All the financial changes coming tomorrow + property nuances

Hi everyone,

This week has laid the groundwork for Tuesday’s Reserve Bank decision. I’ll explain the background as well as summarise all the 1 July financial changes coming into effect, the nuances which drive property values, and how you spend time in your life.

But first, inflation. The financial evil the RBA is trying to bring under control by raising interest rates and slowing the economy.

The good news is, it looks like it’s working. And the odds have swung back in favour of the RBA keeping rates on hold when it meets on Tuesday.

The monthly inflation figure for May was significantly down. Way more than expected, BUT they are just monthly figures, which can be a bit volatile. The RBA puts a lot more importance on the quarterly numbers.

Even so, the annual rate of inflation fell from 6.8 per cent in April to 5.6 per cent in May – the lowest annual pace since April 2022.  

Economists expected a number anywhere between 5.6-6.9 per cent, with the average expecting over 6 per cent. So for the number to be in the “5s” was a great result. 

The biggest contributor to the drop was holiday travel and accommodation prices, which fell by 11.3 per cent in the month… thank goodness it looks like those outrageous airfares are starting to drop in a big way.  

Remember every new month of figures drops off the CPI of 12 months ago, which was high. The 3‑month annualised rate is now at 3.1 per cent, while the 6-month annualised rate is at 4.3 per cent. Which if maintained, is getting back to the RBA’s desired 2-3 per cent target range. 

So the expectation is for the RBA to keep rates on hold this Tuesday. But whether this is the peak of the cycle will depend on whether this trend will continue. July 1 is bringing a lot of price increases based on the previous inflation highs, which could spike the figure up. For example, Telstra is putting its prices up 7 per cent and blaming inflation. But it’s using inflation of months ago, not the 5 per cent it’s at now.

Rents and housing cost rises are still a big driver of inflation, and they’ll need to moderate.

Central Banks around the world are focusing on the inflation genie and they are having some success in putting it back in the bottle. As this graph shows, inflation in the world’s seven biggest economies is now well past their peaks and strongly trending down.

Inflation is heading in the right direction… but are consumers slowing their spending?

As I’ve been mentioning over the last few months, the RBA has been saying interest rates have to go up because inflation is too high, consumers are spending too much, and the job market is too tight.

Now inflation is coming down and this week the May retail figures came out as well. Retail trade was up 0.7 per cent in May – much stronger than expected – although annual growth fell marginally to 4.2 per cent.

The biggest driver of growth was other retailing (+2.2 per cent). Also strong was cafes, restaurants and takeaway (+1.4 per cent). It appears Australians are still spending up big when it comes to a night on the town. But the Australian Bureau of Statistics made the point that rising food prices may be behind the increase, rather than us eating out more often. We’re just paying more for the meal.

Household goods (+0.6 per cent) recorded the first rise since January, but remains well below the recent peak. Food retailing (+0.3 per cent) grew again while department stores (‑0.5 per cent) and clothing and footwear (‑0.6 per cent) recorded negative growth after rising in April. 

The ABS also made the point that it seemed consumers were spending up big at the sales, which appear to have been brought forward from the traditional end of June/early July.

What about the job market? It’s easing as well

That’s why this week has been big for economic news – we got the job vacancies numbers as well. Job vacancy fell by 2 per cent over the three months to May and follows a downwardly revised 2.4 per cent decline over the three months to February.

So the tight job market is starting to ease… but is still much tighter than it was pre-pandemic.

A fall in the number of vacant jobs in the private sector more than entirely drove the overall decline. Private sector vacancies fell by 2.3 per cent, while public sector (Government) vacancies increased by 0.3 per cent. 

Over the year, job vacancies have now fallen by 10 per cent. Private sector job vacancies have declined by 12.3 per cent, whereas the public sector is 14.4 per cent higher. Relative to its peaks, private sector vacancies are 12.3 per cent lower while public sector vacancies are just 0.8 per cent lower.  

