Key takeaways
If a picture paints a thousand words, then this collection of charts should do a pretty good job of painting the landscape as it affects our economy and our property markets.
Australia's economy doesn't operate in isolation, so it's important to keep track of how the economies of our major trading partners are performing.
While only a year ago many economists suggested a number of countries could fall into recession in 2023, this didn't occur and in fact Australia's economy is still growing, in fact almost too strongly for the RBA's liking.
Inflation around the world seems to have peaked and this should make this easier for the RBA to get inflation under control in Australia, but it will take much longer than they hoped.
While the high cost of living is affecting many Australian households, so far the impact of the Reserve Bank's 13 interest rate rises has barely to be felt by many others, as we're still spending boldly.
While rising interest rates and inflation have eaten away at the average household budget, in general Aussies have significantly more equity in their homes than they had four years ago.
Australia's residential property market is valued at $10.7 trillion, yet only $2.3 trillion worth of debt is against this large asset base. In fact 50% of homeowners don't have a mortgage against their homes.
Currently, Australia has a significant shortfall of housing, and the cost of residential construction has risen substantially in the last few years. This means that most developments on the drawing board are not currently financially viable to get out of the ground.
Consumer confidence remains at very low levels but is likely to rise as more people realise we're at the peak of interest rates and inflation is falling.
Australia's business sector is doing well, but the near-term business outlook is one of softening consumption and investment growth, tightening government expenditures, and high debt costs.
The unemployment rate is still low, recently falling to 4.0%, meaning Australians can feel secure about their financial futures.
The labour force participation rate is an estimate of an economy's active workforce. The participation rate has increased over the last few years, and there are currently over 400,000 jobs advertised, but nobody to fill them.
If a picture paints a thousand words, then this collection of charts should do a pretty good job of painting the landscape as it affects our economy and our property markets.
Each month the RBA summarises macroeconomic and financial market trends in Australia by providing a detailed chart pack.
World Economy
- Australia's economy doesn't operate in isolation, so it's critical to keep track of how the economies of our major trading partners are performing.
- The global economy is currently facing a number of challenges, including high inflation, high interest rates, the ongoing war in Ukraine and the Middle East and heightened geopolitical tensions.
- The International Monetary Fund (IMF) recently published its latest update on the state of the world economy, predicting the world economy will continue growing at 3.2 percent during 2024 and at 3.5% in 2025. Their report suggests...
- Growth in major advanced economies is becoming more aligned as output gaps are closing. The United States shows increasing signs of cooling, especially in the labor market, after a strong 2023. The euro area, meanwhile, is poised to pick up after a nearly flat performance last year.
- Asia’s emerging market economies remain the main engine for the global economy. Growth in India and China is revised upwards and accounts for almost half of global growth.
- Yet prospects for the next five years remain weak, largely because of waning momentum in emerging Asia. By 2029, growth in China is projected to moderate to 3.3 percent, well below its current pace.
- The global economy has been surprisingly resilient, despite significant central bank interest rate hikes to restore price stability.
- Of course, Australia is not the only country suffering from inflation which has been a concern for policymakers worldwide.
- Global inflation is forecast to decline steadily by the IMF, who project global inflation will slow to 5.9 percent this year from 6.7 percent last year, broadly on track for a soft landing. But in some advanced economies, especially the United States, progress on disinflation has slowed, and risks are to the upside.
- However, inflation around the world has clearly peaked, and that should make it easier for the RBA to get inflation under control in Australia.
Australia's Economy
- The Australian economy is currently facing a number of challenges, yet it is still performing more strongly than the RBA would like.
- Clearly, the impact of the previous interest rate rises hasn’t really been what the Reserve Bank had hoped for. Sure, over the last year consumer confidence has fallen, as has business confidence and building approvals have fallen. But residential property loans are rising and loans to investors are up 31% over the last year.
- In June 2024, In seasonally adjusted terms, in June 2024:
- unemployment rate increased to 4.1%.
- participation rate increased to 66.9%.
- employment increased to 14,406,100.
- employment to population ratio increased to 64.2%.
- underemployment rate decreased to 6.5%.
- monthly hours worked increased to 1,967 million.
- full-time employment increased by 43,300 to 9,944,200 people.
- part-time employment increased by 6,800 to 4,461,800 people.
