Panic over petrol prices + Interest rate curve ball

Hi everyone,

Hope you’ve had a good week despite the continued tensions in the Middle East dominating our media and daily lives. It remains one of the great unknowns affecting everyone at the moment, and will certainly be a centrepiece of the Reserve Bank board meeting on Monday and Tuesday - more on that shortly.

In this week’s newsletter:

• Will - or won’t - the Reserve Bank lift interest rates next week?

• How the rise in global oil prices relate to pump prices.

• SQM slashes property forecast.

• Rent increases slowing... but not falling.

• Solid returns from superannuation funds - but what about the war?

• The boom in granny flats and the pros and cons.

• What it takes to be a 1 percenter.

Will the Reserve Bank lift interest rates next week?

Another rate hike is all but certain this year, with the impact of the war in Iran adding to the already concerning acceleration of Australia’s inflation figures.

Pressure is mounting on the Reserve Bank to take quick action to quash inflation, as expensive fuel and supply shortages threaten to escalate prices even further this year.

So, it isn’t a question of ‘if’, but ‘when’ rates will move again.

Australia has been chasing down inflation for several months and now - to everyone’s horror - the situation could get much worse because of the war with Iran.

Higher fuel prices have a huge inflationary ripple effect through the entire economy as it costs more to fill up the trucks that transport your groceries from farms and suppliers to the supermarket ... and that extra cost is passed on to consumers through higher prices.

Anything that’s imported - whether that’s clothes, homewares, or other supplies – will be impacted by the cost of fuelling ships and planes.

It’s a real worry for RBA Governor Michele Bullock, who knows that if conflict in the Middle East is here for the medium to long term, it’ll be shocking for inflation.

Unfortunately for homeowners, the cash rate is the only real lever the RBA has to try to rein in spending and disrupt the trajectory of product pricing.

While many economists are predicting a rate increase at next week’s RBA board meeting, I’m not so sure. I reckon the RBA board will take into account:

• Higher prices from the war in Iran are not caused by Australians spending too much, but by unforeseen circumstances beyond our control.

• It’s uncertain how long the war will last, and the RBA may prefer to wait for greater clarity. The last thing it would want is to plunge the economy into recession by overreacting.

• Higher petrol prices will siphon money out of households budgets to a similar extent as a rate rise. Doing both together could break the economy and hurt consumers.

If we are spared a rate hike next week, we’ll almost certainly see one in May, and potentially another later in the year depending on what happens.

Someone with an average loan of $730,000 would see their repayments increase by around $116 a month or $1,392 a year with a single 0.25 per cent interest rate increase.

It’s a huge hit to the household budget, especially when we’re being stung at the petrol
bowser, facing higher prices at the grocery store and scrambling to keep up with the rising costs that are hitting us from every direction.

According to a recent survey by Compare The Market, 39 per cent of Australian homeowners say they don’t even know their current interest rate.

Aussie homeowners also said that to make extra repayments in the event of more interest rate rises, they’d have to:

• Dip into savings: 15 per cent.

• Spend less on clothing and accessories: 22 per cent.

• Reduce spend on eating out and takeaway meals: 21 per cent.

• Sacrifice social activities: 19 per cent.

• Delay big-ticket purchases: 15 per cent

Making small adjustments is a smart move as we face uncertainty around interest rates in 2026.

With rate hikes on the cards, it’s a good idea to familiarise yourself with your current interest rate so you know if you’re on a good deal or if you’d benefit from refinancing or switching to a lower rate.

If you haven’t already, talk to your lender about ways to shield yourself from potential rate rises. It could be utilising an offset account, making extra repayments to build a buffer, changing to fortnightly repayments or even refinancing so you’re on a competitive interest rate.

We’re likely in for a bumpy 2026, so anything you can do to minimise the impacts now could set you up for a smoother ride throughout the year.

How global oil prices translate to pump prices

With all the wild headlines predicting the future of global oil prices as the Iran war continues, it’s often hard to relate those claims to the price at the bowser.

In the US, economists estimate that a US$10 rise in crude adds 10 to 15 cents per gallon at the pump and nudges headline inflation higher.

In Australia, which imports roughly 90 per cent of its refined fuel, prices are sitting at an
average of around A$2.00 a litre - an increase of around 30 cents since the strikes began.

According to AMP, each US$1-per-barrel rise in oil prices adds roughly a cent a litre to Australian petrol prices. Westpac is modelling a worst-case increase of AU$1.00 per litre if the Strait of Hormuz remains closed for three months.

SQM Research slashes property forecast

Regular readers would know I’m a big fan of property research group SQM Research and, in particular, Louis Christopher’s annual Housing Boom and Bust Report. I reckon it is one of the best property research reports of the year.

So, when SQM Research issue a downgrade to their annual report just three months into the new year, I take notice.

SQM Research has revised its 2026 dwelling price forecasts downward, reflecting heightened risks from persistent energy shocks, reaccelerating inflation, and the possibility of further RBA rate hikes.