By state, there were very large quarterly declines in NSW (‑11.7 per cent), Qld (‑9.3 per cent), NT (‑8.7 per cent), Tas (‑7.8 per cent) and Vic (‑5.1 per cent). A more moderate decline was seen in the ACT (‑0.9 per cent), where there is a large share of public sector jobs. WA (+4.0 per cent) and SA (+8.7 per cent) saw increases in the quarter. 

By industry, the key driver was a large 26.5 per cent quarterly decline in job vacancies in accommodation & food services.  

The 1 July tidal wave of changes affecting your finances

The start of a new financial year brings an enormous number of changes… everything from superannuation and childcare to pay rises and paid parental leave.

RateCity.com.au has compiled a list of major changes that could see a material impact to your bank account.

Key changes include:

• Increase to the childcare rebate (from 10 July).

• Release of 50,000 new places in the Home Guarantee Scheme with wider eligibility conditions.

• Increase to electricity prices up to 25 per cent.

• Increase to the Super Guarantee from 10.5 per cent to 11 per cent.

• Increase to the Age Pension Age to 67.

National changes that could affect your hip pocket 1 July 2023

NSW changes from 1 July 2023

Queensland changes from 1 July 2023

ACT changes from 1 July 2023

Common mistakes in forecasting property values

There is absolutely no shortage of data or commentary when it comes to the property market or forecasts about where it’s going. I often say that property values are all about demand and supply, but obviously it’s a bit more nuanced than that.

It’s why I was fascinated by this report from Ray White chief economist, Nerida Conisbee, who looked at the most common reasons as to why a lot of property forecasters can get it so wrong. I really rate Nerida, which is why I think this is worth a read.

1. Assuming that house price movements are consistently driven by the same things

House prices are more sensitive to some things than others. There is a tendency to over-emphasise one factor over another. In the most recent cycle, the main thing that many got wrong was putting an over-emphasis on interest rate changes, but ignoring housing shortages and population growth.

2. Assuming that what drove prices up will also push them back down

What drove prices up doesn’t necessarily drive them back down again. During the pandemic, Australia lost people to overseas and population growth was very low. At the same time, prices increased dramatically primarily because the cost of finance was so cheap and people weren’t spending as much on other things. As interest rates started to rise, many assumed that prices would move back in the exact same direction. While this happened a bit, the bounce back in population growth prevented a dramatic fall.

3. Assuming that all housing markets are the same

House prices can be falling in one city but increasing in another. Even more locally, this can happen in adjacent suburbs. Different markets have different drivers. Cities like Perth are more sensitive to the commodities cycles, whereas Melbourne and Sydney move more closely with interest rates. Head to small regional towns and the addition of a new employer or a strong agricultural year can make a difference. At a very localised level, a new café or new form of public transport can drive up prices.

4. Perception that house prices swing around dramatically

The cost of transacting and the speed of sale and settlement make housing a far less volatile investment to easily traded shares. This makes house prices far less volatile to a change in conditions.

5. Look at housing markets in the same way as financial markets

Financial factors do drive housing markets, but demographic change is also a factor. In fact, many changes to property markets beyond residential are heavily influenced by changes to the way people live and work. Shopping centres can do well in a poor retail trade environment if there is strong population growth. Industrial property is doing well because of changes in the way we are shopping.

6. Don’t understand the consumer response

Building a model to forecast house prices is difficult. A simple model utilising population growth, number of dwellings and cost of finance will ignore a lot of what drives consumers when buying and selling homes. Selling the family home is a big deal and spending on other things will be reduced first before selling. This cycle, many investors have not sold because rents have increased, helping with mortgage payments.

7. Underestimate long term trends

Long term preference changes drive property markets. The pandemic led to the highest movement to regional areas ever recorded, leading many to believe that regional pricing would come back down quickly as pandemic restrictions faded. This hasn’t happened and reflects that this regional movement was already happening prior to the pandemic. It also reflects that it wasn’t just pandemic movement that led to price rises, strong performance in mining and agriculture contributed as well.

What do you do with your life?

I follow a Twitter account called World of Statistics (yes, I love stats and yes, I know I’m a nerd). But some of their stuff is fascinating.

Like, who has ever wondered, ‘how much time do I spend on different activities across an entire lifetime?’ Here’s the answer.