Steady rates and easing inflation should provide boost to consumer sentiment

Commentary by CoreLogic Research Director, Tim Lawless

THE RBA’s decision to hold the cash rate at 4.1% will be considered a welcome reprieve for many, but it doesn’t necessarily signal an end to the rate hiking cycle. Considering the RBA is working with a mixed bag of key data sets that guide their decision making, another rate hike down the track remains a possibility.

On one hand, we have a lower than expected inflation outcome for the June quarter supporting the hold decision, with headline inflation lower than RBA forecasts at 0.8%, the lowest quarterly change since Q3 2021. Retail sales posted a broad based decline in June, down 0.8%, and economic conditions weakened with GDP growth of just 0.2% in Q1. Regarding the housing market, the RBA previously expressed concerns about asset value growth, but those worries may have diminished as we’ve seen price growth decelerate in the past two months.

On the flipside, we have persistently tight labour market conditions, with unemployment at just 3.5% alongside strong jobs growth, low productivity growth, and wages that are rising at well above the decade average. Although inflation is coming down, services inflation is ‘sticky’, with annual growth tracking at the highest annual level of growth since 2001. Although rates remained on hold this month, it’s not to say there won’t be another hike down the track. We will see more detail on the RBA’s economic perspectives when the quarterly Statement on Monetary Policy is published on Friday, but considering the aforementioned opposing trends, another rate hike can’t be dismissed.

Highlighting the uncertainty ahead, some economists have already called a peak in the rate hiking cycle, others believe there will be one more hike in the coming months, while others are pricing in two more rate hikes on the basis of tight labour market conditions potentially feeding wages growth and keeping inflation higher for longer. The range of cash rate forecasts reflects the sheer uncertainty in the economy.

The RBA itself has once again left the door open for rate hikes, noting some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but this depends on the trajectory of inflation and labour market outcomes.

For the housing sector, the decision to hold interest rates over the past two months is positive news. A growing expectation that interest rates have peaked, or are near a peak, should help to lift consumer sentiment from the recession-like lows that have persisted over the past nine months.

Consumer confidence and housing activity go hand in hand. Generally, when sentiment is low, home sales are low and vice versa; so, any lift in sentiment is likely to be accompanied by a rise in active buyers and sellers.

ABS data shows that the Consumer Price Index (CPI) rose 0.8% in the June quarter of 2023 and 6.0% over the twelve months.

“This is down on the annual figure for the December quarter of 2022 and March 2023 of 7.8% and 7.0 respectively, and is the lowest annual increase since the March quarter of 2022. In addition, the annual figure for the monthly CPI was down to 5.5% and confirms a downward trend in the rate of increase”, said REIA President, Hayden Groves.

“The most significant quarterly price rises were rents, up 2.5%, international holiday travel and accommodation, up 6.2%, other financial services, up 2.5% and new dwelling purchase by owneroccupiers, up 1.0%.

“Rents rose 6.7 per cent annually - the largest annual rise since 2009, reflecting low supply across the country.

“The important analytical series, trimmed mean and weighted mean, which exclude large price rises and falls, were 0.9% for the quarter and 5.9% for the year and 1.0% for the quarter and buyers,” he said.

5.5%, respectively. These are the lowest monthly increases since late 2021.

“With the CPI having peaked late last year as was forecast by the RBA and with the current level below RBA’s May forecast of 6.3% for the year to June it is time not only to continue to keep a pause on further interest rate rises but to rethink the economic orthodoxy on the level of unemployment required for inflation to be neither rising nor falling – the nonaccelerating inflation rate of unemployment (NAIRU),” concluded Mr Groves.

CORELOGIC’S national Home Value Index (HVI) rose 0.7% in July marking a fifth consecutive month of housing value recovery. Since finding a floor in February, the national HVI is up 4.1%, following a - 9.1% decline from record highs in April 2022.

REIA President Hayden Groves has today (27 July 2023) called on family investors to have their say into the inquiry into worsening rental affordability.

Mr Groves said the continued politicking around rental affordability is causing further confusion for Australians and adversely impacting housing supply.

