The Trump tariffs may or may not liberate the US economy but they could have lasting implications for the Australian economy, interest rates and property market.
It’s a confusing time to be an RBA Governor.
The United States’ application of blanket tariffs around the world has sent shockwaves through the global economy that will reverberate all the way through Australia’s economy and down to the national property market.
For Michele Bullock, at the helm of the Reserve Bank of Australia, deciding how to react to this chaotic economic landscape is far from clear-cut.
For the past couple of Monetary Policy Decisions that follow interest rates announcements, the RBA has been firm in its assertion that the global economic uncertainty lavished upon the world by Donald Trump’s unpredictability and tariff threats will deter it from cutting rates too quickly.
Prospective property buyers and homeowners with a mortgage are eagerly awaiting Ms Bullock’s reading of the situation.
The RBA’s view, up to now, has been that tariffs would add to the cost of goods, leading to inflationary pressure, and therefore negating the argument in favour of interest rate cuts.
It sounds simple enough. So why are markets now raising their collective expectations of an interest rate cut, not just on 18 May, but also another by August, and a third by November?
Before Trump launched a global trade war on Thursday (3 April, Australian time) financial market pricing had suggested there was a 70 per cent chance that the RBA would cut rates at its next get-together, after it held steady on 1 April.
But after the tariff plan was announced, those odds leapt to 90 per cent.
The reason? Well, countering the inflation theory is the one that sees the global economy lurching towards deflating growth or even recession. Outside the US, whose consumers are the ones footing the bill for the tariff explosion, the economic slowdown as trade volumes take a hit will slow global growth and, as a result, suppress inflation.
Bendigo Bank’s Chief Economist David Robertson acknowledged the juggling act facing the RBA Governor.
“Uncertainty around the impact of the tariffs makes the job of setting the cash rate much more complex,” he said.
“Australia is one of the least exposed to tariffs directly, given less than 5 per cent of our goods exports head to the US, so it will be indirectly, via our major trading partners, that we are likely to be most impacted.”
“Will global demand slow down sharply, meaning all the more need for RBA rate cuts?
“Recent forecasts from the RBA and the OECD do show slower growth ahead in the US and to a lesser extent the global economy, but not at this stage a slowdown for our major trading partners,” Mr Robertson said.
“This will be a key variable for the rest of the year and will depend on the degree to which countries retaliate to US tariffs, or perhaps seek more reliable trade partners elsewhere.”
Australia’s property market has already returned to a couple of months of capital growth following a few months of modest declines that put an end to a record breaking spell of median dwelling value increases.
That rate of growth could again take off if borrowers sense loan repayment pressures are about to ease. Investors in particular will be eyeing the gains to be made from mortgage savings when rents still continue to rise.
Rest of world leaning to rate cuts
If the RBA is seeking guidance from around the world, it will note that central banks elsewhere appear to be erring on the side of stagflation rather than rampant inflation, in a post-tariff world.
Investors in the UK are increasing their bets on interest rate cuts by major central banks in an effort to stave off a potential global recession. Futures markets suggest a reduction of approximately 60 basis points (bps) to the Bank of England’s benchmark Bank Rate by December. This marks an increase from the 54 bps expected just a day earlier.
In the Eurozone, investors have increased their bets on another rate cut on 17 April and now see a roughly 90 per cent chance of a downward move, to be followed by two more cuts later in the year, as inflation pressures dwindle as tariffs damage the economy.
The likelihood of the Bank of Japan, where a 24 per cent tariff was imposed by the Trump administration, pausing interest rate hikes is also increasing.
The China effect
No discussion about Australia’s economy in a global context is complete with a consideration of what the fallout will be in China.
The direct effects of the 10 per cent tariff on Australian goods exported to the US is likely to be small. The US is Australia’s fifth largest goods export market, with exports worth $34 billion in the 2023 calendar year. But that is overshadowed by $218 billion worth of exports to China and the noteworthy $90 billion worth to Japan.
China has copped a massive 54 per cent tariff imposition. The trade numbers between the US and Chinese economic behemoths are quite staggering. The US-imported goods from China in 2024 totalled $438.9 billion, up 2.8 percent ($12.1 billion) from 2023.
The saying used to be that if the US coughed, Australia caught a cold. Today, it’s more like, if China catches a cold, Australia is hospitalised with pneumonia.
China buys 32.5 per cent of everything Australia exports and is the clear number one trading partner. If the economy there shrinks, so does Australia’s. Japan is the second largest export market, at less than half the value of China’s expenditure.
Not only that, but Vietnam copped a 46 per cent tariff hit, Thailand 37 per cent, Taiwan 32 per cent, Malaysia 24 per cent and Bangladesh 37 per cent (while impoverished Cambodia was somewhat bizarrely slammed the hardest of all nations with a 49 per cent tariff).
Just as Australia said it would do, so too will the economies of southeast Asia.
Among the responses in Prime Minister Anthony Albanese’s five point plan for countering American tariffs, he said his government would provide $1 billion in zero interest loans for firms to take advantage of new markets and export opportunities.
The RBA will (presumably) be factoring in that other countries in our region will also be looking to unload their goods in markets outside the US, including Australia.
A flood of cheaper goods into Australia from southeast Asia would dampen inflation further.
And with that, likely hasten a round of interest rate cuts and subsequently add further fuel to a property market that has been teetering on the parapet between growth and price decline.
The ball is in Michele Bullock’s court.
Article Q&A
What do the Trump tariffs mean for the Australian property market?
Prospective property buyers and homeowners with a mortgage are eagerly awaiting the RBA’s reading of the tariff situation. Finance markets are now raising their collective expectations of an interest rate cut, not just on 18 May, but also another by August, and a third by November, which could fuel property markets.
How are central banks responding to the tariff increases?
