Has The Inflation Genie Escaped The Bottle?
Kanebridge News
    HOUSE MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $1,471,287 (-0.47%)       Melbourne $953,578 (0%)       Brisbane $813,837 (+0.79%)       Adelaide $762,215 (+0.12%)       Perth $660,264 (+0.59%)       Hobart $715,003 (-0.87%)       Darwin $649,416 (+2.32%)       Canberra $938,596 (-3.12%)       National $942,992 (-0.51%)                UNIT MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $699,562 (+0.47%)       Melbourne $469,057 (-0.10%)       Brisbane $443,473 (-0.97%)       Adelaide $377,120 (+2.85%)       Perth $368,266 (+0.42%)       Hobart $549,709 (-0.61%)       Darwin $339,112 (+0.57%)       Canberra $492,401 (+2.61%)       National $493,098 (+0.45%)                HOUSES FOR SALE AND WEEKLY CHANGE     Sydney 8,253 (+355)       Melbourne 11,270 (+481)       Brisbane 8,990 (+21)       Adelaide 2,573 (+50)       Perth 8,017 (+44)       Hobart 886 (-7)       Darwin 252 (+5)       Canberra 876 (+38)       National 41,117 (+987)                UNITS FOR SALE AND WEEKLY CHANGE     Sydney 7,339 (+207)       Melbourne 6,852 (+127)       Brisbane 1,928 (+30)       Adelaide 437 (-33)       Perth 2,214 (+33)       Hobart 140 (+3)       Darwin 334 (-5)       Canberra 435 (+1)       National 19,679 (+363)                HOUSE MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $680 ($0)       Melbourne $500 ($0)       Brisbane $565 ($0)       Adelaide $530 (+$5)       Perth $570 (+$10)       Hobart $560 ($0)       Darwin $678 (-$3)       Canberra $700 ($0)       National $606 (+$1)                    UNIT MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $620 (+$3)       Melbourne $470 (+$10)       Brisbane $510 (+$10)       Adelaide $430 ($0)       Perth $500 (+$10)       Hobart $498 (+$13)       Darwin $560 (+$10)       Canberra $550 ($0)       National $523 (+$7)                HOUSES FOR RENT AND WEEKLY CHANGE     Sydney 6,511 (-206)       Melbourne 6,333 (-297)       Brisbane 4,007 (-126)       Adelaide 1,167 (-60)       Perth 1,654 (-51)       Hobart 274 (+2)       Darwin 144 (+2)       Canberra 710 (-5)       National 20,800 (-741)                UNITS FOR RENT AND WEEKLY CHANGE     Sydney 7,667 (-348)       Melbourne 5,301 (-243)       Brisbane 1,588 (-99)       Adelaide 402 (-13)       Perth 705 (-26)       Hobart 112 (+3)       Darwin 234 (-4)       Canberra 569 (-24)       National 16,578 (-754)                HOUSE ANNUAL GROSS YIELDS AND TREND       Sydney 2.40% (↑)      Melbourne 2.73% (↑)      Brisbane 3.61% (↑)      Adelaide 3.62% (↑)      Perth 4.49% (↑)      Hobart 4.07% (↑)        Darwin 5.42% (↓)     Canberra 3.88% (↑)      National 3.34% (↑)             UNIT ANNUAL GROSS YIELDS AND TREND       Sydney 4.61% (↑)      Melbourne 5.21% (↑)      Brisbane 5.98% (↑)        Adelaide 5.93% (↓)       Perth 7.06% (↓)     Hobart 4.71% (↑)      Darwin 8.59% (↑)        Canberra 5.81% (↓)     National 5.52% (↑)             HOUSE RENTAL VACANCY RATES AND TREND       Sydney 1.6% (↑)      Melbourne 1.8% (↑)      Brisbane 0.5% (↑)      Adelaide 0.5% (↑)      Perth 1.0% (↑)      Hobart 0.9% (↑)      Darwin 1.1% (↑)      Canberra 0.5% (↑)      National 1.2% (↑)             UNIT RENTAL VACANCY RATES AND TREND       Sydney 2.3% (↑)      Melbourne 2.8% (↑)      Brisbane 1.2% (↑)      Adelaide 0.7% (↑)      Perth 1.3% (↑)      Hobart 1.4% (↑)      Darwin 1.3% (↑)      Canberra 1.3% (↑)      National 2.1% (↑)             AVERAGE DAYS TO SELL HOUSES AND TREND       Sydney 42.5 (↑)      Melbourne 44.7 (↑)      Brisbane 46.7 (↑)      Adelaide 39.8 (↑)      Perth 45.7 (↑)      Hobart 43.3 (↑)        Darwin 40.7 (↓)     Canberra 47.9 (↑)      National 43.9 (↑)             AVERAGE DAYS TO SELL UNITS AND TREND       Sydney 43.8 (↑)      Melbourne 45.0 (↑)      Brisbane 45.7 (↑)      Adelaide 39.7 (↑)      Perth 47.4 (↑)      Hobart 51.1 (↑)      Darwin 61.3 (↑)      Canberra 44.6 (↑)      National 47.3 (↑)            
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Has The Inflation Genie Escaped The Bottle?

