Credit growth crushed by interest rate hikes

Credit growth plummets

Housing credit growth slowed to just 0.24 per cent in June, the lowest since August 2020, suggesting that housing prices will lose some momentum going into spring. 

Anecdotally mortgage brokers are reporting a recent lift in activity as borrowers sense that interest rates are close to peaking, but the June figures were very soft. 

Overall credit growth in the economy dropped to just 0.2 per cent, so this engine of economic growth is really plunging now as interest rate hikes begin to bite. 

The economy recorded only 0.2 per cent growth in the first quarter of the year, and Q2 doesn't look any better, so things are already teetering on the brink of a recession, if we aren't quite there already. 

Investor credit growth turned sharply negative in June, the clearest evidence yet that some portfolio and cashflow-focused investors are offloading their properties. 

Rental squeeze

For much (if not most) of the country this will likely present little problem given the supply pipeline of new housing still due to come online.

But I do wonder about the route Victoria is going down with its proposed expanded land taxes for landlords, rent controls, tenancy rights, and so on.

There's presumably a lot of hope being pinned on Build to Rent projects coming to the rescue.

Brisbane is another city where there is an awful lot of pressure on the rental market.

Australia's population is projected to grow by 2.2 million over the next five years.

But cumulatively there have been so many moves to disincentivise investors, from the interest-only lending crackdown, higher mortgage rates for investors, and a record 300 basis points serviceability assessment buffer, in addition to all off the tenancy rights changes and other proposed tax changes.

PropTrack reported that total rental listings in Melbourne fell precipitously by -22.7 per cent over the past year, while asking rents are up by more than 20 per cent over the past year. 

Could get messy. 

2 Sense: Listings on the rise, mortgage stress builds, & rent controls are back in

2-Sense

This week on 2-Sense, Chris Bates and I discuss the big 3 property news stories of the week.

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Has the RBA won the fight against inflation?

Big Picture podcast

I joined Michael Yardney on his monthly Big Picture podcast to discuss what's happening.

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Retail sector is cooked; homebuilding inflationary pressures falling

Producer price pressures plunge

Not a big surprise, given what's been reported by card trackers, but retail turnover fell -0.8 per cent in June, and remains lower than it was last year (in spite of high population growth).

Clothing and footwear retail fell -2.2 per cent, food retailing was down marginally, and department store turnover fell by a savage -5 per cent. 

It's not looking great out there in retail land, with consumers suddenly snapping their wallets shut. 

The retail volumes figures aren't out yet, but it looks like a significant contraction of around -0.5 per cent for the June quarter. 

Australia might dodge a recession, with the Q1 national accounts showing a very narrow growth in GDP of 0.2 per cent. 

But in per capita terms, of course, we already are in recession.

In another soft data release, producer prices increased only +0.5 per cent in Q2, the lowest increase since March 2021. 

Source: ABS

Notably, as pointed out by the king of data James Foster, homebuilding inflationary pressures are subsiding fast, after some alarming increases over the past few years. 

While the retail and homebuilder sectors will both be under some severe pressure, this is news which portends lower inflation ahead. 

On the road with Rask

Rask roadshow

Futures markets are looking for no further interest rate hikes in this cycle (with cuts to come next year).

It's no wonder, therefore, that investors are starting to get a bit more active, both in the stock market and in property.

Australia also faces a chronic housing shortage given projected population growth of 2.2 million over the next five years, so there will be no shortage of demand. 

What better time than for us to be getting on the road with the Rask Roadshow.

See the details in this short blog and video here (or click on the image below):

Inflation trends are down

Inflation trending down

The ABS produces a handy chart, which helps to show the recent trends in inflation.

In March 2022, inflation increased by 2.2 per cent over a quarter, the largest increase in many a year.

But in the most recent quarters inflation has fallen from 1.9 per cent in December 2022, to 1.4 per cent in March 2023, to 0.8 per cent in June 2023. 

Source: ABS

Next quarter a big quarter of inflation for September 2022 (1.8 per cent) will drop out of the annual figures, so we'll see another large drop in the inflation figures from 6 per cent to under 5 per cent.

Clearly policy settings are contractionary, and year on year consumer spending now appears to be in freefall.

Hence markets think that interest rate hikes are all but done in Australia. 

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Housing prices rose sharply in the June quarter on low stock numbers.

Price increase were led by a +5.3 per cent quarterly increase for houses in Sydney.

Source: Domain

Unit prices also increased +2.6 per cent in Sydney, with larger increases recorded in Brisbane, Melbourne, and Adelaide.

Source: Domain

Domain's full report for the June quarter can be found here.

Rask: Living your best life (FIRE webinar)

Rask webinar

Great webinar from Owen yesterday, on the concept of Financial Independence, Retire Early (FIRE). 

Check it out here (or click on the image below):

YouTube

version is here:

Inflation slows to 0.8pc

Inflation drops sharply

Some very good news on inflation for Aussie policymakers today, with quarterly inflation slowing to just 0.8 per cent, the lowest level since September 2021.

