The Inflation Picture Darkens, As The Property Market Stalls...

Added: 2026-05-20

[00:00:00]Today, the inflation picture darkens as the property market stalls.

[00:00:15]Hi again, it's Martin North from digital finance analytics, well notice post covering finance and property news. The outlook for inflation ahead is getting more concerning as the lasting impacts of the closure of the straits for moves plus the recent budget announcements and the already higher for longer bonds merge with the existing pattern of inflation which is already lodged above the RBA's target range and all of this is now coming home to roost. Meanwhile, we are seeing more signs of the property market faltering. Of course, inflation erodess real wages and puts more pressure on households, something which we've been tracking for some time via our surveys. But now we need to consider the implications of higher costs potentially translating into higher levels of unemployment. If unemployment does rise, this will have a further dampening impact on the property market and potentially higher levels of defaults and of course for sales. RB assistant governor Sarah Hunter delivered a speech on the 19th of May titled inflation and the impact of the Middle East conflict which at one level reconfirm what we already knew but there were some important nuances which I want to go through today. She underscore that the RBA's price stability objective is to achieve average price growth across a broad range of goods and services CPI of between 2 and 3%. And looking ahead, of course, the RBA takes into account domestic cost pressures, which include things like wages, rents, intermediate inputs, and other costs that are mainly reflective of the balance of supply and demand in the domestic economy. And they also then include external costs because businesses can face higher costs if the price of imports rise or if other factors disrupt production. Increases in oil prices are a natural example. These directly increase costs for firms and households in the form of fuel and other refined oil products. In the CPI, spending on fuel for our cars is around 3 and a half% of the total basket. They also have indirect effects because fuel is used in the production and transport of other goods and services that firms use and consumers buy. And she went on to reiterate the difference between the first round effects of price increases and the subsequent effects. For example, the increase in the cost of filling our cars with fuel is flowing directly into higher headline inflation Australia. And by the way, globally, too. Australian petrol prices rose by 36% at their peak, though they've fallen back in recent weeks, reflecting both domestic lower refined oil prices and excise changes.

[00:03:02]Diesel prices rose by even more and remain well above preconlict levels. by those direct effects. Their May forecast saw headline inflation peaking at 4.8% in the June quarter, which was significantly higher than they expected in their February forecast.

[00:03:21]But there are also indirect second round effects too. Higher fuel prices are going to influence prices indirectly.

[00:03:29]Domestically, fuel accounts for around two two and a half% of the cost of producing and distributing other goods and services in the CPI. Components which are more exposed to fuel prices include travel, transport and postal services, some grocery items and new dwelling construction are on the top of the list there. In addition, oil is also an input into the global supply chains and that will influence imported good prices. For example, oil and gas are used in the manufacturer fertilizers and plastics and the costs of those goods have already started to rise. The effect of these input costs on the prices faced by consumers will depend on the degree to which firms pass costs increases on and the timing of when firms review their prices and firms expectations of future costs and prices. The third impact of course is the expectation of future inflation because if this gets embedded as Michelle Bulock in a recent press conference said this leads to higher wages claims which like the 1970s led to a wage price spiral which is hard to control. Actually, the latest data from the weekly A&Z Roy Morgan consumer survey showed inflation expectations are sitting at around 6% last week, which actually was down a bit, though it's still 0.6 percentage points higher than the beginning of the year. The still elevated level of inflation expectations likely reflects higher fuel prices over recent months and some risks of second round effects where higher input costs such as fuel and fertilizer flow through to goods and services broadly and overall consumer confidence is still well in the gutter. So all up, Hunter warned that if inflation expectations were to become untethered, a sharper economic slowdown may be needed to bring them back under control. If expectations rise persistently, it becomes harder for the central bank to bring inflation back to target as it must both bring expectations back down and restore the balance between supply and demand. And Hunter said in a speech at the event doing so may require a more substantial slowing of economy as we saw during the early 1990s recession. Yes, the Rword.

