What will the RBA decide next week?
All eyes have been on the quarterly inflation numbers, which came in today — pretty much in line with expectations. Inflation grew 3.8% for the June quarter. Not good, but not completely disastrous either. We had a pretty bad inflation number in May so the market was expecting the worst. Things settled down a little in June.
If the RBA wants to increase rates next week, they can. But I doubt they will, because while inflation is taking longer to come back, the rest of the economy is already sliding. Retail sales fell again in June, now down 6 out of the last 7 months.
Consumers are doing it tough. Some could argue not tough enough (mostly out of touch economists) but there is no doubt that the RBA will be fearful about pushing too hard when it meets next week.
I spoke last week to The Guardian newspaper (see full article here) to explain that we’re already seeing car repayments being missed and auto loans starting to go into delinquency.
People tend to miss the car payment before the house payment. The RBA has already caused pain and it’s flowing through. Another rate rise won’t do much to slow inflation, international factors are more important and peers like Canada have already started cutting rates.
I think there is a 30% chance the RBA could hike, but I wouldn’t put it at any more than that. The market is still expecting them to hold and I haven’t changed my view since the beginning of the year that rates will start to come down towards the end of 2024/early 2025.
Impact on real estate market
The big news for property investors isn’t necessarily what the RBA does next week, but instead, the shocking building approval numbers out this week which continue to show that our housing supply levels are disastrous. The fact that we can’t increase supply in Australia is the single most important factor for property investors to watch.
Daniel Rossi, ABS head of construction statistics, said: “Over the past 12 months, there have been a total of 162k dwellings approved, compared to 177k in the 12 months prior, representing a 8.5 per cent decrease, in original terms. This is the lowest number of dwellings approved on a financial year basis since 2011/12.“
The migration floodgates have been open for the past two years and instead of building more houses, our supply levels remain depressed. This will continue to support house prices, particularly in the major metropolitan cities where employment levels are still strong.
Interest rates go up and down, but building approvals and supply is a much more important factor because it impacts the medium-long term. Homes take about 12-24 months to progress from approval to completion, apartments around 36-48 months. This week’s building approval numbers will filter through the market for the next 2-4 years.
Bottom line: The biggest news story this year hasn’t been inflation or interest rates. It’s been the shocking housing supply numbers which aren’t improving, in fact getting worse by the month.
The Australian federal government and states promised more housing last year. They’re quickly back tracking from those commitments as market reality kicks in. Residential housing will hold up regardless of what the RBA does, because supply is at very low levels. The next election will be lost on housing.
Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.