressed
API Magazine Editor Craig Francis draws upon an old-school journalist's bar-room view of the world to assess what the current interest rate cycle and economic situation means for property prices.
Property seems locked into an unhealthy relationship with interest rates.
The higher the latter soars, the more depressed the former becomes.
It wasn’t long ago that property was the one out dancing while interest rates sat on the floor cross-legged watching the world go by.
Interest rates clearly found their mojo and the question now on property’s lips is, when will interest rates finally settle down?
The answer seems to be that it’s midnight and interest rates still want to party until dawn, regardless of how much of a downer that puts on property.
Inflation is the that evil friend everyone’s had that won’t let interest rates go to bed.
Any hopes that interest rates may be nearing their peak went out the window with Tuesday’s Reserve Bank (RBA) decision to raise interest rates by a double-sized 0.5 per cent for the fourth time in a row, in addition to the smaller rate rise that started it all in May.
So far, inflation has paid scant regard to the RBA despite anyone with an $800,000 mortgage having $1,000 less to spend each month.
But many sceptics of the RBA’s approach argue it might be on an interest rates bender without thinking about the possible hangover, in the form of loan delinquencies, forced property sales and heavily stressed households.
CBA’s head of Australian economics, Gareth Aird, released research showing that it takes an average of two-to-three months for an increase in the RBA’s official cash rate to be felt by mortgage holders.
So, has the RBA had time to assess the impact of it go-hard attitude?
Mr Aird went along with the party analogy.
“The RBA’s aggressive tightening is “like having five shots of vodka in an hour and saying, everything is OK but you know that it will soon have a big effect,” he said.
“I firmly believe the RBA has lifted rates too far, too quickly, and should pause to see what the effect is, otherwise, it risks driving household consumption off a cliff, crashing house prices, and driving Australia into an unnecessary recession.
“I also believe the RBA will be forced to cut rates mid next year (as) by then, the delayed impact of rate hikes will have arrived with house prices having fallen sharply, the economy stalling, and inflation declining,” he told media.
But RBA Governor Philip Lowe is having none of that and is lining the shots up on the bar.
“Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead”.
“The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path.”
Rest of the world
Inflation is not a uniquely Australian issue.
Around the world, advanced economies are wrestling with inflation that has been stirred by easy credit, money-printing machines working through the night (or quantitative easing, as the economists prefer to call that sort of all-nighter), and pandemic stimulus packages that pump-primed the economies as business ground to a lockdown halt.
Traditionally, inflation in Australia has been the result of rising wages, and a blunt instrument like interest rates has been able to constrain runaway prices caused by cashed up workers spending freely.
But the current economic picture is markedly different.
With wages only now showing signs of emerging from hibernation and nowhere near matching inflation that sits at 6.1 per cent, it’s external factors that are driving up prices.
Philip Lowe (almost) admitted as much in his Monetary Policy Decision on Tuesday.
“The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments,” he noted.
“The outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in most countries, Russia’s invasion of Ukraine, and the Covid containment measures and other policy challenges in China.”
But he went some way to countering the critics who said interest rates will do little to alleviate inflation that has nothing to do with how much money households have left after paying for expensive fuel and groceries and swollen mortgage repayments.
“Global factors explain much of the increase in inflation ...” – drumroll – “... but domestic factors are also playing a role.”
“There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.”
He clearly believes in his primary weapon and isn't afraid to use it.
Mr Lowe also had a salutary message for anyone who thought a little wage increase might alleviate some of the financial pain.
“Wages growth has picked up from the low rates of recent years and there are some pockets where labour costs are increasing briskly.
“Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.”
By “pay close attention” he means rates are going up to cover any wage hikes or predatory pricing by business.
In another sign that property prices won’t be getting any favours from workers earning more money, households are not the ones benefiting from an improving economy.
Federal Government Treasurer Jim Chalmers said it out loud.
“We saw company profits reach record highs as a percentage of GDP, but real household disposal incomes fell for the third consecutive quarter by 0.5 per cent in the June quarter that meant real incomes fell again,” he said
“While there are some welcome and encouraging science that wages are starting to pick up, there is no significant measure of wages growth that tells us anything other than real wages are still falling given the high and rising inflation that we confront in our economy,” he said.
Driving home that point, data revealed almost a third of national income went to profits (32.9 per cent) while a record low share went to wages (48.5 per cent).
Where’s the party?
So, what does it all mean for property prices that were partying like it was 1999 in 2019 (and thereabouts – it was a big party)?
It’s difficult to mount a strong case that they are going to arrest their slide before interest rates curtail rampant inflation, perhaps late in 2023 – but where they bottom out in that time is unclear.
Economists say the current downturn could be the steepest and longest since the 1990s. Others point out that national property price booms last around three times longer than the downturns, so could soon bounce like partygoers in a mosh pit.
The punters for now though are a little less energetic.
They're sitting home and paying off their credit cards (debt is down by 1.8 per cent according to data released Wednesday, 7 September), refinancing their scary loans in record numbers (PEXA’s Refinance Index up by 3.7 per cent for the month to 4 September), and avoiding risky loans (APRA’s Quarterly ADI Property Exposure report reveals risky loans have come down from the record levels of December 2021).
So, first-home buyers are watching intently and saving for that elusive deposit in the face of rising rents and living pressures, buyers who were late to the party watch in dread as they creep towards negative equity and investors reassess their buy and sell strategies.
But for now, nobody knows when the invitations to the next property soiree are being sent out. Keep an eye on the letterbox.