Media Release | 7 November 2023
Commentary by The Agency Group CEO and Managing Director Geoff Lucas on the November RBA Interest Rates decision
As suggested over the past few months, today’s 25 basis point increase is an appropriate and timely response by the RBA. Ever since September CPI data pointed to uncomfortably high inflation (a very strong 1.2% ahead of the 0.9% expected) pressure has been on the RBA to lift the cash rate from a point of relative neutrality to a more constrictive level.
It’s clear that services inflation including petrol, electricity and rents remain entrenched. As we’ve been mentioning since early 2023, there is a lag on rent price data flowing into the official CPI figures and this will further increase into 2024. Indeed, some elements of services inflation would be even higher if not for government subsidies.
There is clearly a strong groundswell of consumer demand that has not yet been subdued by the RBA’s monetary policy. One of the big components here is the unabated spending of retirees who in many cases have little debt, are not impacted by higher rates and are recipients of stronger positive cash flows through higher interest credits. Although not something mortgage holders want to hear, there is conjecture that perhaps one final rate increase is to come, which would still keep us c.1% below our peers in the UK, Canada, US and New Zealand. Relativity to these international peers is important as the further below we are – the weaker the AUD – and therefore increasing inflation through imported goods.
The good news is we are now getting very close to the end of this tightening cycle – this provides not only an environment of price stability, but also greater clarity to consumers, including first home buyers who are looking to enter the property market. And for the first time, aspiring buyers are receiving material interest on their savings - incentivising savings, and reducing consumption. At the same time, higher rates are forcing an increased number of investment properties to be sold due to the changing cashflow dynamic. Evidently, investors are beginning to be attracted to the low risk returns of cash and bonds, particularly when returns, in some cases nominally, outweigh that of residential and commercial real estate.
Looking ahead, this “trading places” of investors into first home buyers is an interesting dynamic, we expect this to accelerate over the coming year. Furthermore, with constrained supply domestically, expect to see “beds and sheds” remain as the preferred real estate sectors. We also expect to see continued strong supply of new listings, less price volatility and a safer transactional environment. Although there’ll be pockets of price reductions in coming months, and a reduction in the rate of price increases overall, Australia – due to strong demand and limited supply will remain a strong positive benchmark of global real estate.