Inflation comes in at 1.2pc (expected: 1.1pc)

Inflation 1.2 per cent

Inflation came in at 1.2 per cent for the September quarter, a bit higher than the median market expectation of 1.1 per cent. 

The trimmed mean reading also came in at 1.2 per cent for the quarter, slightly above market expectations.

Over the year the inflation rate has slowed from 7.8 per cent to 5.4 per cent, and with another large print to drop off the annual reading next quarter we'll be down to about 4½ per cent or a bit below that by the end of 2023. 

Source: ABS

So, it's seemingly going to take a bit longer than previously hoped to see inflation falling back to the target range, and this led to many economists upgrading their calls to incorporate another interest rate hike on Melbourne Cup Day to a cash rate target of 4.35 per cent.

Others, including Deloitte Access Economics, Stephen Koukoulas of Market Economics, and Terry McCrann in The Australian, have argued strongly for no jumping at shadows, and for taking a more anguine approach of interest rates to stay on hold until next year. 

Until yesterday, Westpac saw the next move in interest rates as being down, but haven't yet updated their call. 

The inflation in the September quarter was largely driven by international pressures driving higher fuel prices, and domestically by housing costs (i.e. rents and new dwelling costs), and electricity prices. 

We do know that many developers are teetering on the precipice of extinction and that further tightening would almost certainly kill off another swathe of construction businesses.

This would arguably make the rental market pressures worse than they already are.

Indeed, capital city rental listings have declined to their lowest level on record this month,

The real elephant in the room here is that immigration is now running at an annualised pace of around 550,000 per annum, fueling population growth of around 2,000 per day in Australia. 

Source: Shane Oliver, AMP

New dwelling costs have been a huge contributor to inflation through this cycle and the HomeBuilder stimulus package, but thankfully cost pressures here are reportedly now easing in real time (despite the more modest increase of +1.3 per cent this quarter).

Source: ABS

Voters should justifiably be angry about electricity costs, which would be around 30 per cent higher over the year were it not for government subsidies. 

Lower energy prices were a key election pledge, and we can't so easily blame this surge in prices on external factors. 

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Market reaction

Overall, this was a stronger than expected inflation print, although the higher fuel prices were largely driven by international issues, and will themselves act as an effective 'hike' on households spending in due course.

The Aussie dollar initially kicked up a bit on the news, before later trading all the way back down from whence it came, to finish the day lower than where it started. 

Looking further out, Australia's 3-year bond yield is quietly retesting the highs seen back in early July.

What next?

What happens to housing if we get a further interest rate hike in November on Melbourne Cup day?

An ongoing rise in mortgage arrears, certainly, and more developers doubtless fall over as a result of worsening cashflows combined with a further hit to confidence. 

Dwelling prices in many regional parts of the country will likely also take a further step down towards reality.

Housing supply is already struggling to keep pace with population growth, and a further interest rate hike wouldn't help here. 

The rental crisis most likely worsens as a result, as well as leading more landlord owners to selling up. 

Borrowing capacities may also be set to take a further hit, pushing more buyers into lower price points, and in Sydney and Brisbane more buyers will be pushed from looking at houses into units. 

There's still a fair amount of monetary tightening in the pipeline, as fixed rate mortgages continue to reset.

Create A Life On Your Terms: A Recipe for Using Property Investments to Buy Back Your Life (Part 1)

Australian Property Show

I joined Tom Haigh from My Money Sorted on the Australian Property Show podcast, to talk property investment and buying your time back. 

Tune in here to listen at Apple podcasts (or click on the image below):

You can also listen at Spotify, Podtail, or anywhere else that you get your podcasts.

Part 2 coming soon.

House price expectations continue to rise

Red Book of truth reveals all

Consumer sentiment remained mired at very low levels in October, according to Westpac's 'red book', despite a small lift in the reading from 79.7 to 82.0.

Spending has held up, to some extent, as households run down their financial buffers, but a contraction in spending is expected ahead. 

House price expectations continued their relentless rise, however, as they have all year. 

The house price expectations index increased +7.4 per cent over the past three months to a new cycle high.

Source: Westpac: Red Book

All of the most populated states have house price expectations in positive territory, with Western Australia and Queensland now leading the way. 

Source: Westpac, Red Book

Looking further out, economists see confidence growth among the industry rising to 2-year highs.