- At the same time, wages are slowly rising, and though retail spending is slowing, we’re still spending up big.
- Rents are skyrocketing, adding to inflationary pressures, and, of course, house prices are rising across the nation.
- We’ve passed the peak of inflation this cycle, and it seems inflation is falling but not as fast as the RBA would like, and even though we are likely to be at the peak of the interest rate cycle, it is unlikely that rates will fall any time soon.
- Of course, inflation has been the focus of media attention throughout the last few years, but it has now passed its peak and has now fallen for the fourth successive quarter.
- The Consumer Price Index (CPI) rose 1.0% in the June quarter. Over the twelve months to the June 2024 quarter, the CPI rose 3.8%.
- Both goods and services annual inflation ticked up this quarter. Prices continued to rise for goods such as tobacco, new dwellings and automotive fuel, while prices for fruit rose strongly this quarter.
- Annual services inflation continued to be impacted by higher prices for rents and insurance. This quarter saw rises for private health insurance premiums, which are typically reviewed in April each year.
Household Sector
- The following chart shows how the disposable income for Aussie households has dropped over the last year as they have grappled with rising costs, yet it has picked up recently.
- Despite the Reserve Bank's best efforts to slow down household spending, we’re still spending up big on discretionary items such as clothes, restaurants, and lifestyle, defying cost of living pressures.
- According to the ABS: in June:
- Household spending fell 0.5% month-on-month on a current price, seasonally adjusted basis.
- In seasonally adjusted, current price terms household spending on goods rose 0.5% month-on-month, driven by increased spending on purchase of vehicles, goods for recreation and culture, and furniture, floor covering and household goods.
- In seasonally adjusted, current price terms household spending on services fell 1.8% month-on-month, driven by decreased spending on recreational and cultural services, accommodation services, and catering services.
- In calendar adjusted, current price terms household spending increased through the year for eight of the nine spending categories. The largest increases were in:
- miscellaneous goods and services (+10.8%)
- health (+7.8%)
- furnishings and household equipment (+6.6%
This chart also shows our savings ratio has now dropped to below pre-pandemic levels as we keep spending our stashed cash to support our lifestyles.
- I keep careful track of consumer confidence because it's a good leading indicator of what's ahead for our economy and property markets.
- The media's continual barrage of negative news about the economy, inflation and interest rates is having a significant impact on consumer sentiment.
- Currently, consumer confidence is bouncing up a little from historically low levels. I see consumer confidence rising over the year as Aussies realise inflation has peaked and that interest rates will eventually fall.
- While rising interest rates and inflation have eaten away at the average household budget, in general, Aussies have significantly more equity in their homes than they had before the pandemic, and they started this rising interest rate cycle with considerably more savings stashed in their savings or offset accounts than they had at the beginning the pandemic, three years ago.
- The following chart shows our net wealth position, and that our main assets are in real estate (particularly our homes) and financial assets (including our superannuation.)
- As you can see, the net wealth position of Australian households is still high since asset growth has outpaced the increased debt levels, meaning our net wealth position, while falling a little lately, is very strong.
- The Australian residential property market is valued at over $10.7 trillion, yet there is only around $2.3 trillion worth of debt against this large asset base. In fact, 50% of homeowners don't have a mortgage against their homes.
- We experienced a “once in a generation property boom” in 2020 and 2021 when the value of almost every property in Australia increased by 20% -30%. Since then we have worked our way through the downturn phase of the housing market and the stats from CoreLogic, Proptrack and Dr Andrew Wilson's My Housing Market all suggest our housing markets bottomed in February 2023.
- The current upturn in housing values coincides with consistently low advertised supply levels at a time when our population is growing strongly.
- Currently, Australia has a shortfall of housing, which is particularly showing up in our rental markets with historically low vacancy rates and skyrocketing rents.
- The government has shared their plan to build 1.2 million homes in the next 5 years, but I can't see how this will be achieved.
- The cost of residential construction has risen substantially in the last few years, in part because of the lack of available skilled labour and supply chain restrictions.
- This means the cost to build new apartments has risen to such an extent that most developments on the drawing board (see the following chart of dwelling approvals) are not currently financially viable and won’t be built until the market is prepared to pay substantially more than the current prices.
- It has been estimated that currently we have a deficit of over 200,000 properties, something that won't be made up any time soon.
