If what I am hearing is happening elsewhere then the Australian economy is about to enter a sharp but hopefully short reversal. Anecdotal evidence from 2 business owners that I have talked to in the last week confirm that turnover in one iconic Adelaide outlet is down by 60% and a Quantity Surveyor involved in Government contract work when normally flat out at this time of year has been asked to take 4 weeks accrued holiday leave. Other reports from third parties indicate a not dissimilar downturn particularly in the discretionary spend sector. All of this happened in the month of May.
It is clear that the impact of the severest interest rate rises in decades is finally starting to bite. I have the advantage of talking to a broad cross section of people daily whereas the RBA lags for months to be convinced and any change to their interest rate strategy will be delayed accordingly to the detriment of us all.
During the Pandemic household savings increased by $200 billion due to lockdowns and border closures. Interest rates started rising in May 2022 and the initial impact of rising costs for all things was afforded by these household cash reserves but these are dwindling and fast.
Here is a probable scenario. The GDP figures for the June quarter will show a small positive number but a notable reversal from previous quarters. A negative figure in September will confirm a technical recession is looming and as with any recession Companies will cut costs as turnover and profits drop, and unemployment will rise.
In this scenario there is no need for any further interest rate rises but equally to expect inflation to drop immediately is not realistic. Buyers who were encouraged into the property market by unsustainably low fixed interest-rated mortgages are desperately in need of hope and help. The first message that must come out of the Reserve Bank, particularly with its new management structure, is that interest rates don’t need to rise further and in time, as inflation comes down, they will decrease. To put a time on this is nigh on impossible but surely in the latter part of 2024 there may be a glimmer of interest rate relief.
The second issue relates to the migrant intake. It doesn’t stand to reason that students will come into a country where they can’t be assured of getting a roof over their head. We can only hope that the natural forces of supply and demand will cut the immigration intake by at least 100,000. If that doesn’t happen, then the Government could apply limits on visas that will give some relief at least to the ever increasing rentals that are occurring.
As hinted by the RBA Chair last week, with rising rentals comes a natural solution through a higher level of housing efficiency. The Federal Government, in the short term at least, could incentivize households that have unused bedrooms to be encouraged to take on boarders particularly the Baby Boomer providing they are assured that the income earned will not impact negatively on their pensions. This will put an under-utilised asset into a higher and better use to resolve a short-term problem that is otherwise heading for a disaster.
Residential rentals are now one of the largest elements in the inflationary equation and there is little chance of rental rates topping out before the end of 2024. To match off the excess demand with adequate supply is going to take years not a year or two. The investment returns can only improve as rents keep rising and interest rates start falling, and eventually rented property will become a dominant feature in a balanced investment portfolio.
Looking out to the end of 2024 it would seem prudent to ‘Beware’ of the next 9 months when the full effect of the recent RBA strategy is absorbed by the economy but be ‘Ready’ from March 2024 when the focus will be on interest rates falling in line with a topping out in the inflation rate. This will provide investors an opportunity to buy into the market in the knowledge that, over time, the cost of the mortgage will be more than offset by the rise in rents.
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