Spring 2014 Economic Overview – Part 2 | Tim Lawless

RPData has recently released its quarterly Australian property market and economic review.

Yesterday I started a series of 4 blogs I’ve called Spring 2014 Economic Overview in which I’ll walk you through some of our economic findings, so you can better understand the macroeconomic influences on our real estate markets.

Today in part 2 we focus on interest rates, unemployment levels, the Aussie economy and the soaring housing prices to give you a better understanding of the influences on our real estate markets.

Official interest rates on hold at 2.5% for 12 consecutive months

  • The Reserve Bank has now kept official interest rates on hold at 2.5% for 12 consecutive months to August 2014.interest rates Feb 2014
  • On an historic basis, official interest rates are at extremely low levels and subsequently mortgage rates are also at near record low levels.
  • In August 2014, the standard variable mortgage rate was 5.95%, the discounted variable rate was 5.1% and the three year fixed rate was 5.1%.
  • With borrowing costs so low it is no surprise that housing market transaction activity has lifted and that home values are also rising.
  • The interest rate futures market suggests that official interest rates are set to remain on hold for the foreseeable future with no change in interest rates priced in over the next 18 months.1

The impact of low mortgage rates

  • The low interest rate environment is also impacting on the type of investment vehicles investors’ target.
    Safe investments such as government bonds and term deposits are showing very low returns. Australian Government 10 year bonds are returning just 3.5% currently while the 12 month term deposit rate is just 3.3%.
  • The low returns from ‘safe’ investment classes are seeing investors move to slightly riskier investment classes.
  • Over the 12 months to July 2014, investments such as housing and equities that show a higher risk profile relative to bonds and term deposits have recorded much stronger returns.
  • As a result we are seeing more investors target these asset classes due to the inferior returns available in safe asset classes.2

Unemployment rate is at its highest level in more than a decade

  • The national unemployment rate was recorded at 6.4% in July 2014 which is its highest level since August 2002.
  • At the same time a year ago, the national unemployment rate was recorded at 5.6%.
  • The number of employed persons has increased by 0.9% over the past year.
  • Full-time employment has increased by 0.8% over the year compared to a larger 1.2% increase in part-time employment.
  • The Federal Budget forecast that the unemployment rate would peak at 6.5%, only 0.1 percentage point higher than its current level
  • Although the unemployment rate is increasing, it is encouraging to note a slight up-tick in employment participation over recent months.
  • Higher unemployment and the increasing propensity for part-time job creation may make it harder for some to fulfil their mortgage repayments or to be considered for a new home loan.3

Inflation at the higher end of the Reserve Bank’s target band over the 2013/14 financial year

  • The Consumer Price Index (CPI) recorded an increase of 3.0% over the 12 months to June 2014.
  • The RBA has a target band for inflation of between 2.0% and 3.0% throughout the cycle so the June read for inflation was at the top of the target band.
  • Although inflation was at the upper end of the band, most of this inflation was over the first two quarters of the year, with quarterly inflation recorded at just 0.6% in March 2014 and 0.5% in June 2014.
  • The RBA looks at headline inflation, however they pay closer attention to the two measures of underlying inflation; the trimmed mean and weighted median.
    These two measures of underlying inflation were recorded at 2.9% and 2.7% respectively. Much like the headline figure, the rate of inflation has slowed over the most recent two quarters.
  • The latest Statement on Monetary Policy issued by the Reserve Bank, showed a lowering of their inflation forecasts from 2.75% to 2.5% for the 2014 calendar year. 4

Housing costs are growing at a rate which is faster than headline inflation

  • Housing is a component of the bundle of goods used to measure inflation and it actually has the greatest weighting which reflects the fact that, for most people, costs relating to housing are what they spend the greatest slice of their income on.
  • The inflation data does not measure escalation in the cost of existing homes, rather it only measures purchases of new homes by owner occupiers.
  • Over the 12 months to June 2014, housing costs have increased by 3.9% compared to headline inflation which was recorded at 3.0%.
  • The data indicates that the largest increases are being experienced across those essential household goods which are billed each quarter such as electricity, utilities, water and sewerage and gas. 5

The Australian Economy continues to grow

  • Gross Domestic Product (GDP) data from the ABS to March 2014 shows that the Australian economy grew by 3.5% over the 12 months. The 3.5% growth rate was the greatest increase since June 2012. growth
  • The growth in economic activity over the year was driven by a 1.9% increase in government consumption, a 2.8% increase in household consumption and a 10.4% increase in exports of goods and services.
  • More regular indicators of government and household consumption suggest that both will slow over the coming quarters which will likely result in a lower level of economic growth.
  • Although headline economic growth was solid over the year, on a per capita basis economic growth was recorded at a much lower 1.7%.
    This result indicates that the strong rate of population growth recently is also significantly contributing to economic growth.
  • With population growth having recently slowed, it will also likely impact on economic growth over coming quarters.
  • While GDP is likely to slow over the coming quarters as spending and population growth slows, the economy is likely to continue to expand. As a result Australia looks set to complete 23 years without a recession.6

Watch out for tomorrow’s blog where I cover other statistics including interest rates, unemployment levels, inflation, housing costs and more.

If your missed yesterday’s  1st part of this 4 part series – our Spring 2014 Economic Overview – click here


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Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au

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