That's an annualised quarterly pace of only 3.2 per cent, so it's little wonder that there was a big shift in OIS pricing, with a 4.3 per cent terminal cash rate now priced in, well down from nearer 4.5 per cent. 

Trimmed mean inflation was 0.89 per cent for the quarter, also much better than expected.

Inflation in Australia peaked 6 months later than in the US and Canada due to border closures, but it's evidently following the same pattern: lower. 

The monthly CPI indicator for Australia also came in lower than expected, slowing to 5.4 per cent over the year. 

After half a decade of inflation being too low, we've now a significant overshoot...but it does seem to be heading back in the right direction now. 

International travel and accommodation costs were up sharply in the June quarter, but these are clearly now easing (my London return airfares are down 25 per cent from the highs suddenly). 

Insurance costs, as we already knew, have been horrible, up +14.2 per cent over the year. 

There is still some inflation coming through from the housing component, with new dwelling costs up again and rental price inflation spiking to 6.9 per cent. 

But there's also plenty of goods price deflation around, as well as falling prices in plenty of categories. 

Spending in the economy is also tanking, so the job is now almost done for monetary policy, you'd think.

Markets certainly are leaning in that direction.

I don't think it's an exaggeration to say that this release was a major relief, as a higher than expected inflation number today could've created all manner of challenges.

The central bank will likely now hold interest rates for a period of time to see what transpires.

Post-pandemic Principle #7: Becoming your own boss - time and income freedom

Post-pandemic principles

In this 7th short blog and video in my latest mini-series, I discussed creating time and income freedom.

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Building and renovating for profit is easier than it seems with Rebeka from BuildHer

Renovating for profit

This week, Amy and Owen are joined by Rebekah Morgan to discuss building and renovating for profit.

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You can also watch on YouTube here:

Inflation in focus this week

Inflation preview

By far the most anticipated data release this month will be the quarterly inflation figures for June, which are due to be released on Wednesday.

Australia's monthly inflation indicator has already eased back to 5.6 per cent over the year to May, having run as high as 8.4 per cent in December 2022. 

The quarterly figures won't be as low as that, but they'll probably come in at around 6.3 per cent over the year to June, down from 7 per cent in March, and 7.8 per cent in December 2022.

So the direction of travel is pretty clear now.

Looking elsewhere around the developed world, the US inflation rate was just a nick under 3 per cent over the year to June, and in Canada the headline inflation figures had already fallen to 2.8 per cent.

Who knows, before long they may well be talking about deflation being a bigger risk!

The UK is a bit of an outlier, having experienced all kinds of bother related to trade friction (Brexit), exploding food prices (Ukraine war), energy bills (ditto), rampant immigration, and more.

But even the Brits have seen inflation drop from 11.1 per cent in October 2022 to 7.9 per cent in June, with the latest figures surprising to the downside. 

Core quarterly or 'trimmed mean' inflation is set to continue its downtrend from 1.9 per cent in September 2022, to 1.7 per cent in December, 1.2 per cent in March...to around 1 per cent this quarter. 

This will be good to see, and I don't know anyone who genuinely believes that the economy is at risk of pumping out too much more heat and inflation from here given the increasingly parlous state of retail sector. 

The June retail figures are expected to be flat at best, even with the very high rate of population growth.

Policy and looking ahead

Still, with headline inflation likely to be around 1 per cent over the June 2023 quarter, there will be some debate about whether interest rates should be increased again to bring inflation down faster than it's already dropping. 

Of course, given that so many fixed rate mortgages have yet to reset, this would add further to the risks of slowing the economy into recession. 

Another key point is that while interest rates are one tool for bringing down inflation, the astonishing turnaround in the Federal Budget due to full employment means that there's a tidy surplus on the way, and the inflation rate may also be further reduced by the Treasurer mechanically through cost of living relief. 

Labor's first Budget was sensible and solid enough, but it did attract some modest criticism for being a tad heavy on expenditure (which may have risked heightening inflation pressures in sectors such as construction).

Should be an interesting week...

2 Sense: RBA changes, construction costs calming & students swamping cities

Australian Property Podcast

This week on the Australian Property Podcast, Batesy and I discussed construction cost woes, international students pouring in, and all change at the RBA.

Tune in here (or click on the image below):

You can also watch on YouTube here (or below):

Post-pandemic Principle #6: Locational freedom as a digital nomad!

Digital nomads

In the next short blog post and video in this mini-series, I take a look at locational freedom as a digital nomad.

Check it out here (or click on the image below):

Record low unemployment rate for NSW

Unemployment holds firm

One of the most watched numbers in the economy - the unemployment rate - held firm at 3.5 per cent in June.

The trend rate of unemployment has been 3.5 per cent for the past 11 months. 

Total employment record a solid increase of +32,600, although the population increase is also much faster now.

