Inflation, interest rates set to fall in second half of the year, top lender forecasts
Weakened household consumption means the economy will slow in 2024, according to CBA’s economic outlook
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Australia is likely to remain in the current per capita recession until the second half of the year, with the “distinct possibility” of a quarterly contraction in economic activity, according to the Commonwealth Bank’s 2024 economic outlook released yesterday. Growth in our gross domestic product (GDP) is likely to be below trend despite continuing strong population growth this year.
CBA forecasts annual inflation to fall to 3 percent by the end of the year, with unemployment to increase from 3.9 percent today to 4.5 percent. This will enable the Reserve Bank to commence interest rate cuts from September, with CBA expecting a total reduction of 75basis points (bps) in 2024 and a further 75 bps in the first half of 2025. CBA does not expect any rate rises beforehand.
“At the heart of our forecast for below-trend growth is continued weakness in household consumption,” said Gareth Aird, CBA’s head of Australian economics. “Real household consumption was just 0.4 percent per year in Q3 23. Against the backdrop of approximately 2.5 percent population growth there has been a big contraction in the volume of spend per person.”
Mr Aird said the compounding forces of weak real wages growth, considerably higher mortgage repayments and the impact of bracket creep on tax liabilities will all weigh on spending in the first half of 2024. “There is no circuit breaker on the horizon in the short run to boost consumer demand. As such, we expect household consumption per capita will continue to contract over coming quarters. And there is a very real risk that total household consumption also declines.”
CBA expects home values in Australia’s capital cities to lift by 5 percent over 2024. CoreLogic data shows a 9.3 percent increase in 2023, largely due to supply constraints in key markets such as Sydney. CBA senior economist Belinda Allen said the imbalance between demand, driven by elevated population growth, and low supply was set to continue this year.
“Many of the same factors that drove prices higher are set to be in place in 2024, albeit with less intensity,” Ms Allen explained. “However we expect affordability constraints and rising advertised supply to put a handbrake on home price growth over the first half or so of 2024.”
The property market is likely to go through “a distinct period of moderation” in the first half, including small monthly falls in Sydney and Melbourne. Ms Allen said Australia’s two biggest cities are forecast to be weaker than the smaller capitals over the first half, but rate cuts from September will spur price growth everywhere. Overall, CBA is tipping home values to rise by 2 percent in Melbourne, 3 percent in Sydney, 8 percent in Brisbane and 9 percent in Adelaide and Perth.
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The federal budget has rattled property investors. But the biggest mistake isn’t the tax changes, it’s the conclusion many are drawing from them.
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The recent budget has forced a reckoning for property investors.
Negative gearing now restricted to new residential builds, the CGT discount gone and on paper, the numbers look different.
And many investors are responding by pivoting toward yield, prioritising cash flow over capital growth in a way that property strategists say misses the point entirely.
“The debate has shifted to yield versus growth as if they are opposing forces,” says Abdullah Nouh, founder of Melbourne-based buyers’ agency Mecca Property Group. “But that framing is itself the mistake.”
Nouh, who works with high-net-worth families and investors on long-term acquisition strategy, argues that capital growth remains the primary driver of genuine wealth creation and that the post-budget environment has made quality assets more important, not less.
The numbers make his case plainly. An additional $500 per week in rental income is welcome. A prestige asset appreciating by $1 million over a market cycle is transformative.
These are not equivalent outcomes, and portfolios built around yield at the expense of location and land value tend to generate income while wealth stands largely still.
The more nuanced shift Nouh is seeing among sophisticated investors is a move toward assets where both outcomes can be engineered simultaneously – established homes on substantial land in quality locations, where the existing dwelling can be repositioned, rental returns improved, and the underlying land value compounds independent of what sits on it.
For investors with existing equity, commercial property is also entering the conversation in a more serious way.
Prestige industrial assets, medical centres and long-leased essential retail offer income profiles that residential property in most capital city markets cannot currently match: longer lease terms, tenants covering outgoings, and greater predictability than the residential tenancy cycle.
“The investors who build lasting wealth are rarely the ones who chased yield or growth exclusively,” says Nouh.
“They are the ones who built a strategy they could sustain – one that generated enough income to hold quality assets through multiple cycles while those assets compounded in value.”
The budget has changed the settings. It has not changed the fundamentals.
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