Resilient Housing Market Amidst Tightening: An In-depth Look

Housing concerns have eased

Into the mix of things that you wouldn’t normally expect to see after one of the biggest tightening cycles in history, is the fact that the residential housing market, known for its interest rate sensitivity, is not only holding up quite well, it is actually strengthening in some locations and real-time real estate sources suggest that this continued during the second quarter of this year and even on into early third quarter.  

 

Residential house prices

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This is partly a factor of how ahead of the game many households got during the period of low interest rates, overpaying their mortgages, and accruing a buffer against times just like these. Many others have paid off mortgages entirely, though there are certainly some households for whom the current situation is creating genuine hardship. It is also a response to record high immigration rates which are putting upward pressure on house prices at a time when housing supply has been weak.

 

Permanent and long-term migration

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High risks of inflation bumps

When it comes to the inflation story itself, and how this may develop and feed through into future RBA policy, the monthly data tell the most coherent story. This data shows how very high month-on-month rates of growth in the first six months of last year are one of the main reasons why the annual inflation rate has dropped. All that has needed to happen each month is that the CPI index rises less than it did last year, and the inflation rate automatically drops. That is basically how year-on-year inflation works.  

 

Australia's CPI outlook

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But the month-on-month increases in the CPI index this year have still been quite fast. Looked at from the perspective of the annualised rates of 3m and 6m inflation (what we refer to as the 'run-rate'), which is less influenced by what happened 12 months ago, and tells us more about what inflation is doing right now, it is clear that the inflation run-rate has not dropped very much.

Moreover, unless it does so, and soon, given the much less favourable series of base comparisons from August to October, there is a very good chance that the annual inflation rate will begin to move higher again, not lower during third/fourth quarter 2023. Even the July print, where the last high base comparison should make progress possible, we have large electricity tariff hikes to incorporate, so the bad news may come even earlier.

inflation