Central banks elsewhere appear to be erring on the side of stagflation rather than rampant inflation, in a post-tariff world. Investors in the UK are increasing their bets on interest rate cuts by major central banks in an effort to stave off a potential global recession, while Europe and Japan are also betting on downwards inflation pressure.
When share prices are tanking and Trump-supporting hedge fund billionaires are predicting a ‘nuclear winter’, is Australian property a safe haven or susceptible to a crash?
By resorting to 19th century economic models, the Donald Trump-engineered global stock market crash has seen multi-trillions of dollars wiped from major international indices.
Trump himself actually cited this era as justification of the tariff formula seemingly composed on a beer mat and applied without nuance to all countries.
“In the 1880s, they established a commission to decide what they were going to do with the vast sums of money they were collecting. We were collecting so much money so fast, we didn’t know what to do with it. Isn’t that a nice problem to have?”
Times have changed since the 1880s. People no longer travel by horse-drawn omnibus or communicate over long distance by Morse code and telegraph.
Tariffs anywhere near the scale unleashed by the Trump administration are reminiscent of the financial panic of 1873, in which European nations and North America imposed huge protectionist trade barriers in attempt to shore up domestic economies. It failed spectacularly.
The 1930s’ Great Depression came about through the sort of astonishing wealth disparities seen today but just as in 1873, governments responded by imposing large tariffs. History repeated itself and the problem only got worse.
Fast forward almost a century and the US economic policy foisted upon the world last week more resembles the fever dream of an 1800s robber baron than that of the president of the world’s largest economy in a time of globalisation and free trade agreements.
“We are heading for a self-induced, economic nuclear winter, and we should start hunkering down.”
– Bill Ackman, Founder and CEO, Pershing Square Capital Management
On Monday (7 April), the Australian share market lost $160 billion within a minute of opening. The US is forecast to slide into recession.
Stock market turmoil on this scale reverberates through every aspect of the financial world and Australia’s property market is no exception.
So, what does history – for those who do choose to pay heed to it, perhaps unlike some Presidents – teach us about where real estate markets might head if the market was to crash even further or the downturn be sustained for a lengthy period?
The 2025 financial landscape
Throughout 2024, share markets around the world had been on a tearaway run to record levels around the world in the years since the pandemic.
From New York to London and Tokyo, 14 of the world’s 20 biggest stock markets had hit record highs. Then came a burst of volatility in early August, when Japan’s Nikkei Index lost 12.4 per cent of its value in a day before adding another 10 per cent the next day, and the US and Europe markets contracted very sharply.
Whether this latest market panic is a ‘healthy correction’ or the harbinger of more turmoil to come is unclear at the moment.
There is still, of course, the risk of an expanded Middle East conflict, or even the same eventuality beyond Ukraine and deeper into Europe. There’s still China’s slowing economy, aggressive tariff response and its unpredictable regional sabre rattling. And in any market correction, there is always the potential for a global herd reaction that could throw a major spanner into the whole international economic system.
And there is there is the instability of US policymaking. Policies are enacted, withdrawn, stalled and overturned by legal challenges.
A nervous administration is already laying the groundwork for a possible reversal of what has so far been an absolutely disastrous tariff introduction.
US Commerce Secretary Howard Lutnick said on the weekend that the different countries’ tariffs, which are set to come into force on 9 April, could be in place for “days and weeks”.
Property’s historic resilience
As Covid proved, when Australian property was seen as a safe haven in an uncertain world, even the complete freezing of global supply chains was not enough to pull the real estate market down.
When property prices did last fall in Australia, during 2017–18, it was matters closer to home that were the driver. There was no economic crisis, and property prices had been rising steadily in the years before.
(Source: CoreLogic)
Low interest rates and loose lending policy have always driven price growth more than almost any other factor.
In 2017 and 2018 low interest rates had everyone borrowing whatever they could get their hands on.
In response, lenders became very strict and APRA came down with some very hard-hitting policy changes as a result of the Financial Services Royal Commission.
When people could no longer throw wheelbarrows of money at property, prices retreated.
For now, the likelihood of property market crash appears fairly remote, even if far from out of the question.
If there is a massive stock market crash on the scale of the GFC, property is likely to respond slowly to such volatile scenarios. With the current low rate of loan delinquencies few sellers would be forced to offload property and therefore add supply to the market that might lower prices.
The current imbalance between housing supply and demand that has driven prices to record levels around the country are not being addressed, population growth is still high even if migration levels are being reduced, and interest rates are easing.
With those parameters in play, even if stock market tremors become a fully-fledged quake, property prices are unlikely to have their foundations shaken.
Hedge fund manager Bill Ackman, a billionaire and staunch Trump supporter, raised the bar to a level at which anything could be possible and from which property in Australia might not be immune.
“The president has an opportunity to call a time out and have the time to execute on fixing an unfair tariff system.
“Alternatively, we are heading for a self-induced, economic nuclear winter, and we should start hunkering down.”
Make of that what you will.
Article Q&A
Will tariffs impact the Australian property market?
The unpredictable global financial ramifications of the Trump government’s tariff regime mean no assets are beyond impact, as seen by the global share market correction, but Australian property has proven resilient in the past.
Could a share market crash cause property prices to fall?
If there is a massive stock market crash on the scale of the GFC, property is likely to respond slowly to such volatile scenarios. With the current low rate of loan delinquencies few sellers would be forced to offload property and therefore add supply to the market that might lower prices.
As Western Australians ready themselves for a March state election, the Labor government has said it will extend a shared equity scheme to include apartments and townhouses if it is re-elected.
If Western Australia’s Roger Cook Labor Government is re-elected on 8 March a shared equity scheme aimed at encouraging home ownership will be extended to include apartments and townhouses.
The scheme would see $210 million invested in shared equity to support the delivery of 1,000 new apartments and townhouses and help thousands of Western Australians into home ownership.
Only a limited number of properties are made available through the scheme at the moment.