[00:05:50]As a result, she said it's crucial for central banks to keep inflation expectations anchored around the inflation target. The RBA aims for the midpoint of its two to 3% inflation band. And the tool of choice, of course, is interest rates. Actually, the RBA minutes were released on Tuesday and they suggested it would take possibly a pause in June following three consecutive rate hikes to assess the impact on the economy and to see how geopolitical events unfolded. And they also stated that monetary policy would not alter the near-term trajectory of inflation. In any case, having decided by majority to raise the cash rate by 25 basis points, members considered what their deliberations implied for upcoming decisions. Members judged that while it was still uncertain, financial conditions would probably be somewhat restrictive after the decision and therefore agreed that the decision would give the board space to see how the conflict in the Middle East develops and Australian households and businesses respond. also agreed that any assessment of how the incoming data could change the outlook should acknowledge that monetary policy could not alter the near-term trajectory of inflation and additionally that output growth would likely be lower than potential growth for some time. But here's the rub. Bond yields are continuing to claw higher with Australia leading the way, which is potentially a signal of higher interest rates still. So actually markets are divided on whether the RBA will hike again at the next meeting. Money markets are pricing at least one more RBA rate hike this year and a 40% chance of a second one in lifting the cash rate again two weeks ago. The central bank unwound all of last year's easing.

[00:07:44]Beyond that, Hunter also said that the three interest rate rises so far this year were expected to soften the housing market and construct activity and warned the effect would be compounded by property tax changes in Treasur Jim Chararma's fifth budget. This is already having a damping impact on the property market as I discussed with Leath Van Oneland yesterday. Check out the replay of our live show. State governments, for example, could lose around $9 billion in stamp duty because of the Albanesei government's crackdown on property tax breaks or 25% out of a forecast $ 37.3 billion in revenue from residential and commercial property transactions. And as the AFR reported, the number of homes sold could fall by as much as 30% as buyers and sellers shy away from the property market as a result of budget changes to negative gearing and the 50% capital gains discount. That's according to property analyst Louie Christopher at SQM. You're going to have fewer investor buyers and you also have a large component of property owners wishing to hold because they've got the grandfather of negative gearing and they won't want to liquidate because then they'll be up for capital gains tax, Christopher said.

[00:09:02]And elsewhere, Westpak told mortgage brokers that it will not honor pre-approved investor loans for customers, which will need to be reassessed after the federal government banned negative gearing for existing properties in the budget. On Wednesday, Australia's second largest mortgage lender emailed its broker network, warning them to set expectations early by clearly discussing with customers where the removal of the negative gearing benefit may create a serviceability shortfall in the future.

[00:09:32]Mortgage customers seeking an investor loan are expected to have their borrowing capacity reduced because they can no longer factor in savings from negatively gearing a property. Mortgage brokers can expect some customers borrowing capacity could be slashed by as much as 20%. In fact, on Monday, McCquory told its mortgage broker network to update their lending policies to apply the federal government's ban on negative gearing for existing properties, even though it is not yet passed as legislation.

[00:10:03]Under responsible lending rules, banks are required to alert brokers when they expect changes of policies. Commonworth Bank, National Australia Bank, A&Z and ING are currently reviewing their investor home loan policies. Aside from COVID, we cannot recall a time in the past 25 years when the operating conditions for banks have shifted so quickly. Morgan Stanley Bank analyst Richard Wild said, "In our view, the combination of RBA rate hikes and uncertainty created by the proposed changes to property related tax concessions increases the risk of a further derating. Now, the signal to watch here is actually unemployment. If that starts to rise, more people will struggle to service their often significant debt obligations. So we should watch for signs of rising hardship claims to the banks and this might in turn shape the future path of interest rates. But I expect we will start to hear concerns being expressed about the financial stability of banking system given the bulk of lending is for yes residential property. So watch the skies for higher inflation, the first domino, higher interest rates, the second, higher unemployment, the third, and the fourth domino is rising financial stability risks thanks to our overleverage into property.

[00:11:33]Things are going to get very interesting, so prepare accordingly.

[00:11:38]I'm Martin North from Digital Finance Analytics. Many thanks for watching and I'll see you again next time.

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