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The real impact of rising interest rates + property bargains

7 min read
20 Nov 2023

The Reserve Bank has been constantly saying that as it monitors the economy for any further need for interest rate increases, apart from inflation its focus is on jobs, household spending and the property market.

This week we received key data on all these areas. First up jobs.

Unemployment up but job creation still strong

The great fear of the RBA is that a strong job market will lift wages as employers bid against each other to hire staff and that would flow into inflation. Plus, if everyone is in a job they’ll go and spend more at the shops which, again, feeds inflation.

The latest unemployment rate rose from 3.6 to 3.7 per cent, but 80,000 new jobs were created when the markets were expecting just 20,000. So while unemployment rose (which the RBA would be happy with), strong jobs growth shows there is still strong demand for workers (which the RBA won’t like).

And, as a result, wages are booming

The Wage Price Index measures pay rises across all private and government jobs. In the September quarter it rose 1.3 per cent and 4 per cent for the year. That’s the strongest growth since March 2009.

But the Bureau of Statistics did point out this very strong growth in September was because of a number of one-off factors in the September quarter which wouldn’t be ongoing. Such as:

The Fair Work Commission lifting the minimum award wage 5.75 per cent in July. The full impact of this decision was felt in the September quarter alone and won’t spill over to the December quarter outcome.

The Aged Care Work Value case resulted in a 15 per cent wage rise for workers in that sector which, when the Fair Work decision is added, meant average wage increases of between 5.75 per cent and 21 per cent for aged care workers.

The traditional 1 July new financial year inflation adjustments for many workers.

The formal ending of public sector wage caps by state governments, which meant 34 per cent of public sector jobs received an average pay increase of 3.3 per cent. In fact, public sector wage growth is the highest since 2011.

So while the Wage Price Index surge in September is worryingly strong, it did include a number of factors which won’t be repeated.

Despite big wage increases, household income is falling

According to the Australian Financial Review, Australians have suffered the biggest fall in standard of living of any advanced economy in the world. Household income dropped 5.1 per cent in the last financial year, the sharpest fall recorded across the OECD.

Inflation-adjusted disposable incomes have hit their lowest level since June 2019 as high inflation, a rapid increase in mortgage repayments and rising income taxes ravage household budgets, newly released data from the OECD show.

It is something I’ve been talking about for months. Yes, high inflation and rising interest rates are draining household budgets, but even though there was strong growth in wages for the September quarter all those extra dollars don’t go to you. The Federal Government gets in the way and takes a slice of it.

A pay rise means being pushed into a higher tax bracket, you pay more in tax and the Federal Budget is the big winner. The reason why the Federal Budget has such a healthy surplus is because of you and your wage rise.

The cold hard facts are… your spending power is being eroded by inflation, higher interest rates AND higher taxes.

The impact of rising interest rates on your household

Let’s go behind the headlines and look at the facts behind the impact of rising interest rates.

Yes, we all think the banks are “so-and-sos” for making us pay more on our loans, but what may surprise you is that they haven’t passed on the full rate rise to borrowers. And they haven’t passed on the full rate rise to savers either.

Surprising, isn’t it?

It’s more a reflection of just how competitive the mortgage market is at the moment and the deals and sweeteners being offered to new borrowers.

That’s why it’s so important to shop around and make sure you have the best rates because if your existing lender isn’t doing the right thing, other lenders are itching to do business with you.

Even though the banks haven’t passed on the full RBA cash rate increases, this interest rate cycle has been the shortest and sharpest in a generation. It has been devastating to Australian families with a mortgage.

By the end of this year mortgage repayments are expected to reach a record high 10 per cent of disposable income. And remember those mortgage repayments are being made in after-tax dollars, whose value is also being eroded by inflation.

Is it any wonder that consumers are tightening their belts and we’re become gloomier about the future? Retail sales are still reasonably strong, but that’s because of the huge influx of new consumers through immigration. On a ‘per person’ basis, we are all spending less.

The spring property selling season is approaching a crescendo

On November 18, according to CoreLogic, capital city auction activity is set to exceed the 3,000 mark for just the second time this year, with 3,133 homes currently scheduled to go under the hammer across the combined capitals.

This week’s auction numbers are up 18 per cent compared to last week (2,656), with auction activity rising across five of the seven capital markets. This week’s numbers are 36.3 per cent higher than this time last year when weaker selling conditions saw 2,298 homes auctioned.

Sydney is expecting its busiest auction week of the year, with 1,169 auctions currently scheduled, while Melbourne auction numbers are set to rise 22.3 per cent this week.

But despite the frenzy of auctions, our capital city property markets are currently performing at very different levels.

CoreLogic regularly looks at what makes up an individual capital’s property areas (suburbs) and how many of those areas are rising or falling in value.

They found the Brisbane market is hot with each of the 162 home unit markets analysed seeing values rise in the past three months, while of the 305 house markets, only four saw a quarterly decline. These were the higher-end suburbs of Kalinga and Windsor as well as the more affordable Redland spots of Macleay Island and Lamb Island.

Likewise in Adelaide, only 3 per cent of house markets saw a decline in the quarter, but there was a notable portion of unit markets in decline (13.4 per cent, or nine of the 67 suburbs analysed).

In Perth, there was only one suburb where house values fell in the past three months, which was Mount Hawthorn. That means 98.1 per cent of the house and unit markets across Perth rose in value over the past three months, and 96.3 per cent of suburb dwelling markets in Perth were at record high values at the end of October.

But the pace of growth across Sydney and Melbourne has slowed from the middle of the year when the June rate-hike surprised financial markets.

Currently, growth in Sydney markets is strongest across relatively expensive house markets, with Five Dock houses topping the three-month capital growth ranking (up 8.4 per cent).

In Melbourne, it was the more mid-priced unit market of Moorabbin which topped the list, increasing 7.4 per cent.

In Hobart and Darwin, 41 per cent of house markets saw a quarterly decline. Canberra has also seen relatively flat capital growth trends, and particular weakness in the unit market.

Summer holiday property bargains

Okay, hands up if you get distracted by the property values at your summer holiday destination. You get caught up in the holiday spirit and start peering into the local real estate agent’s window display to see what’s about. Thinking maybe a little place would be a good investment and great to come back to every year…

It’s about this moment that Libby drags me away with a few choice words of common sense.

But it’s interesting that those pandemic beach boom towns look to be coming down in value from their dizzying heights when buyers saw them as an escape from lockdowns.

According to real estate giant Ray White, the list of towns seeing the largest declines in value are predominantly beach holiday destinations. As interest rates rose and international travel became an option again, owning a holiday home became far less attractive.

Add in tighter restrictions on short term rentals and it has made holding such properties far less attractive. In many of these areas, the number of listings has increased dramatically.

One exception to this is East Lismore, which isn’t typically a holiday town. While flooding in Brisbane had a minimal impact on house prices, the same cannot be said for Lismore. The scale of the devastation has led to a significant price drop, particularly in those areas where insurance costs are likely to have now risen rapidly.

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