Under the updated base case - assuming the cash rate rises to 4.35 per cent by mid-2026 and annual CPI peaks at 4.4-5 per cent for the June quarter - weighted capital city property prices are now expected to rise by just 0 to 3 per cent. That’s a significant downgrade from the November projection of 6-10 per cent increase.

The revisions take into account escalating Middle East tensions disrupting oil supplies -Brent crude is already above US$92 per barrel, with the potential to reach US$150. This could intensify cost-of-living pressures, dampen buyer sentiment, and prompt tighter monetary policy.

While Perth and Darwin retain strong outlooks (+10-13 per cent and +12-16 per cent,
respectively) due to resource-driven demand, major eastern capitals like Sydney (-6 to -2 per cent) and Melbourne (-4 to -1 per cent) will experience a fall in property values because of higher borrowing costs and subdued migration.

According to SQM Research, the situation could worsen if the cash rate rises above 4.5 per cent by year’s end and the CPI exceeds 5.5 per cent by September. In that scenario, capital city property values could decline further, averaging between –3 per cent and +1 per cent.

Conversely, if rates peak at 4.1 per cent and then ease later in the year, or hold steady at 3.85 per cent, the outlook improves, with modest property growth across the board.

Rent increases slowing ... but not falling

According to real estate giant Ray White, Australia’s rental market is no longer accelerating at the pace seen through 2022 and 2023, but it is far from weak.

National weekly house rents are now $650 and unit rents $625, with annual growth running at 4.8 per cent for houses and 4.2 per cent for units.

Monthly growth has flattened at a headline level, suggesting the surge phase has eased. However, beneath the national average, conditions remain firm in several parts of the country.

In houses, the Gold Coast continues to lead capital city growth at 8.6 per cent annually, followed by Hobart and the Sunshine Coast. Perth, Adelaide and Brisbane remain positive but are moderating.

Sydney is recording modest annual growth of 1.2 per cent, while Melbourne has edged slightly lower over the past year. The national picture is one of stabilisation, but not broad-based decline.

The unit market is more active. Adelaide is recording a double-digit annual growth of 10 per cent, with Perth and Brisbane also posting strong gains. In contrast, Sydney and Melbourne units are growing at more moderate rates of 4.3 per cent and 3.6 per cent respectively. Demand in higher-density markets remains resilient, even as the pace of growth has cooled.

The relative cost of renting now varies sharply between cities.

The Gold Coast is the most expensive capital city market for houses, with median weekly rents at $950 - higher than Sydney at $810 and well above Melbourne at $575. Perth houses now rent for $700 per week, ahead of Adelaide at $625 and Brisbane at $675.

In units, Perth and the Gold Coast are both sitting at $650 and $770 respectively, while Sydney remains high at $730. Melbourne remains comparatively affordable at $580 for both houses and units.

Historically, Sydney and Melbourne have dominated the upper end of the rental market. Today, lifestyle and smaller capital markets are competing at the top of the pricing spectrum.

Several Adelaide suburbs continue to post strong rental growth, particularly in units, where annual increases remain in double digits in some areas. Perth’s outer-metro house markets are still recording firm annual gains, and parts of regional Queensland continue to exceed the national average.

Inner-city unit markets are also stabilising at elevated levels. Parts of inner Melbourne, inner Sydney and Brisbane’s inner city have firmed again following the post-pandemic rebound in migration and student demand. Vacancy rates remain tight, suggesting rental demand has not meaningfully eased in higher-density markets.

Melbourne is currently recording the weakest annual rental growth of the major capitals, with house rents slightly lower over the past year. Yet the longer-term pattern remains significant.

Superannuation funds produce solid returns - before the Middle East crisis …

Despite the Reserve Bank of Australia raising rates at the start of the month, superannuation balances continued to grow in February.

Superannuation research house, SuperRatings, estimates the median balanced option rose by 1.1 per cent over the month.

To the end of February, funds have delivered small but consistent positive returns in most months to drive a respectable 6.3 per cent return for the financial year to date. However, with events currently occurring in the Middle East and inflation expectations pointing towards the potential of further rate increases, funds are likely to have an uncertain path towards the end of the financial year.

The median growth option rose by an estimated 1.2 per cent over February, while the median capital stable option is estimated to deliver 0.8 per cent to members.

Pension returns delivered similar results with the median balanced pension option growing by an estimated 1.3 per cent. The median capital stable pension option is estimated to return 0.9 per cent over the month, while the median growth pension option is estimated to be in line with balanced options returning 1.3 per cent.

But SuperRatings have already seen significant movement in share markets over the beginning of March with super balances estimated to now sit below where they were at the beginning of February.

The median balanced option is estimated to have fallen 1.6 per cent in March, while the median growth option lost 2 per cent. Even the more defensively positioned capital stable option is thought to have been affected by the war, with a decline of about 0.9 per cent since the start of the month.

