Megan Lieu, Economic Analyst at REA Group

Updated 23 Sep 2022,

With Covid border closures now a distant memory, Australia has just seen its largest annual population growth since June 2020 – and housing markets aren’t prepared for the influx.

With the rental market already struggling from supply constraints and heightened demand, this influx of people will add to the pressures felt in some of our largest cities.

The recent national, state and territory population release from the Australian Bureau of Statistics shows the country’s population grew by 0.9% annually to March 2022.

A large contributor to this was the increase in net overseas migration by 204,000 people in the year ending March 2022.

For the past two years, New South Wales and Victoria saw almost no population growth. With Melbourne and Sydney being usual hubs for international students, border closures had a considerable impact.

This was exacerbated by increased interstate migration into Queensland by residents from our two largest states, as they sought a lifestyle change and more affordable housing.

However, with overseas migration now returning, rental demand for homes in our largest capital cities has risen again – and this is reflected in weekly rent prices and the number of potential renters per listing.

On average, there has been a 32% rise in the number of highly engaged people looking at Melbourne rentals since August last year.

With companies encouraging a return to the office and international students resuming their studies in Australia, there has been a surge in competition for inner-city rental apartments and houses.

Weekly rental prices have increased by 9% across capital city markets over the past year as a result of high demand and low supply.

Rents in Sydney, Melbourne, and Brisbane have risen by 10%, 12% and 8% respectively.

As overseas migration continues to increase, demand for rentals will remain elevated for some time.

We expect to see little improvement in the supply of rentals amid already tight rental markets. Those factors will put further pressure on the cost of renting over the short- to mid-term.

Megan Neil, Senior Journalist

published 16 Sep 2022, 2

Reserve Bank of Australia governor Philip Lowe says the central bank may move to smaller interest rate rises as soon as next month.

After aggressively lifting interest rates, including an unprecedented four consecutive double hikes, Mr Lowe said the RBA board will consider going back to a “business as usual” 25 basis point rise at its October meeting.

“At our next meeting we will be considering whether it’s a 25 basis point increase or a 50 basis point increase,” Mr Lowe told a federal parliamentary hearing on Friday.

“At some point we’ll obviously not need to be increasing rates by 50 basis points at each meeting and we’re getting closer to that point.”

The RBA has lifted rates by 225 basis points since May in the fastest hiking cycle since 1994, taking the cash rate to 2.35% – its highest level since January 2015.

Mr Lowe said 2.35% is “still too low” and there will be further rate rises to bring down soaring inflation.

But he said interest rates are now closer to a normal setting.

“The fact that we’ve raised interest rates by quite a lot already increases the strength of the argument for smaller increases going forward,” he said during a twice-yearly appearance before the House of Representatives Standing Committee on Economics.

“We’re closer to a normal setting now which means that the case for large adjustments in interest rates is diminished.”

Mr Lowe said the board’s decision on 4 October will come down to its view of the balance of risks facing the economy, including what’s happening in the global economy, inflation and wages in Australia and how household spending is responding to higher rates.

Mr Lowe said further rate increases will be required to get inflation, which is expected to peak at around 7.75% later this year, back down to the RBA’s 2% to 3% target range.

While the RBA cut the cash rate to a record low 0.1% during the “dark days” of the pandemic, Mr Lowe indicated rates are unlikely to fall back to such low levels.

“We would only see rates come back down to close to zero if we had a sharp downturn again.”

He indicated a normal range for the cash rate is 2.5%, which is the mid-point of the RBA’s inflation target range, to 3.5%.

“I think we’ll cycle around some number between 2.5% and 3.5%, it’s hard to be specific, and we’ll cycle up and down that with the economic cycle.

“So we’re closer now to that, we’re at 2.35%, so we’re getting to that range that you’d think is normal but probably still on the low side.”

Some economists expect another mega rate hike

While the RBA board will be considering a smaller rate rise in October, National Australia Bank economists have now joined their ANZ counterparts in forecasting a fifth consecutive 50 basis point hike next month.

The NAB economists expect a step down to a 25 basis point rise in November that takes the cash rate to 3.1%, before the RBA pauses to assess the impact of its hikes and the evolution of inflation, the labour market and the economy.

