Sharp inflation drop welcomed

Finally, some good news on the horizon for home owners as a dramatic fall in inflation flags more rate cuts.

If rates start to drop, this will be good news for existing mortgage holders but for those still looking at getting into the market, it may be a double-edged sword, lower loan repayments will help but any interest rate cuts may stimulate the housing market further putting home buyers under more pressure as properties values rise.

The official Consumer Price Index readings shows that annual inflation has nearly halved in just 12 months, which is the sharpest drop in recent history, according to one of the nation’s most awarded mortgage brokers.

CPI for the 12 months ending December 2023 was just 4.1 per cent, a staggering reduction from the 7.8 per cent, which was the peak of the present cycle, recorded just one year ago, according to the Australian Bureau of Statistics (ABS).

Monthly inflation for December also fell from 8.4 per cent in 2022 to just 3.4 per cent in 2023.

Zippy Financial director and principal broker Louisa Sanghera said if the volatility during the first year of the pandemic was not included, the annual result was the sharpest inflation drop in recent history and showed the central bank was trigger-happy on rate hikes.

“Borrowers had to cope with the most rapid rate of interest rate increases on record as the Reserve Bank pumped up repayments, almost in a frenzy, without giving mortgage-holders the benefit of allowing much time to pass between each increase.

“The November rate rise, in particular, was completely unnecessary and I said as much at the time.

“Now, inflation has dropped so quicky that the Reserve Bank must move to an easing bias at its meeting in February with rate cuts on the agenda in coming months, too.”

Ms Sanghera said borrowers had cut back on spending as much as possible to manage their higher mortgage repayments, with many also axing insurance policies as they simply can’t afford them any longer.

“Rate reductions cannot come soon enough for many mortgage-holders, with many holding on by the skin of their teeth at the moment.”

However, Ms Sanghera said there had been marked uptick in enquiry from investors since late last year, with many recognising that the peak of the rate cycle had passed.

“There have also been a cohort of people who haven’t been proceeding with their real estate plans, whether it’s buying, selling, or investing, until there was more certainty on interest rates.”

Torquay finance broker Daniel Walsh from UFinancial said the local market on the Surf Coast and Geelong had seen both first home buyers and investors put a hold on purchasing plans until they had confidence that interest rates would cease to increase and begin to plateau.

“As we enter the new year there is renewed confidence from prospective buyers that we have seen the peak of the rate cycle and December retail spending figures just released only support this.

“Already we have seen an upturn in pre-approval applications early in the new year.”

Master Builders Australia chief economist Shane Garrett said these new inflation figures would bolster hopes that the last of the rate increases is behind us.

“However, there are a number of grounds for caution in terms of the latest inflation figures.

“The cost of new dwelling purchase was up by 1.5 per cent in the December 2023 quarter alone.

“Cost pressures here are still much stronger than anyone would like and are being prolonged by the labour shortages in our industry.

“The latest inflation figures clearly show that housing costs are still a source of pressure, as well as hurting living standards, excessive housing costs tend to restrict the supply of labour, force wages higher and hurt our economic competitiveness.

“Government policy needs to focus on building productivity rather than dismantling it.”