Through Keystart, the new scheme would fund up to 35 per cent of the purchase of an apartment or townhouse, purchased off plan or while under construction.
Income limits for the new shared equity products will be set at the recently raised thresholds of up to $123,000 for singles and $189,000 for couples and families.
“Housing has been one of our top priorities during this term of Government, and these changes we’re proposing if re-elected will put home ownership within reach for thousands of Western Australians,” Mr Cook said on Monday.
“We know shared equity is an important way the Government can ease the burden of trying to save for a new home, as well as making monthly mortgage repayments more affordable.
“This major boost will not only support lower income Western Australians into their own homes, it will also help to get more apartment developments off the ground sooner.
“We know housing supply and affordability is one of the critical issues facing our state.”
The government’s Keystart scheme offers loans that require just 2 per cent deposits — but interest rates are higher than those given by banks.
With the shared equity scheme, people can continue to buy the government’s share in the home — until they own 100 per cent of the property.
Modular home loan changes
Recent legislative changes made by the Cook Labor Government to make Keystart a Government Trading Enterprise will also provide new powers to support home ownership.
This includes the capacity to use funding to underwrite new developments by purchasing a portion of apartments off-the-plan, and on-sell those apartments as part of the shared equity scheme.
The scheme is expected to unlock around $600 million in new apartment and townhouse projects, both private and public. WA Labor also announced today it will establish two new Keystart home loan products that would support apprentices and graduates, as well as the delivery of modular homes.
Under the new Graduate and Apprentice Home Loan, Keystart will provide loans to graduates and apprentices, which will include low deposits, free financial coaching and lower upfront mortgage repayments that will enable borrowers to get into the housing market and transition to commercial lenders over time.
The new Modular Home Loan will make it easier for people to access finance for new modular homes, with most home loan products currently designed to finance established homes or builds via traditional construction methods. The new loan product will include additional progress payments to support builder cash flow, and low deposits to allow greater access for customers.
Article Q&A
What is Western Australia’s shared home equity scheme?
If Western Australia’s Roger Cook Labor Government is re-elected on 8 March a shared equity scheme aimed at encouraging home ownership will be extended to include apartments and townhouses. The scheme would see $210 million invested in shared equity to support the delivery of 1,000 new apartments and townhouses and help thousands of Western Australians into home ownership.
Property investors continue to plunge back into the market, far outstripping the pace of new loan growth among owner-occupiers and first home buyers.
Investors are continuing their momentum-gathering return to the property market, outpacing the growth of owner-occupiers and first home buyers.
Over the last year, property investors have ignored higher interest rates, with the annual growth in the value of investor home loans rising 30 per cent in June from a year earlier.
Australian Bureau of Statistics (ABS) data released Friday (2 August) revealed that the value of new owner-occupier loans grew by 0.5 per cent to $18.2 billion in June, while the value of new investor loans jumped a hefty 2.7 to $11.0 billion during the month.
Over the year, the value of new investor loans surged 30.2 per cent, more than double that of owner-occupier loan values, which rose 13.2 per cent, The value of loans to first home buyers rose just 3.4 per cent from a year earlier.
Simon Arraj, founder and director of private credit investment manager Vado Private, said first home buyers were being priced out of the market but investors chasing capital growth were largely undeterred.
“While the cash rate has increased 4.25 percentage points since early 2022, investors are still investing heavily in bricks and mortar,” Mr Arraj said.
“Notwithstanding this, house prices could consolidate from their record levels, as the Australian economy slows and higher rates feed through the economy.”
Interest Rates No Barrier
Over the last 12 months, the national average has risen by $56,357, an increase of $154 a day, despite the fact the cash rate is at its highest level since November 2011.
The average new owner-occupier mortgage in Australia is now $636,597 – a new record high that is set to keep on rising alongside property prices in key states.
New South Wales is leading the nation in terms of loan sizes. Over the past 12 months, NSW continued to have the highest average loan sizes for both owner-occupiers and investors. In June, it rose to $780,000 for owner-occupiers and $818,000 for investors, compared to $636,600 across Australia, $604,300 in Victoria, Queensland’s $599,300, $545,800 in SA, $566,700 in WA and $467,500 in Tasmania.
RateCity.com.au’s Research Director, Sally Tindall, said the average new owner-occupier loan size has just hit another record high, as property prices in key capital cities continue to soar.
“Across the country, the average new owner-occupier mortgage has risen by $154 a day over the last 12 months, and on a 30-year mortgage you can basically double that figure when adding in interest costs,” she said.
“In Western Australia, the average new mortgage for an owner-occupier is now almost $100,000 more than it was just 12 months ago – rising by a gobsmacking $257 a day.
“It’s incredible to think this has unfolded under the weight of a rising cash rate.
“While there is seemingly no shortage of buyers prepared to up their bids at heated auctions in key capital cities, many would-be first home buyers have their hands tied by the double whammy of rising rates and property prices.”
The number of owner-occupier first home buyer mortgages, meanwhile, is stuck in neutral, clocking in at just 9,947 in the month of June.
“This figure has managed to lift above the 10,000 mark just once since the start of the rate hikes – a far cry from the most recent peak in first home buyer numbers recorded back in January 2021 when over 17,000 first home buyer mortgages were written for owner-occupiers,” Ms Tindall said.
The proportion of new and refinanced loans opting for a fixed rate clocked in at 2.6 per cent in the month of June. While this is just a fraction of what it was at the peak in July 2021, when 46 per cent of new and refinanced loans chose to go with a fixed rate, it is the highest level of fixing since September of last year.
Reflecting Australians’ love affair with property, recent data from the ABS reveals that household net wealth was a record $16.2 trillion in the March 2024 quarter, boosted by a record level of property assets of $11.0 trillion. As a proportion of household wealth, residential property comprises 67.9 per cent, up from 61.7 per cent in December 2020.