Rising rents and returning kids: The backyard housing boom

Lately, people have been telling me they’re considering adding a small dwelling to their backyard... either to generate rental income or to give their grown-up kids a place to live.

Despite rising construction costs and higher interest rates, relaxed planning laws are making these builds easier than they once were.

But is adding a granny flat or tiny home right for you? Can it genuinely help adult children navigate a boiling hot property market? Or are families being nudged into more debt to solve what is ultimately a policy problem?

Let’s take a closer look.

The micro housing trend

If you’ve noticed more backyard builds popping up in your neighbourhood, you’re not imagining it.

Australians are building significantly more secondary dwellings than ever. According to a survey of builders by the Housing Industry Association, respondents expect to build 10 times more backyard dwellings this year than they did in 2022.

Online interest is also rising sharply. According to property platform Domain.com.au, “granny flats” is now one of the most popular search terms ... topping the charts in Sydney and seeing big increases in Perth (+59.8 per cent) and Adelaide (+24.4 per cent).

Backyard dwellings are no longer a niche idea but a housing class of their own. One that is becoming increasingly popular as another trend grows.

Families turn to duel-living

With rents rising faster than inflation and property prices still eye-watering, more adult children are moving home... not by choice, but by necessity.

For many families, building a small place out the back is preferable to watching their kids struggle in a brutal rental market.

The result is more grown-up kids, maybe with children of their own, are living next door to their parents.

What we are seeing is a quiet density shift in our suburbs. More families living on a single block than there are council bins to collect their rubbish.

Aside from the occasional extra recycling bin (which you can buy from the council, by the way), these dual living arrangements offer families a practical way to support one another. It’s living together, but separately. Maintaining independence while helping solve a range of financial and care challenges within families ... from childcare to aged care.

A granny flat helps ease mortgage pressure and boost retirement savings, whether it’s rented to adult children or to tenants in the broader rental market. And of course, it can increase the overall value of your property.

All of this and it’s easier than ever to do.

Less red tape

Governments, keen to increase housing supply, are fuelling the granny flat boom by loosening planning rules.

In many areas, if you meet standard design requirements, you can bypass full council approval. Size limits have also expanded. In some states you can build a flat of 70sqm or more and parking and setback rules have softened.

But a faster approvals process doesn’t remove the financial realities: debt, rising construction costs and interest rates.

When it works - and when it doesn’t

Consider these two scenarios.

Jack and Jill build a granny flat for their adult daughter... a single mum with a toddler. She works part-time and pays rent, but it doesn’t fully cover the loan because construction costs blew out. Jack and Jill had to borrow more than planned and then copped interest rate rises. They’ve delayed retiring, shelved their travel plans and financial pressure has crept in.

Now consider a different approach.

Peter Piper’s rent has become unaffordable, so he moves home with a plan to save for a deposit and eventually enter the property market. With his parents’ help, he buys a modular tiny home delivered on a truck, reducing the usual construction costs. Peter pays modest rent while building his savings. A few years later he buys an apartment with his partner. His parents then rent out the tiny home, creating an ongoing income stream and adding value to their property.

Same idea. Very different outcomes.

The difference comes down to cost control, borrowing capacity and long-term planning.

Tax and aged pension implications

Of course, there’s more to consider than construction and rent, especially when it comes to tax and the aged pension.

If you rent to a parent, child, or sibling under a formal arrangement, the flat is usually exempt from the assets test and rental income may be ignored.

However if you rent to a non-relative or friend, the granny flat is treated as a separate dwelling to be included in the assets test, and the rent counts as income.

For tax, since 1 July 2021, Capital Gains Tax does not apply to the creation, variation, or termination of a granny flat arrangement, provided it is not commercial (eg, a family living arrangement).

If the flat is rented at market rates, the income is taxable, and you can claim deductions. Renting commercially may also mean that part of your main home becomes subject to CGT when you sell.

The bigger issue

Backyard builds can absolutely help individual families.

They can put a roof over a loved one’s head and help families support one another, while making better use of land and existing local infrastructure such as schools and transport. They can also add value to a property and, over time, provide a passive income stream.

In many cases, they are a smart response to changing family needs.

But they are not a silver bullet, nor should they be thought of as ‘band aid builds’ to solve the housing crisis.

Australia’s property affordability and rental challenges are fundamentally a supply and planning problem. Addressing it requires large-scale development, infrastructure investment and meaningful reform from governments... not everyday Australians who happen to have a backyard.

Still, for those who run the numbers thoughtfully, a granny flat can be a worthwhile investment in both family wellbeing and financial security.

What it takes to be a ‘One Percenter’

You often read stories about the ultra-wealthy and their economic influence on society -the so-called ‘One Percenters,’ the richest one per cent of the population.

I’ve often wondered how that is measured and what it takes to enter that financially rarefied circle. The chart below, based on the Knight Frank Wealth Report, shows the net assets (assets minus debts, in US dollars) required to be classified among the top one per cent of wealthiest individuals.

Have a great week, everyone.