- In other words... there is no end in sight for the undersupply of dwellings. It also means that there is substantial inbuilt equity in established properties as their replacement cost is very much higher than their current market value.
While the property pessimists were making a fuss about falling housing loan commitments, which are clearly a leading indicator of what's ahead for our property markets, the following chart shows that they are still well above long-term averages and now rising again.
In particular, investor lending is up over 30% in the last 12 months. In other words, strategic investors are taking advantage of the current window of opportunity to get into the housing market.
- Also read:This week’s Australian Property Market Update – Latest Data, State by State September 10th 2024
- Also read:Melbourne property market forecast for 2024
- Also read:Sydney property market forecast for 2024
- Also read:Brisbane’s property market forecast for 2024
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
Business Sector
- Australian businesses survived the ravages of Covid-19 but now face new challenges, such as the rising cost of living, the RBA hell-bent on slowing our economy, and a war in Europe and the Middle East leading to high energy prices.
- The near-term business outlook is one of softening consumption and investment growth, tightening government expenditures, and high debt costs.
- This troubled backdrop has been reflected in low business investment, but it now seems to have bottomed out.
Labour Markets
- Australia's labour market continues to show impressive resilience in the face of high-interest rates and unprecedented global challenges.
- The ABS has reported the following Key Statistics
- In trend terms, in June 2024:
- unemployment rate remained at 4.0%.
- participation rate remained at 66.8%.
- employment increased to 14,402,500.
- employment to population ratio remained at 64.1%.
- underemployment rate remained at 6.5%.
- monthly hours worked increased to 1,967 million.
- In seasonally adjusted terms, in June 2024:
- unemployment rate increased to 4.1%.
- participation rate increased to 66.9%.
- employment increased to 14,406,100.
- employment to population ratio increased to 64.2%.
- underemployment rate decreased to 6.5%.
- monthly hours worked increased to 1,967 million.
- full-time employment increased by 43,300 to 9,944,200 people.
- part-time employment increased by 6,800 to 4,461,800 people.
Australia's unemployment rate, a key indicator of labour market health, has been at historic lows for a number of months now.
- One of the notable trends in Australia's labour market has been the shift towards more flexible work arrangements. The pandemic has accelerated the adoption of remote work, prompting many businesses to reconsider their work policies. This shift has implications for worker mobility, productivity, and the geographical distribution of jobs.
- The current unemployment rate 4.0%% is still virtually the best Australia has seen in decades meaning Australians can feel secure about their financial futures.
- It's likely the unemployment rate will rise moving forward as the return of foreign workers and international students will likely impact labour market dynamics.
- The labour force participation rate is an estimate of an economy’s active workforce. The formula is the number of people ages 16 and older who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population.
- The participation rate in Australia averaged 63.51% from 1978 until 2022, as you can see from the chart below the participation rate has increased over the last few years as a bigger percentage of Australians have entered or re-entered the workforce.
- As you can see from the chart below, service-related industries have had significant growth, and in particular, there has been strong growth in the healthcare, accommodation and food services industries.
- Currently, there are 352,600 jobs advertised
- Total job vacancies were 352,600, a decrease of 2.7% from February 2024.
- Private sector vacancies were 313,500, a decrease of 2.7% from February 2024.
- Public sector vacancies were 39,100, a decrease of 2.5% from February 2024.
- While national average wages have underperformed inflation over the last couple of years, meaning that “real” wages have actually fallen, we are now experiencing moderate wage increases.
- Recently the Fair Works Ombudsman increased the minimum award wage.
Interest Rates
- Interest rate levels set by the RBA respond to changes in inflation. When rates rise, they slow economic growth and discourage borrowing, typically signalling a strong economy. On the other hand, low interest rates promote economic growth.
- The latest RBA decision was to hold rates steady at their August meeting, and most commentators agree that we have reached the peak of this interest rate cycle, but rates won't fall at least until the end of the year or possibly early next year.
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- Despite the sharp rise in interest rates over 2022, despite ticking up a little, home loan arrears remain at post-GFC lows, defying those property pessimists who forecast that significant levels of mortgage stress would lead to forced sales by homeowners who got over their heads in debt.
The following chart shows the interval between previous peaks in interest rates and how long they remained high before they eventually fell.