The key driver of household wealth gains in recent years has been rising property prices.
Housing Industry Association Economist, Maurice Tapang, the number of loans issued for the purchase and construction of a new home has been steadily increasing since the start of 2024, from a very low base.
“Market confidence appears to be stabilising following nine months without a change in interest rates.”
The number of loans issued for the purchase or construction of a new home increased by 9.2 per cent in the June quarter 2024 compared to the previous quarter.
“This quarterly increase was broad-based, with all states recording more loans issued for new homes in the June quarter 2024 than in the March quarter.
“This increase in lending is partially driven by a return of first home buyers to the market.
“The number of loans issued to first-home buyers in the June quarter 2024 was 5.8 per cent higher compared to the March quarter, which suggests building activity is at, or near, the trough in this cycle.”
Article Q&A
Which buyers are driving the Australian property market?
Over the last year, property investors have ignored higher interest rates, with the annual growth in the value of investor home loans rising 30 per cent in June from a year earlier. Australian Bureau of Statistics (ABS) data released 2 August revealed that the value of new owner-occupier loans grew by 0.5 per cent to $18.2 billion in June, while the value of new investor loans jumped a hefty 2.7 to $11.0 billion during the month.
Are new home loans increasing?
The number of loans issued for the purchase or construction of a new home increased by 9.2 per cent in the June quarter 2024 compared to the previous quarter. This quarterly increase was broad-based, with all states recording more loans issued for new homes in the June quarter 2024 than in the March quarter.
Home buyers will be contemplating more expensive property purchases with their increased borrowing power, while mortgagees will be hoping to bolster their loan repayments, with the Stage 3 tax cuts coming into effect.
As the new financial year begins, millions of Australians will be feeling a sense of mild relief that they have received a cut to their tax rate.
But as well as having an average of $1,888 extra on their annual income statement, for many Australians it will be welcomed for another reason.
For home buyers, the Federal Government’s Stage 3 tax cuts are set to receive a boost in borrowing power. Those already on the property ladder could slice years off their mortgage.
The tax cuts reduce the 32.5 per cent tax bracket down to 30 per cent and increase the 37 per cent threshold from $120,000 to $135,000.
Source: Federal Government
Additionally, the 45 per cent threshold is being increased from $180,000 to $190,000, and the lowest tax bracket drops to 16 per cent, from the current rate of 19 per cent, for those earning between $18,000 to $45,000.
Individuals earning above $120,000 will see the most substantial tax cuts due to the flattening of the tax brackets and the increase in the threshold for the highest tax rate.
The long political gestation of the tax reform culminated in the delivery of the cuts from Monday (1 July), after the Albanese government adjusted the original ruling Liberal Party’s measures to pare back benefits from the wealthy and bolster savings for low income earners.
Sally Tindall, Research Director, RateCity.com.au, said borrowers should start preparing their budgets for the possibility of not just one, but potentially two more rate hikes before the year’s end.
The tax cuts could both offset and contribute to this likelihood.
Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest with 25 years remaining at the start of the hikes on the average variable rate back in April 2022 of 2.86%. Assumes cash rate increases are in August and November 2024 and that banks pass them on in full.
Ms Tindall said that for an owner-occupier with $500,000 debt at the start of the hikes and 25 years remaining, two more rate hikes would add another $150 onto their monthly mortgage repayments.
At existing interest rates, the cuts would still mean, for an average mortgage repayment of $3,681 a month on a $625,791 average loan, the tax cut could potentially wipe out one monthly mortgage repayment per year.
That is based on a dual income family with a combined household income of one person earning $100,000 and getting a $2,179 annual tax and another person earning $80,000 and getting a $1,679 tax cut.
The combined value of the tax cut in this case is $3,858.
As of 1 July, the national minimum wage was also increased by 3.75 per cent. The new rate will be $24.10 per hour.
Greater Borrowing Power
Helen Avis, Director of Finance, Specialist Mortgage, said the tax regime adjustment means many Australians will see an increase in their disposable income.
“Higher disposable income directly translates to enhanced borrowing capacity for prospective home owners and investors,” she said.
“These savings can significantly impact an individual’s serviceability for a mortgage, as lenders assess borrowing capacity based on net income.
“More take-home pay means borrowers can afford larger loans, leading to an uptick in borrowing power.”
To illustrate, Ms Avis noted that a single borrower earning $100,000 annually could see their borrowing capacity increase by approximately $50,000.
“This substantial boost could be the difference between securing a dream home and settling for a less desirable option,” she said.
Steve Douglas, Chairman, Australasian Taxation Services, said that the broader economic implications could amount to increased activity in the property market.
“The Stage 3 tax cuts are poised to stimulate the housing market by increasing demand through having 13.6 million Australians having some extra real income.”
“When individuals have more disposable income, they are more likely to invest in property, whether it be their first home, an upgrade, or an investment property.”
Mr Douglas highlighted the potential ripple effects on property prices.
“With increased borrowing capacity, we may see heightened competition in the housing market, which could drive property prices up.
Mortgage aggregator Aussie published on its website two examples of how the new tax changes could bolster borrowing power.
One such scenario indicated that single Australians with no dependents earning $120,000 per year in the financial year just concluded, who could borrow a maximum $615,135, will increase their borrowing capacity in Financial Year 2025 by $27,062 on a mortgage, based on a 6.28 per cent interest rate, to $642,197.
Additionally, a married couple with two dependents earning a combined taxable income of $280,000 will increase their borrowing capacity by $75,346 on a mortgage with a 6.28 per cent interest rate in FY25, which is a 5.64 per cent increase on their previous maximum borrowing amount of $1,334,871.
Inflation to May 2024 has taken a stunning turn, rising sharply and effectively quashing any hopes of an interest rate cut this year.
A shock rise in inflation for the year to May has extinguished any hope of an interest rate cut any time soon.