Over the year total employment increased by 3 per cent to above 14 million, so there were very few signs of material deterioration here yet. 

New South Wales continues to power along, with a strong monthly increase in employment taking the unemployment rate down to a record low of just 2.9 per cent. 

Source: ABS

The numbers weren't quite as strong as they first appeared.

The underemployment rate is now 6.4 per cent, having bottomed out in February at 5.8 per cent.

Source: ABS

The underutilisation rate at 9.9 per cent is also above the cycle lows of 9.4 per cent.

Source: ABS

Overall, very solid release, although employment growth will have to be very high to keep up with population growth from here, and forward-looking measures don't indicate that's likely.

With the New South Wales unemployment rate housing price forecasts for Sydney keep getting revised up...but we are seeing some weakness in other parts of the market.

All eyes will now turn to the June quarter inflation figures, with headline inflation expected to fall from 7 per cent to 6.3 per cent, and core inflation likely to drop to 6 per cent, with the pace continuing to moderate from here on out. 

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James Foster chimes in with the detailed report here.

Bank of England breathes a sigh of relief

UK disinflation FINALLY underway

I watched the cable (GBP/USD) markets with bated breath this morning.

After so many bad inflation prints in a row, I could barely bring myself to look at the UK consumer price figures figures...the coming UK recession was seemingly threatening to leave a smouldering crater where consumers used to be.

Maybe that will still happen, but at least the news was considerably more positive today.

As it turned out, for the first time in seemingly an age, the inflation news surprised to the downside.

UK inflation was expected by financial markets to fall from 8.7 per cent to 8.2 per cent in June, but in the event the release wasn't as bad as feared, and annual inflation fell to 7.9 per cent. 

Over the month, inflation was only 0.1 per cent, and the core figures were also lower than expected.

The reason I though this merited a blog post in its own right is that, while many developed countries have clearly struck back hard in the battle against inflation - such as the US (down to 2.97 per cent) and Canada (down to 2.8 per cent) - the UK was being cited as an alarming outlier. 

Of course, 7.9 per cent is still miles over the 2 per cent target, but it's the direction of travel which is important here, especially after so many upside surprises. 

UK producer prices also fell -0.3 per cent over the month, following a -0.6 per cent decline in the preceding period, portending further disinflation ahead.

Antipodes news

The sigh of relief was even audible Down Under, with bonds rallying a bit further. 

New Zealand's inflation figures were reported for the June quarter today, with annual inflation falling from 6.7 per cent to 6 per cent. 

In other Aussie news, job advertisements fell a further -2 per cent (or -5,600) jobs in June, according to the skilled vacancies from Jobs & Skills Australia. 

Source: Jobs & Skills Australia

The high watermark for the cycle was 303,450 job advertisements, so the market is gradually normalising. 

SEEK has also recorded declines in advertisements over 12 of the past 13 months, with the -2.3 per cent decline in June taking total advertisements to -22.1pc from the peak.

Source: SEEK

The labour force figures are due out tomorrow, with the median market forecast expecting a modest increase in employment, holding the unemployment rate steady at 3.6 per cent. 

Canada's inflation falls to 27-month low

Inflation plunges in Canada

Short and sweet post here today.

Canada's inflation rate fell to the lowest level in 27 months at 2.8 per cent as energy prices eased.

Canada thus joins the US in having a headline inflation rate of under 3 per cent (albeit only just in the case of the US). 

Yes, pressures still persist...yada yada...but what a turnaround. 

Source: Alex Joiner, IFM

People keep talking about sticky inflation and core prices, but it increasingly looks as though deflation might be on the cards before too long, the way things have been going. 

Let's hope Australia follows this trajectory next...

What's driving the surge in property listings?

Property listings surge

I joined Danielle Ecuyer on ausbiz TV to discuss what's happening with property listings, in the construction sector, and with the change of Reserve Bank of Australia governor. 

Tune in here (or click on the image below):

Post-pandemic Principle #5: Understanding your most valuable asset of all

Post-pandemic principles

In this short blog post and video, I look at the 5th post-pandemic principle, as the next part in this mini-series.

Tune in here (or click on the image below):

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Reuters reported today that LendLease is looking to shed 10 per cent of its 7,800-strong global workforce, as part of a plan to 'rightsize' its workforce and focus on lower-risk projects.

Bond yields took a turn lower through the day. 

Growth in Australian construction costs lowest since 2020

Construction costs calmed

The tapped out construction sector has been one of the major sources of inflation since the onset of the pandemic.

So, here's some extremely welcome news from CoreLogic and the Cordell construction cost index!

A key excerpt below explains how the quarterly increase in construction costs at just +0.7 per centis now well below the decade average. 

Source: CoreLogic

Following an enormous surge in costs over the past 2½ years, it's quite likely that materials and trades prices can fall from here. 

This is how inflation comes back down. 

The report, which also looks at how a floor has been put under housing prices, can be accessed here.