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Markets Panic! Declining Living Standards, RBA - If in doubt, do nothing!
4 months ago
Markets Panic! Declining Living Standards, RBA - If in doubt, do nothing!
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Hey there, property enthusiasts! Justin here, and wow, what a rollercoaster of a time we're navigating in the real estate market! With all the media buzz about potential interest rate hikes in August, there's a lot of chatter and, yes, some panic. So, let’s dive into what’s really happening.
Why All the Buzz About Interest Rates, Frenzied Rate Hike Speculation in the media
Recently, the annual inflation rate hit 4%, higher than expected. This sparked fears that the RBA hasn't done enough to curb inflation, leading to a 50-50 market prediction on whether we'll see a rate hike in August. The culprits driving this inflation include:
* Tobacco and alcohol prices
* Petrol costs
* Rent and insurance
* Seasonal travel costs, like airfares
Interestingly, these are areas where the RBA has little control. On the other hand, prices for interest rate-sensitive items like food, clothing, and cars are stabilising or even falling.
Declining Per Capita GDP, Shows Decline in Standard of Living
GDP is how we measure growth and prosperity of the nation. Per Capita GDP is the measurement of improvement of our individual wellbeing which informs us of our standard of living. Per capita economic activity is going backwards which means on average a decline in the standard of living for each person, our standard of living is in decline.
This also feeds into how bad consumer sentiment is right now, people are tightening their belts and not retail spending. The RBA does not like the talk about Per Capita GDP and the declining standard of living which for some people, the lower income earners, is up to 8-10%!
Economic Indicators to Watch
1. GDP Growth
: Currently weak, indicating a sluggish economy.
2. Employment: While employment growth is slowing, the unemployment rate is edging up, and job vacancies are down by 26%.
3. Building Approvals: These remain weak, highlighting a downturn in construction activity.
4. Commodity Prices: Linked to the Chinese economy, commodity prices are down over 20% in the last couple of years, impacting Australia's economic outlook.
The Bigger Picture
Despite the media's focus on inflation, it's essential to remember that the RBA's mandate also includes full employment and economic growth. As unemployment rises, wage growth stabilises, and GDP remains weak, there's a growing argument for the RBA to hold off on further rate hikes. The goal is to balance inflation control with economic stability and job security.
Why Comparing Us to the US Isn't Fair
Some argue that Australia's cash rate should be closer to the US rate of around 5.5%. However, the US mortgage market is predominantly fixed-rate (95% for 30 years), meaning rate hikes have little immediate impact on most borrowers. In contrast, about 90% of Australian mortgages are variable-rate, meaning any rate hike hits borrowers almost immediately.
Looking Ahead, The RBA does not look at inflation alone to decide Rates
The next CPI numbers come out on July 31st and unless these numbers show an extreme shift, I personally think the RBA will not raise rates, with the other major indicators like GDP growth being very weak and employment growth slowing, unemployment rate is edging up and job vacancies down 26%!
The economy seems like it is on a knife edge. I feel the RBA will take a 'if in doubt do nothing' approach being if they did move and raise rates with these other economic indicators being like they are, there is possibility of a disastrous outcome for the overall Australian economy.
So, what does this mean for you? If you’re buying, selling, or renting, keep a close eye on these economic indicators. The RBA’s decisions in the coming months could significantly impact mortgage rates, borrowing costs, and the overall real estate market.