The monthly Consumer Price Index (CPI) indicator rose 4.0 per cent, up from 3.6 per cent in April, according to the latest data from the Australian Bureau of Statistics (ABS).
The figure is likely to send shockwaves through the corridors of the Reserve Bank of Australia’s Chifley Square offices in Sydney.
Michelle Marquardt, ABS head of prices statistics, offered some hope that the numbers were not as bad as they appear, although the RBA may see it differently.
“CPI inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables, and holiday travel.
“It can be helpful to exclude these items from the headline CPI to provide a view of underlying inflation, which was 4.0 per cent in May, down from 4.1 per cent in April.”
Wednesday’s Consumer Price Index (CPI) puts inflation well off the trajectory needed to return to the RBA’s target band of 2-3 per cent by the end of 2025.
Inflation has now risen from the 3.4 per cent recorded in December 2023 and January and February 2024, and if it carries through to the June quarter result to be released just before the August Reserve Bank Board meeting, it will put a cash rate increase well and truly on the agenda.
Canstar’s Group Executive, Financial Services, Steve Mickenbecker, said an interest rate rise was now possible, and perhaps soon.
“This increase in the CPI Indicator for May makes it the third on a trot, lifting from 3.4 percent in February to a staggering 4.0 percent for May, confirming that inflation is off the trajectory towards the 2 to 3 percent target band the RBA seeks.
“The increase in the CPI Indicator will have the Reserve Bank moving towards the starting blocks and readying to fire the interest rate increase gun, just as the men line up for the 100 metre final in Paris, presuming that June quarter inflation reflects the same trend.
“The CPI rose 1.0 percent in the March 2024 quarter from 0.6 percent in the December 2023 quarter and a further rise, or even a failure to fall, in the June quarter will test the Reserve Bank’s patience.
“With scant evidence that inflation is moving towards the target band, the Reserve Bank will feel uncomfortable waiting a further three months for the following release of quarterly CPI and will surely lift rates in August – the risk of baked-in inflationary expectations is too high,” Mr Mickenbecker said.
Renters, Borrowers Left To Tackle Inflation
It was a worrisome outlook for borrowers.
An increase of 0.25 percent would add another $100 to the monthly repayment on a $600,000 loan over 30 years.
Cruelly, the very people hardest hit by inflation will be the ones to pay the price if, as seems increasingly likely, the next interest rate move is upwards.
The most significant contributors to the annual rise to May was housing (5.2 per cent), up from 4.9 per cent in April. Rents increased 7.4 per cent for the year, reflecting a tight rental market across the country.
Increased loan repayments will hit borrowers, with rents also subsequently rising as landlords look to pass on at least some of their own elevated expenses.
Around a third of Australian households either rent (31.4 per cent) or were homeowners with mortgages (36.8 per cent). It is this cohort that will carry the load when it comes to tackling rising inflation.
Notes: based on an owner-occupier paying principal and interest with 25 years remaining at the start of the hikes on the average variable rate back in April 2022 of 2.86%. Assumes cash rate increases are in August and November 2024 and that banks pass them on in full. (Source: RateCity.com.au)
The stage three tax cuts that will kick in on 1 July are now being seen through a different lens too.
On the one hand, hopes they would help offset the rising cost of living are now being replaced by concerns they will only go towards higher mortgages and rents.
Just as disconcertingly, the tax cuts could have a further corrosive impact on inflation, ultimately delivering more pain than comfort.
The RBA does not meet until 6 August, giving it time to contemplate its next move with newer inflation data. On 18 June it kept interest rates on hold at 4.35 per cent.
Real Estate Institute of Australia President, Leanne Pilkington, said economic sluggishness should encourage the RBA to hold fire on interest rate increases.
“This stickiness in the final hurdle to beat inflation is the same as other countries are experiencing in getting inflation into the target range of their central banks.
“The CPI figures need to be taken against the background of an economy that is barely growing.
“While headline unemployment declined slightly in May, the trend unemployment rate rose a little from 3.9 per cent to 4 per cent, to its highest level since Covid lockdowns.
“GDP growth in the March quarter it was 0.1 per cent and 1.1 per cent for the year and trending down – on a per capita basis we have had four consecutive quarters of negative growth.
“The current uptick in inflation should not in itself flag an increase in interest rates but a delay in any drop,” Ms Pilkington said.
Building Industry Still Struggling
The annual rise in new dwelling prices remained steady at 4.9 per cent, with builders passing on higher costs for labour and materials.
The ABS also released the March quarter engineering construction data on Wednesday (26 June) showing its first decline in two years.
The volume of engineering construction dropped by 2.3 per cent during the March 2024 quarter.
The reduction affected both public sector and private sector projects.
There was a 2.4 per cent fall in engineering construction work done for the public sector while the volume of private sector activity fell back by 2.2 per cent.
The reverse in engineering construction activity is ominous given that it was previously the main source of growth in the industry.
All three pillars of construction activity are now moving backwards.
Master Builders Australia CEO, Denita Wawn, said inflation was hurting construction too, and curtailing hopes of resolving the housing crisis.
“Inflation is a capacity killer, making investment more expensive and less attractive.
“On the ground, we continue to hear projects for new homes, commercial or infrastructure construction simply don’t stack up because it takes too long to build and is too costly.
“If we don’t get inflation under control and urgently start boosting housing supply we are in for a lengthy period of pain and depressed construction activity.
“We know governments have acknowledged that more reform is needed to reduce building costs but the rubber needs to hit the road.
“Bringing down housing and rental inflation can only be achieved once we get a move on and speed up planning reforms, address tradie shortages through domestic and skills migration pathways, reform the regulatory environment, and scrap damaging elements of recent IR changes,” Ms Wawn said.
The annual rise in new dwelling prices remained steady at 4.9 per cent, with builders passing on higher costs for labour and materials.
Article Q&A
What is the inflation rate in Australia?
