The inflation problem in Australia, which has been a keen area of national interest recently, has been driven by both domestic and global factors.
Globally, ongoing supply chain issues relating to the pandemic and subsequent lockdowns, particularly in Beijing and Shanghai, as well as the awful war in Ukraine have added to the global impetus for inflation. But we're now seeing domestic inflation really starting to pick up with headline inflation now at 5.1 per cent and the trimmed mean measure at 3.7 per cent.
“When interest rates start to rise, CoreLogic expects growth in housing to come down. That will probably be the factor that ticks most of Australian housing markets into a downswing phase.” – Eliza Owen
I recently caught up with CoreLogic’s Head of Research for Australia Eliza Owen at the launch of the latest ANZ CoreLogic Housing Affordability report where we discussed the relationship between inflation and interest rates - and what this may mean for house prices.
After the higher than anticipated forecast update, ANZ Research expects the Reserve Bank of Australia (RBA) to move quickly on the official cash rate (OCR). We expect the RBA to continue to raise rates every month until mid-2023, lifting the OCR to around 2.25 or 2.5 per cent. This is clearly a steep trajectory and will have broader implications for the economy and for housing.
According to Eliza, CoreLogic data show an historically inverse relationship between the home value index and the OCR.
“When interest rates start to rise, CoreLogic expects growth in housing to come down,” she explained. “That will probably be the factor that ticks most of Australian housing markets into a downswing phase.”
Eliza pointed to modelling of an expected 200 basis point rise in the OCR which the RBA thinks could create a 15 per cent decline in real property prices.
“For a lot of people who've been struggling to get into the housing market, that's a moment where maybe you… think all prices are going to come down,” she says. “What might be important to consider for first home buyers is… this is about an increase in interest costs as well.”
This means even if deposit costs, loan sizes and property prices are lower, the cost of servicing the mortgage could see buyers spending more money overall.
Regional rentals: out of reach?
Looking at the latest ANZ CoreLogic Housing Affordability report, it’s clear that although in some ways rental costs were becoming lower for those in bigger rental markets like Sydney and Melbourne, many people hadn't expected the level of rental affordability constraints flowing into regional Australia.
The report shows the portion of income required to service rent at a record high for the regions with capital city markets still sitting slightly lower. Clearly, one of the most urgent issues within the affordability space is thinking through how we help people, particularly on lower incomes and in the regions, with housing costs.
But thinking through rental constraints in regional areas will clearly be a longer-term challenge. With flexible and remote working trends not looking to shift any time soon, giving capital city-based workers the opportunity to move to the regions – in some cases displacing long-term regional residents.
Felicity Emmett is Senior Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
12 May 2022
12 May 2022