MSQ Capital’s Managing Director Paul Miron thinks a small recession could be the key to economic control.

By Paul Miron
Tue, Jul 12, 2022 2:48pmGrey Clock 5 min

OPINION

For the past 40 years, inflation in the western world has not triggered any emotion…until now. Naturally, the question we must ask is: What exactly has caused the sudden panic, fear, and obsession with the subject of inflation?

In central banks’ pursuit of taming inflation, we have seen the blunt instrument of raising interest rates being applied worldwide. This has negatively impacted most asset classes, especially property and shares.

Since 1990, the general trajectory of interest rates has been downward, ultimately reaching the floor of a 0.1% p.a. official cash rate in Australia. In other words, “free money”. This led to an unprecedented demand for almost any time type of asset that can store wealth.

It is no surprise that with the onset of rate hikes, as well as wild predictions of the share market and property market falling in excess of 60% and 30% respectively, all types of investors have their eyes and ears fixated on what will happen next in the global economy.

On the topic of interest rates, it must be noted that if rates are raised too quickly, they could trigger a recession. On the other hand, if inflation is unchecked this could lead to deeper and more damaging recessions worldwide. It may take decades to return to normality.

This is undoubtedly the most pressing economic issue of our time.

To understand the origins of inflation and to arrive at possible antidotes, one needs to dust off their economics textbooks from an era that experienced this phenomenon firsthand – the 70s.

As one of my favourite sayings goes – “History doesn’t repeat itself, but it often rhymes.”

What is the True Origin of Inflation?

Milton Friedman is one of the most highly regarded economists of modern times, reinforced by his receiving of the 1976 Nobel Memorial Prize in Economics for his work on the study of inflation. He is the principal architect of modern monetary policies applied by western central banks.

The words Friedman uttered during his era are all the more relevant to today’s economic climate. As he put so simply: “Inflation is a monetary phenomenon. It is made and stopped by central banks.”

In other words, it is the volume of money being printed, which can be economically summarised as an increase in the money supply, that is relevant to the question of inflation.

Increase In The Money Supply

Since the onset of COVID, the increase in money supply has never been more significant in our economic history. We have been paid a raft of various government benefits to sit at home and disrupt normal business and spending habits. At the same time, the RBA increased the money supply to counterbalance the loss of productivity. Central banks were essentially “printing more money” at a rapid pace, while lowering interest rates and allowing the bank to issue more credit.

Also, let us not forget quantitative easing, where the government buys and issues debt, reducing the cost of capital and creating massive liquidity in the financial markets.

According to Friedman, once a rapid increase in money supply occurs, it takes anywhere between 6 to 18 months for inflation to work through the economy. We are seeing this phenomenon firsthand here in Australia and around the world, with inflation rates not seen since the 70s.

Friedman also noted that inflation is not a global phenomenon but a home-grown problem that is caused by central banks and can be remedied by central banks.

Supply/Demand for Goods And Services

In the normal free-market economic system, prices of goods and services adjust according to demand, with businesses either increasing or decreasing production. Over time, this results in new business entrants increasing supply, or businesses leaving the market and decreasing supply.

Counterintuitively, these disruptions do not cause persistent inflation. From the onset of COVID, the stop-and-start nature of the global economy has resulted in supply chain issues and overnight demand for certain services, with employers needing to re-skill and re-tool their businesses to cope with unexpectedly high demand.

Once again, using free-market logic, these issues will eventually resolve themselves over time. Economists often refer to these impacts being ‘transitionary’ impacts of inflation; that is, temporary.

Looking back at the ’70s inflation crisis, many governments around the globe tried to lay blame on the 1973 war in the Middle East that disrupted oil production and increased its price by as much as 400%. Comparisons can be drawn to the Russian-Ukraine War and its effects to supply chains and commodities globally.