The Australian Bureau of Statistics (ABS) has released the CPI Indicator for May 2024 showing an annual increase of 4.0 per cent. It has risen from the 3.4 per cent recorded in December 2023.
The Mortgage and Finance Association of Australia named Ms Avis Residential Finance Broker WA 2024, marking her second time atop this podium.
The mortgage and finance broking industry in Western Australia honoured this year’s achievers at the 2024 MFAA State Excellence Awards, with Helen Avis, Director of Finance, Specialist Mortgage, taking out one the most coveted awards for the second time.
The Mortgage and Finance Association of Australia named Ms Avis Residential Finance Broker WA 2024.
Ms Avis said the MFAA Excellence Awards are renowned for celebrating the highest standards of professionalism, integrity, and innovation in this finance field.
“This recognition is a significant milestone in my career, and I am deeply grateful for the acknowledgment of my hard work and dedication within the mortgage and finance industry,” Ms Avis said.
“Winning this award is not just a personal achievement but also a testament to the incredible team and clients I have had the privilege to work with.”
Ms Avis added that the award highlighted the significant contributions of women in the mortgage industry.
“It is a powerful reminder that with determination, passion, and the right support, we can achieve great heights.
“I hope this recognition inspires other women in our industry to pursue their goals with confidence and resilience.”
All Western Australia MFAA State Excellence Awards winners are finalists in their respective categories at the MFAA National Excellence Awards which will be held in Melbourne on Thursday 25 July following the MFAA National Conference.
Advice For Borrowers Struggling With Deposit
While it’s often said a 20 per cent deposit is needed to qualify for a home loan, a significant number of borrowers are securing mortgages with smaller deposits, according to the latest data from APRA, the banking regulator.
Ms Avis said it was still possible to buy a property with a small deposit and could offer advice on structuring a loan application correctly.
In the March 2024 quarter, 31.0 per cent of new home loans (by value) had deposits of less than 20 per cent, while 6.2 per cent of new loans had deposits of less than 10 per cent.
“While more than three in 10 borrowers are taking out loans with deposits under 20 per cent, these figures are relatively low by historical standards.
“Back in December 2020, for example, 41.7 per cent of new loans had deposits of less than 20 per cent, while 11.3 per cent had deposits of less than 10 per cent.
“This illustrates how banks have tightened their lending standards, to ensure borrowers don’t take on an excessive amount of debt, yet it’s still possible to buy a property with a small deposit,” Ms Avis said.
Generally, these buyers will need to pay lender’s mortgage insurance (LMI) when purchasing a property with a deposit of less than 15-20 per cent.
Commentators were unanimous in their expectations the Board would sit tight in the face of stubbornly high inflation but is an interest rate shock in the pipeline?
The RBA continues to perform its balancing act of trying to contain inflation without causing an economic hard landing.
Given all 38 commentators in a Finder survey tipped a rate hold, the decision to retain the official cash rate at 4.35 per cent at its Tuesday (18 June) meeting comes as no surprise.
The RBA did, however, say it won’t tolerate high inflation indefinitely.
The recent falls in the inflation rate reversed last month, when it inched up and spooked borrowers hoping its continued decline would mean a rate cut was imminent.
But short of a major international economic shock that rattled the local economy, a rate cut now seems a distant prospect.
There have been 13 interest rate increases since May 2013 but the latest decision marks the fourth successive hold.
The holding pattern may run for some time yet, although the RBA made it clear that economic uncertainty could see it spring a surprise if that was necessary to contain inflation. Borrowers will have to wait until 6 August for the next RBA meeting.
Australians Spending Money They Don’t Have
In making its decision, the RBA indicated it is keen to see the positive of lower unemployment rates continue and mass job losses avoided, but with spending levels contained to ensure inflation fell to within its preferred band of 2 to 3 per cent.
There are worrying concerns that spending is continuing in the face of cost of living pressures and heightened levels of loan delinquency.
Worldpay’s Global Payments Report 2024 revealed buy now pay later (BNPL) use is at an all-time high in Australia – accounting for 15 per cent of eCommerce transaction value in 2023.
Almost half of experts who weighed in (44 per cent) say the current level of BNPL use is alarming.
Finder’s Consumer Sentiment Tracker shows two in five (42 per cent) Australians have used a BNPL service in the past six months.
Those who have used BNPL are carrying an average of $1,073 in debt, up from $916 in 2022.
Spending on property also appeared unlikely to be curtailed in the short term.
Helen Avis, Director of Finance, Specialist Mortgage, said rising property prices were unlikely to be stifled by the RBA.
“With the high migration there is not enough supply, while we have also seen an exodus from Sydney to regional NSW and Queensland that has applied price pressure to those markets.
“So despite the fact that rates are high we are still seeing people buying.
“I had a period earlier this year where my clients were ‘wait and see’, but recently they have had the confidence to buy.
“Some people have cut back on spending and adjusted their finances to manage the increased cost of their mortgages and also the cost of living, but overall clients seem to be coping with the current market conditions.”
RBA Keeps It Short And Sweet
In the RBA’s shortest Monetary Policy Decision in this reporter’s memory, inflation and economic uncertainty were its key themes.
“Inflation is easing but has been doing so more slowly than previously expected and it remains high,” the Board’s statement noted.
“The Board expects that it will be some time yet before inflation is sustainably in the target range (and) while recent data has been mixed, they have reinforced the need to remain vigilant to upside risks to inflation.
“The path of interest rates that will best ensure inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.”
On the economic front, the RBA suggested it could be a bumpy road ahead, noting that, “the economic outlook remains uncertain and … the process of returning inflation to target is unlikely to be smooth.”
“The possibility of another rate increase is on the cards and that will push many mortgage borrowers over the edge, and take many other Australians with them”.
