On Tuesday 4 July the Reserve Bank of Australia Board met and decided to leave the cash rate on hold at 4.1%.
As in previous months the comment on the press release from the Governor of the Bank has said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe,”
The statement mentioned that by holding interest rates in July the pause will provide the Board some time to assess the economy and to determine the impact of the recent rate increases.
Some of the indicators that the Board uses to determine the level of interest rates is of course inflation which is currently at 7.0% after the March quarter 2023 and the indicator rate at the end of May 2023 was 5.8%. Obviously the May indicator rate gave the Board some confidence that inflation was reducing albeit very slowly so they have decided not to increase the rate in July. Retail sales is an indicator that the Board is also looking at when determining the cash rate and the last retail sales number from the Australian Bureau of Statistics was an increase year on year of 4.2%.
Another major factor that is causing inflationary pressure on the economy is the increases in residential rents. There have been many stories in the media over the last number of months the level of rent increases in some areas of the country. These rent increases along with increasing interest rates is causing major economic stress to a large number of households.
One commentator that I have heard in the last few days has said that it is not generally the interest rate alone that is hurting people with mortgages; it is this coupled with the amount they have borrowed to pay for their property. For those of us that are old enough the cash rate in January 1990 reached 17.5% but the level of borrowing was not as great.
Let us see what a cash rate of 4.1% will continue to do to the rate of inflation in the coming months and all eyes will be on the release of the June 2023 inflation data on July 12, 2023.
Rental Market Data
In the last couple of days CoreLogic, released their Quarterly Rental Review Report for June 2023. Rents across Australia rose 2.5% over the quarter to June 2023. In the months prior to June 2023 April and May rents increased by 2.8% This deceleration is the first since November 2022. The annual trend for National rents has seen an increase of 9.7% in the 2022/23 financial year.
The reduction recorded is in a period of an increase in overseas migration which is coupled with a shortage of supply. Corelogic has suggested that an increasing proportion of tenants are reaching their affordability ceiling. There is an expectation that rental demand will continue to increase especially from overseas migration. Rental listings are also well below the previous five year average with a shortfall across the country of 32.4% or 47,500 listings recorded over the four weeks to the 3rd of June 2023. Vacancy rates eased ever so slightly over the quarter from 1.1% in March to 1.2% in June but this is expected to remain below the pre COVID average of 3.3%
The following graph gives a good representation of the rents for all dwellings, gross yields and vacancy rates across the capital cities across the country as well as the combined regional areas.
Strong demand from overseas migrants, particularly international students, continues to support stronger growth in the medium to high-density sector, with national unit rents increasing by 3.6% in the June quarter compared to a 2.0% increase in house rents.
Given the above it appears that with the continuing influx of international students the demand for high density living will remain high. Given the position with interest rates and the possibility of further increases in the coming months depending on the inflation rate returning to the preferred range of the RBA there may be additional housing stock coming onto the market which will depend on the financial position of individual investors and their investment preferences.
**The data and information contained above has been sourced from the media release of the Reserve Bank of Australia Board meeting 4 July 2023, the Australian Bureau of Statistics and the CoreLogic, Quarterly Rental Review Report for June 2023. The conclusions drawn are my opinion and all economic opinions can be debated heavily.
***If there is any information that you would like me to cover in the future or if you have any comments please email me at edward@edwardduffy.com.au****I am available to assist with your next property purchase so please do not hesitate to reach out through my website edwardduffy.com.au
