Interest rates outlook turns hawkish ahead of 2024 Budget

Australia’s consumer price inflation came in at 1 per cent for the March 2024 quarter, which was a fair bit higher than market and economist expectations.

Over the year the inflation rate was 3.6 per cent, some way down from 4.1 per cent at the end of December 2023, which is at least heartening, but also a bit above the Reserve Bank's latest forecasts. 

Overall, it seems that interest rates have largely worked as expected on the interest-rate sensitive sectors of the economy — prices actually fell for clothing and footwear, and furnishings and household equipment, for example — however, there are inflationary pressures on some of the non-discretionary items. 

Unfortunately, inflation was higher than expected largely due to sectors that have come under pressure from extremely high population growth.

There were large price increases in secondary education (+6.1 per cent), tertiary education (+6.5 per cent) - this quarter saw a 12-year high for education price increases - and medical and hospital services (+2.3 per cent).

These higher-than-expected inflation figures have seen a marked shift in interest rate expectations, with markets no longer expecting any cuts in 2024, and futures markets even pricing in some chance of a further hike over the next few months. 

There are further global geopolitical risks ahead, which could impact oil and energy prices, while a prospective change of US President could also result in inflationary tariffs. 

The housing market and inflation

From a housing market perspective, the inflation figures suggested that rents also appeared to reaccelerate in the March 2024 quarter, though there was some distortion in the second half of 2023 due to the Commonwealth Rent Assistance package. 

CoreLogic’s latest figures also suggested that rents continued to rise at a brisk clip of +2 per cent in the March 2024 quarter, perhaps partly a seasonal effect, as international students returned to Australia. 

Rental markets remain tight, in any case, and with some 2,350 construction and development firms collapsing into administration and insolvency over the past year, it seems likely that the rental market will most likely remain tight throughout 2024. 

On a brighter note, it seems that the worst of the inflation for construction materials has now passed. 

Budget night 2024

Budget night is coming up pretty soon, and we might expect that the Treasurer will clarify tax incentives to push the Build to Rent (BTR) residential sector forward to assist with the languishing housing supply. 

Corporate landlords will be incentivised to rent out units to tenants and offer the potential for longer lease terms.

Some tenants will like the idea of paying rent to a corporation instead of a private landlord for the security of tenure. However, the experience to date in Australia has been that the rents charged are typically higher than average. 

BTR is a massive part of the new supply in the London housing market these days, and the Labor Party in Australia evidently also likes the idea, spurred on by union-dominated superannuation funds.

Separately, crossbench Senators Pocock and Lambie are pushing the government to reform negative gearing and the capital gains tax discount, modelling a range of potential measures.

However the Labor Party partly lost the 2019 election due to similarly proposed reforms, and it may be considered politically too risky to make wholesale changes to the way rentals are taxed at a time when rental vacancies are already at all-time lows.

Housing price growth peak

The past year has been characterised by housing stock shortages, pushing housing price growth far ahead of what might've been expected or implied by the credit impulse from mortgage lending. 

We thus may well find that the peak for the rate of housing price growth was in the first quarter of 2024, as higher mortgage rates now begin to bite. 

CoreLogic released its monthly housing market report for the month of April, which confirmed what everyone already knew, that Perth's housing market is continuing to tee off.

Perth housing prices were up around +6 per cent over the April 2024 quarter, with Adelaide (+3.3 per cent) and Brisbane (+3.1 per cent) also continuing to record strong price growth. 

The weakest performing market of the capital cities has been Melbourne, with no nominal price growth of late, and some regional markets have seen prices easing back from their pandemic highs. 

Pete Wargent is a co-founder of Brisbane buyer's agency AllenWargent, six-times published author of books like Get a Financial Grip: A Simple Plan for Financial Freedom, co-host of the Australian Property Podcast, and a regular expert commentator in the fields of finance and property.