– Peter Boehm, Pathfinder Consulting
Conceding that economic momentum was weak, savings rates and high spending were weighing more heavily than slow GDP growth, a rise in the unemployment rate to 4 per cent and slower-than-expected wages growth.
“There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight,” the RBA noted.
There also remains a high level of uncertainty about the overseas outlook.
“Output growth in most advanced economies appears to have troughed.
“There has been improvement in the outlook for the Chinese and US economies, and many commodity prices have picked up.
“Some central banks have eased policy, although they remain alert to the risk of persistent inflation.
“Nevertheless, geopolitical uncertainties, including those related to the conflicts in the Middle East and Ukraine, remain elevated, which may have implications for supply chains.”
Where The Experts Expect Interest Rates To Head
The consensus among economists is that rate hikes are finished and the next move from the RBA will be a cut, but the timing is highly uncertain.
Financial markets, based on the ASX cash rate futures, have brought forward the timing of a rate cut from around mid-year 2025 to a fully priced in cut by March of next year. Meanwhile three of the big four banks’ economic units are forecasting a 25 basis point cut in November 2024.
Housing markets seem to be somewhat insulated from higher interest rates, with CoreLogic’s Home Value Index continuing to rise through June, and the combined capitals daily index already 0.4 per cent higher over the first 18 days of the month.
“The RBA made a point of calling out an increase in household wealth via higher housing prices which, together with a rise in disposable incomes, could support household spending,” Tim Lawless, Research Director at CoreLogic Asia Pacific, said.
“Similarly, the volume of home sales is tracking higher than a year ago and above the five-year average, demonstrating consistently strong demand from purchasers despite an array of headwinds including high interest rates, cost of living pressures, low sentiment and stretched affordability.”
The RBA had reason to be patient, according to Matthew Greenwood-Nimmo, Associate Professor of Economics, University of Melbourne.
Matt Greenwood-Nimmo, Associate Professor of Economics, University of Melbourne
“Although inflation is still stubbornly high, the RBA is likely to hold the cash rate constant in the near term.
“There are signs of weakness in the economy, and the full impact of past rate hikes is yet to be fully felt,” he said.
Jakob Madsen, Economics Professor at University of Western Australia, pointed to international conditions propping rates up for now.
“The US Federal Reserve fund rate is still more than 1 per cent point above the RBA cash rate and the increasing worldwide government debt-to-GDP ratio is keeping upward pressure on interest rates.”
There is no justification to reduce rates based on current economic data, according to Peter Boehm, Managing Director, Pathfinder Consulting.
“The pendulum is swinging towards an increase because of sticky inflation and a government fiscal policy that is likely to put upward pressures on inflation.
“Plus, I doubt there is a single Australian right now who is not suffering from sustained and ongoing price increases in such areas as utility/energy, health, food and just general living costs.
“By way of example, many charities cannot keep up with demand due to an increasing number of families struggling to put food on the table or cover essential living expenses.
“The possibility of another rate increase is on the cards and that will push many mortgage borrowers over the edge, and take many other Australians with them.”
Article Q&A
What is the official cash rate in Australia?
There have been 13 interest rate increases since May 2013 but the June 2024 RBA decision marks the fourth successive hold at 4.35 per cent.
A slight improvement in vacancy rates has done little to quell the rental crisis, while a disturbing proportion of home owners are also doing it tough and missing mortgage repayments.
Any joy renters might have had that there had been a fractional improvement in vacancy rates around the country have been extinguished by rents still rising.
For home owners struggling to pay the mortgage, the picture is no brighter.
New research has shown that a worrying one in eight borrowers has missed one or more payment deadlines in the past six months.
An additional 32 per cent of borrowers who did pay on time told the Finder survey that they were worried a missed payment was looming as a scary possibility.
Renters have arguably been the hardest hit cohort of Australians as the cost of living and housing crises have become increasingly problematic.
In a glimmer of good news was PropTrack’s Thursday data showing the share of available rentals further increased in May, with the national rental vacancy rate up 0.08 percentage points (ppt) to 1.30 per cent.
Source: Ray White Group/ABS
This is the highest rental vacancy rate since July 2023, and the first instance of three successive monthly improvements since late-2020.
With overseas migration and student visa applications having peaked, the number of prospective tenants per rental property slightly easing, and more renters entering shared housing options to reduce costs, these factors combined could help to relieve some pressure on the rental market.
According to Rent.com.au statistics released Wednesday (5 June) there was a 7.1 per cent increase in the number of rental properties available nationally in May 2024.
All states and territories recorded increases in rental listing volumes, however, the vacancy rate in Darwin dropped 0.3 per cent to 1.1 per cent in May.
The very modest improvement in vacancy rates the remain chronically tight there was still a 1.7 per cent rise in rents nationally, from $600 to $610 per week. The highest increase in median house rent was recorded in Brisbane (+3.2 per cent; +$20 to $650) while the largest fall was in Canberra (-4.2 per cent; -$30 to $690).
The critical undersupply of current and new rental properties, along continued strong demand and rental price growth, means that it will still be tough going for renters and the rental market will remain extremely challenging for the rest of 2024.
Paul Ryan, Senior Economist, PropTrack, said that while any easing in conditions will be welcomed by renters, available properties remain very scarce with the vacancy rate at around half the levels seen before the pandemic.
“This means competition for rentals will remain strong and rents will continue to increase.
“The easing in conditions over the past three months has been most evident in Perth, Sydney and the ACT, with Perth seeing a substantial improvement after very tough conditions recently.
“While availability remains low across all markets, Adelaide and Brisbane remain the toughest for renters, with rental vacancy rates of 1.03 per cent and 1.11 per cent, respectively.
“We expect renters will face continued difficulty securing rentals and strong rent price growth over the rest of 2024 in these markets,” Mr Ryan said.
Borrowers Trying To Make Ends Meet
A worrying number of homeowners are struggling to keep up with their mortgage repayments, according to new research by Finder, Australia’s most visited comparison site.