This reflects record high population growth, with immigration already topping 500,000 this year, and housing supply not keeping pace. 

This week's developer insolvency was NPM Group, a building group with 45,000 projects completed, and this follows on from Dome Group last week.

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Container freight costs have now fallen by more than 90 per cent since their 2021 peak.

Let's hope this translates into lower inflation ahead too.

Property demand to soar to 2046 (PEXA)

ausbiz TV

Australia's population is set to soar to 35 million by 2026 according to PEXA, with immigration already having hit a record 500,000 this year. 

However, many developers are exiting the market.

I discussed with Danielle Ecuyer at ausbiz here (or click on the image below):

The oldest debate in Aussie finance...

Triggered!

I Tweeted out a few news articles today, as I usually do, one of which contained the below 'triggering' headline in the AFR.

Wow, so many thunderous replies!

There's basically two sides to this debate (if 'debate' is actually the right word - it's usually a slanging match of sorts). 

Yes, it's been a disappointing stretch for the Aussie stock market, especially if you were to account for the very large rise in the cost of living over the past 16 years.

On the other hand, the Aussie stock market tends to be a strong dividend payer, and the dividend streams are tax effective.

On an accumulation basis the chart looks somewhat different...

Moreover, it's always a bit misleading to cherry-pick start and end dates, since as far as I know nobody ever buys all of their stock portfolio at the market peak and then never invests again.

The 20-year ASX chart shows that despite the global financial crisis boom/bust period - which was fueled by the resources construction boom and the liberal use of margin loans - the index has still broadly doubled over the past two decades, even before accounting for the dividend streams.

Both sides of the story, as Phil Collins once said. 

Finally, as to whether the Aussie stock market has underperformed US stocks on an accumulation basis (i.e. including dividends)...well, yes that is true, but this has also been the case for most investments over the past three decades. 

Nice clickbait headline, though...that's definitely true!

2-Sense: Mortgage monster swallowing households

2-Sense

I discussed the mortgage topical monster monster with Chris Bates on the Australian Property Podcast.

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

You can also watch the video version here:

Insolvencies highest since 2015

Insolvencies soar

For the people wondering whether more interest rate hikes are needed to slow the economy...I think not.

ASIC's quarterly data showed insolvencies rising to the highest level since 2015 in the September quarter.

There was an alarming 783 construction insolvencies over the 3-month period,]

New South Wales alone saw 428 business entering external administration in Q3, which doesn't bode at all well for Sydney's housing shortage. 

Annual insolvencies in the sector accelerated to around 2,300.

The worrying thing is that most of this related to cost pressures, rather than the plummeting demand for new projects, most of which has yet to flow through. 

With the fixed rate mortgage cliff yet to flow through in full it's inevitable that construction insolvencies will continue to rise from here, adding further pressure to the dwelling shortage. 

Jobs figures slowly softening

Full-time jobs going

The labour force figures came in soft for September, with employment up only very modestly, by +6,700. 

This did come off the back of some volatile numbers in recent months - seasonal adjustments have been a bit thrown off by shifts in school holidays - so it's a bit easier to look at a 3-month average.

Overall, the quarterly gain in employment slowed to +23,000 per month, which is all the way back down to where things were tracking earlier in the year, and now a long way behind the speed of population growth (more on this in a moment). 

The Aussie dollar fell on the softer than expected report, largely because the number of reported full-time employed dropped by -40,000.

Full-time employment is now -53,000 lower over the past three months, which is an obvious indicator that conditions are softening. 

Unsurprisingly, hours worked are also in decline.

Unusually, there was a sharp monthly drop in the participation rate, from record highs in August at 67 per cent, to 66.7 per cent in September.

Source: ABS

For now, then, the unemployment rate remains steadfastly low at 3.6 per cent. 

Similarly, the recent uptrend in underemployment also saw a temporary blip.

The wrap

Overall, this was a softer than expected report which tends to suggest the economy is cooling.

Separately, ASIC reported the business insolvencies figures for the September quarter, which saw business failures rising to the highest level since, 2015 (and construction insolvencies continuing to soar).

Looking ahead, the economy is no longer strong enough to create enough jobs to fulfil the extremely high rate of population growth, and it's more or less inevitable that the unemployment and underemployment rates will trend higher.

The unemployment rate remains extremely low in the powerhouse New South Wales economy, at just 3.3 per cent. 

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James Foster took a deep-dive into the numbers here.