Despite this, the teachings of Milton Freidman tell us that these supply shocks provide short-term inflationary pressure. In the long-term, free-market economics will find a way to adjust the demand and supply of these goods.

Future Price Expectations

Perhaps the most ignored and least discussed aspect of inflation is future price expectations.

In the US, Australia and most western economies during the ‘60s, inflation had been unchecked for many years, rising from 1.5% to 5% during the ’60s, and reaching more than 14% in the ‘70s. In addition, wage inflation in Australia for the five years during 1969-1974 went up by 98%.

If businesses and employees are accustomed to long periods of persistent, rising inflation, a natural response to the rising cost of living will be employees demanding an adjustment to their wages, leading to higher prices and higher inflation. In such a situation, inflation becomes embedded in expectation and becomes a self-perpetuating inflationary issue that is commonly referred to as the ‘wage-price inflationary spiral’.

The main lesson to be learnt from the 70s is that we cannot allow unanchored inflation expectations. Central banks must act swiftly to tackle inflation and maintain the status quo of people having anchored expectations of inflation so as to maintain faith in our financial system. This is to avoid inflation becoming uncontrollable and inflicting unnecessary harsher pain to the economy.

This is precisely why despite Labor’s promises to support the market with 5.5% wage inflation, the RBA recommends that it remains capped at 3.5%. Lower wage inflation guards against a wage-price inflationary spiral.

Thus, we reach a conclusion that a short recession is better than losing control of inflation and letting loose future price expectations.

Looking back at our central bank, the current actions taken by the RBA are taken right out of pages in Milton Freidman’s economic textbook. They are acting swiftly and assertively.

We believe the next 6 months will have a heightened level of volatility in both the property and share market until there is evidence that the inflation beast has been tamed. We anticipate that this will only occur towards the end of the year once we receive data reflecting lower inflation.

Investors should expect a short and fast series of interest rate rises over the next four months.

Hopefully, this will be followed by stability with minimal changes to the official cash rate during 2023. This would enable the economy to re-adjust to the psychology of normalised interest rates.

The RBA Governor, Philip Lowe, indicated that an official rate of 2.5% is the correct setting for a neutral monetary policy and money supply. Investors and borrowers should brace for this setting sooner rather than later and prepare for the fact that we will have higher interest rates and softening asset prices.

Australia’s present economic strength is significant with a low base of unemployment, plentiful natural resources and a food-rich economy. Despite this, the sudden increase in interest rates will pose an additional risk. As mortgage managers, we appreciate our risk assessment and are completely cognisant to the downward risk of depreciating property prices.

We assess the risk of properties depreciating by perhaps between 15-20% – maybe even more for some specialised properties as well as regional properties and vacant land. Additionally, some construction projects have a significant risk of delays and cost blowouts that continue to be the predominant risk factor for this type of debt over the next 12 months.

However, with the lack of supply, wage inflation, migration, low levels of unemployment, rental growth and times of inflation, property is naturally seen as an inflation hedge. Thus, property will remain relatively resilient through these inflationary times.

 

 

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

MSQ Capital

msquaredcapital.com.au

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In a decision that will surprise few economists – or borrowers –  the RBA announced a further 0.25 percent rise in interest rates when it met earlier this afternoon. This brings the current interest rate up to 3.35 percent, a 3.25 percent increase since May last year.

Prior to today’s announcement, when the interest rate was still 3.1 percent, research by Roy Morgan released at the end of last month revealed that 23.9 percent of Australian mortgage holders were ‘at risk’ of mortgage stress in the three months to December 2022. Mortgage stress is where one third or more of weekly household income is going towards mortgage repayments.

In a tight rental market, mortgage pressure has also lead more landlords to pass rate rises onto tenants.

Research director at CoreLogic, Tim Lawless, says the latest rate rise moves beyond the ‘serviceability assessments’ some borrowers passed when applying for their loans.

“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate,” he said. “The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.  

“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”

Today’s decision signals the RBA’s continued efforts to use the cash rate to manage inflation, which sits at 7.8 percent annually. Time will tell whether it has been successful in curbing spending or whether, as many predict, there are more rate rises on the way. Mr Lawless said overseas economies could offer some hope to borrowers.

“Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending,” he said.  “Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022, albeit from the highest level since the mid-1990s (outside of the impact from the introduction of GST in 2000).

“Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35 percent, through to another 75 basis points of hikes.  However, a recent survey from Bloomberg puts the median forecast at 3.6 percent, implying one more hike of 25 basis points in the wings.”

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