Figures finally trending in the right direction

WITH GARETH KENT, DIRECTOR PRESTON ROWE PATERSON

What a change a few numbers can make!

Last week the publication of the June Quarter inflation numbers crucially demonstrated inflation is in decline, albeit only slightly. Inflation of 3.8 per cent, (down from 4 per cent) was in line with the RBA forecast. The most significant price rises this quarter were housing (+1.1 per cent), food and non-alcoholic beverages (+1.2 per cent), clothing and footwear (+3.1 per cent), and alcohol and tobacco (+1.5 per cent). Interestingly the Federal Government got it right at the right time, with the impact of energy rebates decreasing inflation in this sector from 14.6 per cent to 2.1 per cent. This inflation figure is a great result for borrowers in the property market, as it gives the RBA the breathing room needed to keep rates on hold at 4.35 per cent.

Another number that property owners and investors should keep a close eye on is net migration. Recent data shows the number of temporary entrants to Australia fell from 2.8 million to 2.69 million, in the June quarter. Student numbers dropped from 671,359 at the end of March to 608, 262 by the end of June 2024. We had about 10,452 fewer holidaymakers and other temporary employment visas fell from 171,013 (March) to 145,112 (June 2024). Migration has been one of the key drivers of rental demand, making it harder for people to find accommodation. Whilst these numbers were down, the available Victorian rental stock has also fallen by approximately 18 per cent due to the imposed regulations, costs and taxes placed on owners by the state Government. Net migration is slowing but it is not stopping or going into reverse.

Unemployment numbers were also released, indicating that the jobless figures are slightly up from 4 per cent in May to 4.1 per cent in June. I read this, along with the ASIC insolvency data, which reported business insolvencies increased by 35.5 per cent for the year ending June 2024, compared to the previous year, with over 10,769 businesses entering insolvency. It’s hard to make those two numbers make sense, how can we have businesses going bust, yet unemployment barely impacted? The answer is that these are small businesses with low numbers of employees and more susceptible to economic winds.

It would be quite easy to read all these numbers and think negatively. What we are trying to ascertain from these numbers is the ultimate question; where are we at currently in the economic cycle?

Property prices have been stagnant now for some months. Residential rental growth has also become fairly stable. Investment yields in all commercial property assets classes have corrected. We have seen corrections in locations that had outlier peaks, enhanced by COVID and the rush to the coast during the last cycle, 2019-2022. Mostly this was experienced in our coastal hamlets. For example, Torquay’s median house price has fallen back to $1.2m from $1.3m at the peak. Anglesea has fallen from $1.71m to $1.46m, Aireys inlet from $1.8m down to $1.6m, and Fairhaven, Moggs Creek, and Eastern View are all areas where characteristic growth has fallen back to a normal growth curve. In my opinion, normality has returned via soft corrections in nearly all property asset classes.

But to predict what happens next is the scary part. What I have summarised from this week’s numbers is that inflation is now both locally and globally on the decline and under control. Spending has slowed. Jobs have for the most part been kept, and population/ migration is still growing, albeit slower. Hence, ultimately people must live somewhere, and they have jobs to afford loans. I also put my faith in that one human trait we can all trust. Greed. At some point, people will want to make money. For example, lending institutions will want to take advantage and although lending money is at present difficult, there will be many minds at work inside these institutions working on how to get money out the door and to get their share of the new market. All power to them.

I believe we are on the precipice. We have walked a hard steep uphill trail, we are currently standing at the top, we have survived and can enjoy a peaceful landscape. Spring will bring the start of our new journey, and I do not think a change in interest rates will herald that beginning. Interest rates will hold for the remainder of the year, confidence will return first, based on old-school demand and supply, and of course, greed. You can always bet on that one.

The unfortunate repeat story in these cycles is that small businesses and families paying residential mortgages again bare the brunt of the pain to lead us out of the cycle. We have a few years until the next cycle, let’s use some of the resources we have for governing our economy, to find a better way.