“Adam Bandt is out there campaigning for rent freezes and rent controls, whilst busily attacking family investors when they are, in fact, the main suppliers of rental homes across Australia.

“Meanwhile, Victorian Premier Daniel Andrew’s has joined in with recent speculation about rent controls and rent freezes, with 36% of new property listings in Victoria are now family investors selling rental homes.

“At a time when cost of living, inflation and interest rates are challenging for all, family investors are rightly frightened by talk of rent controls and rent freezes and we see that bearing out in the listings and sales data.

“The biggest loser out of that is, of course, renters as fewer rental properties will be available.”

Mr Groves said that everyday Australians needed to tell decision makers in Canberra their story about supplying rental properties as well as renters themselves.

“Now is the chance for family investors; and tenants to get involved and give their ideas on how we can improve the rental system and increase supply, not further reduce it.” video. Make a submission

FAST FACTS:

There are 2.2 million family investors supplying rentals Australia wide. 30% of households rent their home with 27% renting from a private landlord.

Only 3% rent from a government housing authority – half of what it was two decades ago.

Rental affordability has been largely stable in Australia and was at its worst during the Global Financial Crisis.

Rental availability has been severely challenged since the onset of COVID-19 will all major cities reporting vacancy rates of <3%.

For any further information please contact Olwyn Conrau, REIA Media Consultant 0413 600 350 olwyn.conrau@reia.com.au

Nationally, home values remain -5.3% below the April 2022 peak, with only Perth, Adelaide and Regional South Australia recording a new cyclical high in dwelling values through July.

While housing values are continuing to record a broad based rise, the rate of growth has lost momentum over the past two months, slowing from 1.2% in May.

CoreLogic Research Director, Tim Lawless, noted the most substantial reduction in growth has occurred in Sydney.

“After leading the upswing, the monthly pace of growth in Sydney housing values has halved from a recent high of 1.8% in May to 0.9% in July. Sydney has also seen a significant rise in the number of fresh listings added to the market, 9.9% higher than the same time last year and 18.0% above the previous five-year average. An increased flow of new listings provides more choice and may be working to reduce some of the urgency felt among prospective

Brisbane and Adelaide saw the monthly pace of growth accelerate in July, leading the pace of gains across the capitals with housing values up 1.4% across both cities. Although the trend in new listings has risen in these cities, Mr Lawless said the number remains well below levels from a year ago and the previous five-year average.

Canberra was the only capital city to record a decline in values in July, down -0.1%, while Hobart values were unchanged.

The slowdown in value growth has mostly been driven by an easing in gains across the upper quartile of the market. While growth in the upper quartile of the combined capitals index diminished from 1.8% in May to 0.7% in July, the lower quartile (1.0%) and broad middle of the market (0.9%) remained resilient in July, following a smaller, but more consistent rate of growth over previous months.

“Some resilience in growth across the middle and more affordable end of the market aligns with housing finance data which has shown a stronger bounce back in the value of lending to first home buyers and investors over recent months,” Mr Lawless said.

“These segments tend to be more active across the middle to lower end of the pricing range where competition to purchase a home may be more intense. “Premium housing markets tend to lead the cycles, so the slowdown in the pace of growth could be a sign of a broader easing in the pace of growth over the coming months.”

Regional values continued to lag behind the capitals with the combined regionals index rising 0.2% in July compared with a 0.8% increase across the combined capitals index. Every rest-of-state region recorded a smaller change in dwelling values through July relative to the capital city, reflecting milder housing demand across regional Australia as demographic patterns normalise.

The largest rise in regional housing values over the three months ending July (based on SA4 regions) has been the Gold Coast (4.0%), the South East region of Tasmania (3.1%), and the Newcastle/ Lake Macquarie region (3.0%).

On the flipside, the weakest conditions over the rolling quarter were confined to areas of Regional Victoria, with Bendigo (-3.7%) recording the largest decline, followed by Shepparton (-2.3%) and the Warrnambool/South West region (-2.3%).