Lifting their rate forecasts on Friday, the NAB team pointed to recent economic data and Mr Lowe’s comment that “the general inflation psychology appears to be shifting”.

“To us this is a significant shift and suggests an increased concern that more needs to be done to keep inflation expectations anchored,” they said.

Some economists still expect another double interest rate hike in October. Getty

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ANZ economists on Friday also warned that their current expectation that the RBA’s tightening cycle will end in just under 12 weeks with the cash rate peaking at 3.35% “is starting to look optimistic”.

“Against the backdrop of elevated global inflation and a tight labour market with accelerating wages growth, there is a clear risk the cycle could extend into 2023 and go higher than our current peak cash rate of 3.35%,” ANZ’s head of Australian economics David Plank said.

CBA economists, however, expect the RBA will slow the pace of tightening in October. They forecast 25 basis point hikes in both October and November that take the cash rate to a peak of 2.85%.  

The Reserve Bank of Australia is tipped to begin lowering the official interest rate as soon as next year as higher borrowing costs work to lower inflation and suppress economic growth.

Commonwealth Bank is tipping a cut in the cash rate by the RBA from a peak of 2.6 per cent starting in late 2023, and Westpac and ANZ expect a terminal rate above 3 per cent with cuts by mid-2024.

“With a sudden associated slowdown in economic growth, we are now anticipating rate cuts in 2024 to restore the cash rate to the RBA’s neutral zone (cuts of 100 basis points),” Westpac chief economist Bill Evans said.

That would come as welcome relief to the tens of thousands of fixed rate mortgage holders who face a 40 per cent increase in monthly mortgage repayments as they make the transition to variable rates over the next year.

This week, Treasurer Jim Chalmers downgraded Australia’s growth figures for this financial year and the next to 3 per cent and 2 per cent respectively – both down 0.5 percentage points from the pre-election fiscal outlook.

Before it begins easing, however, the RBA is tipped to press ahead with a third 0.5 percentage point interest rate rise on Tuesday, taking the cash rate to 1.85 per cent as the central bank tries to run down growing inflation.

“It would mean that 175 basis points of tightening has been delivered in just three months,” said CBA head of Australian economics Gareth Aird, the fastest pace of monetary policy tightening in almost three decades.

Households appear to be responding to rising interest rates. After several years of strong monthly deposits, the amount of money being saved has slowed dramatically since the first-rate rise in May.

Harder before it gets easier
Household deposits increased by just $5 billion in May and June compared with $25 billion in the two preceding months. Whether this is a seasonal adjustment or more structural will become clearer in July and August when tax returns lob into people’s bank accounts.

The RBA will also update its outlook for the economy late next week, and raise its inflation forecasts closer to 8 per cent, in line with the Albanese government’s prediction of 7.75 per cent this year.

Jarden chief economist Carlos Cacho said global supply chains continued to be tight, but there were signs that pressures were easing, and shipping costs, chip shortages and Chinese freight had stabilised in recent weeks.

“The New York Federal Reserve’s global supply chain index has fallen materially after peaking in December, which suggests Australian firms should see some easing of global pressure in coming months,” he said.

“However, domestic issues, particularly labour shortages, are becoming more severe with wage cost and labour supply the two most pressing concerns for businesses.

“Indeed, while shortages of raw materials have eased, labour supply constraints have risen further to record highs.”

This week, Treasurer Jim Chalmers revealed that the government expected wage growth to pick up to 3.75 per cent this financial year and the next, which would be the fastest pace of pay rises in almost a decade. But that would still leave real wages going backwards until at least 2024, he said.

The final demand component of the producer price index, also known as “business inflation” rose by 1.4 per cent in the June quarter to be up 5.6 per cent through the year, the strongest annual growth since December 2008.

The primary drivers of growth were building construction, heavy and civil construction and an increase in petroleum refining costs amid oil shortages

“Business prices are soaring across a broad range of categories. In some cases, prices are lifting at the fastest pace in decades and some even since statistics were first compiled,” CommSec’s Craig James said.

“Simply, the supply of goods – locally and across the globe – is not keeping up with demand, resulting in sharply higher prices for literally everything. Australia has not been an exception to this global trend.”

Financial Review
29/07/2022