What a busy week it has been!
The Albanese Government handed down its first budget since forming the government, we got an update on the consumer price index, which lifted by 1.8% in the three months to September, taking the annual rate to 7.3%.
Ms Eleanor Creagh, Senior Economist at REA Group shared her insights:
"The inflation read came in stronger than expected, illustrating broad-based inflation pressures with the economy still very much in the thick of the inflation challenge.
Critical for households – the strong non-discretionary inflation for items such as food, housing, fuel, and healthcare that are tough to avoid or substitute.
In combination with weak wages growth, it points to the ongoing deterioration in living standards and real purchasing power.
It’s all some vindication for Treasurer Jim Chalmers’ budget, which sought to avoid adding further fuel to the inflation fire.
The most recent labour force survey provided some justification for the Reserve Bank’s more cautious procession and its shift back to business-as-usual 25 basis point rate hikes.
But this week's inflation data counterbalance that to a degree."
Will it change anything next week?
The RBA board meets on Tuesday and is widely expected to raise interest rates again.
The inflation data put pressure on it to hike rates further (as was already expected), but still, it’s unlikely to see a reversion to 50 basis points.
Last month, the RBA’s move back to a 25 basis point hike gave it time to better assesses the impacts of rising rates and the substantial tightening pushed through to date on households, as well as how wages pressures unfold, along with fast-shifting global economic conditions.
Ms Creagh commented:
"Despite the hotter inflation read, the RBA was expecting inflation to remain strong, peaking in the December quarter.
The October minutes illustrated the expectation that inflation would push past 7% in 2022 before easing next year.
Although, the trimmed mean inflation forecasts will likely be revised higher in the November Statement on Monetary Policy.
The substantial tightening already pushed through quickly this year is likely to weigh on consumption and GDP growth ahead.
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As spending slows into the year’s end and economic conditions weaken, the RBA may find it appropriate to pause their tightening cycle and further assess the impact, given the “narrow path” that lies between taming inflation and keeping the economy on an “even keel”.
As such, the stronger-than-expected inflation data is no smoking gun for the RBA to reassess.
Certainly, interest rates will continue to rise, with two 25 basis point increases in the November and December board meetings likely locked in.
There’s a chance of a further 25 basis point rise in the first quarter of 2023, depending on how the economy has responded to the tighter policy and how inflation and wages pressures materialise."
The suburbs that have dropped out of the $3 million club
Rising interest rates have quickly rebalanced the housing market from last year’s extreme growth levels – and a lot has changed in a year.
Prices nationally are now sitting 3.4% below their March peak, with prices falling by more in Sydney and Melbourne, but less in the other capital cities.
Last year, Australia’s $3 million suburb club doubled for the second year running, as the housing market boomed thanks to record-low interest rates driving buyer demand, along with shifting lifestyle priorities and closed international borders.
However, with the cash rate now sitting at 2.6% (and soon to be 2.85% next week), borrowing capacities have been constrained by more than 20% and budgets are shrinking, with more expensive regions and property types seeing prices falling fastest.
Ms Creagh explained:
"It’s often the case that the upper end of the market experiences more volatility and larger price declines during downturns, and this cycle is no different.
At the moment it’s the regions that are home to more expensive properties that have seen bigger price falls than more affordable properties.
This has seen a reversal of last year's trend and the $3 million club is now shrinking.
Sydney – the most expensive housing market in the country – is unsurprisingly home to the most $3 million plus suburbs.
As higher interest rates are affecting higher-priced regions, Sydney has seen the most suburbs drop out of the club."
Source of table and commentary: REA Insights