A Finder survey of 1,071 respondents – 342 of whom have a mortgage – revealed 12 per cent have missed one or more repayments over the past six months.
That’s an estimated 396,000 borrowers who have fallen behind on their mortgage.
The research found 4 per cent of mortgage holders – 132,000 households – say they have missed one repayment.
A further 8 per cent of mortgage holders – 264,000 households – have missed more than one repayment.
The data revealed 3 per cent have had to ask for a repayment holiday or applied for hardship from their lender.
Richard Whitten, home loans expert at Finder, said mortgage defaults were a growing concern.
“Thousands of mortgage holders have weathered rate rises but are now experiencing extreme financial strain as savings and emergency funds run dry.
“Any further hikes would push many to breaking point.”
Shockingly, 1 in 3 borrowers (32 per cent) are worried they will miss a repayment due to mortgage stress. That’s over 1 million Australians at risk of delinquency.
Of those who missed a repayment, a third (33 per cent) said they ran out of money because of other bills, while 31 per cent said interest rates increased and they could no longer afford it.
Whitten said many Aussies are forking out a disproportionate amount of their income paying off their home loan.
“Interest rates rose so rapidly that mortgagors have reached breaking point with some unable to stay financially afloat.”
Variable rate loans remain the near-unanimous choice of borrowers, according to Helen Avis, Director, Specialist Mortgage.
Back in March 2020, at the start of the pandemic, 13.38 per cent of new borrowers were choosing fixed-rate loans and 86.62 per cent were choosing variable. But in March 2024, a staggering low of only 1.40 per cent of new loans were fixed, compared to 98.60 per cent variable, according to the Australian Bureau of Statistics.
According to data released by Ray White on Wednesday (5 June), Melbourne contains all ten of the top 10 list of suburbs with the most house rentals listed under that benchmark price.
The list is slightly more diverse for renters looking for units. Of the top 10 most affordable suburbs, half come from Melbourne, three come from Adelaide, while Hobart and Sydney offer one.
Atom Go Tian, Senior Data Analyst, Ray White Group, said the share of median asking rent versus weekly earnings was 40.5 per cent for houses and 38.4 per cent for units.
According to ABS, average weekly earnings as of November 2023 was $1,431 per week, a 35 per cent increase from 10 years ago. During the same period, rent has outpaced our growth in earnings with the median asking rent for houses growing by 56 per cent to $580 and the median asking rent for units growing by 52 per cent to $550.
Mr Tian said the balance between real income and rent costs has shifted dramatically, with the past two years having crunched renters.
“For the first eight years of the last decade, the share of rent versus earnings stayed relatively flat between 33 and 35 per cent.
“Weekly earnings growth even outpaced rent growth, with the share of rent reaching its lowest point in 2020 for houses at 32 per cent of weekly earnings and in 2021 for units at 31.4 per cent of weekly earnings.
“Since then, however, rent has skyrocketed.”
Meanwhile, on the rental supply front, the Property Council of Australia on Wednesday welcomed the introduction of the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 as recognising the role of build-to-rent (BTR) housing in Australia but warned it does not create a level pathway to support 150,000 new BTR homes by 2034.
Article Q&A
What is the national vacancy rate in Australia?
PropTrack’s June 2024 data shows the share of available rentals further increased in May, with the national rental vacancy rate up 0.08 percentage points (ppt) to 1.30 per cent.
Are borrowers defaulting on mortages?
New research has shown that a worrying one in eight Australian borrowers has missed one or more payment deadlines in the past six months. An additional 32 per cent of borrowers who did pay on time told a Finder survey that they were worried a missed payment was looming as a scary possibility.
Are rents still rising in Australia?
In May 2024, there was a 1.7 per cent rise in rents nationally, from $600 to $610 per week. The highest increase in median house rent was recorded in Brisbane (+3.2 per cent; +$20 to $650) while the largest fall was in Canberra (-4.2 per cent; -$30 to $690).
Which Australian city is the cheapest to rent in?
When it comes to suburbs with rental listings under $500 per week, nowhere comes close to Melbourne. According to data released by Ray White on 5 June 2024, Melbourne contains all ten of the top 10 list of suburbs with the most house rentals listed under that benchmark price.
Your 2024 Comprehensive Guide To Off-the-Plan Finance For Australian Expatriates
Investing in off-the-plan properties can be an attractive option for Australian expatriates looking to secure a foothold in the Australian property market. However, navigating the finance landscape for such investments can be complex. Here’s what you need to know if you’re looking to invest in Australian Property as an Aussie expat and seeking finance for off-the-plan properties.
Understanding Off-the-Plan Finance for Australian properties
Off-the-plan finance refers to financing arrangements tailored specifically for properties that have yet to be constructed or completed. As an expatriate, it’s crucial to understand the unique financing challenges and opportunities associated with these types of investments.
Current Finance Landscape For Expatriates
In recent years, there have been significant changes in the finance landscape for Australian expatriates. Lenders have become more cautious due to regulatory changes and increased scrutiny on overseas income. Expats may encounter stricter lending criteria compared to resident borrowers.
Challenges Faced By Expatriate Borrowers
One of the main challenges faced by expatriate borrowers is proving income stability and affordability. Lenders may require additional documentation, such as employment contracts, tax returns, and bank statements, to verify income sources and assess repayment capacity. Moreover, fluctuations in foreign exchange rates can impact borrowing capacity and loan affordability.
Strategies To Overcome Financing Challenges
Aussie expatriates can employ various strategies, including:
Building a Strong Financial Profile
Maintaining a healthy credit history, saving for a larger deposit, and reducing debt can strengthen your financial profile and improve your chances of securing favourable financing terms.
Partnering with Specialist Mortgage Brokers
Engaging the services of experienced mortgage brokers who specialise in expatriate finance can provide invaluable support and access to a wide range of lenders. These brokers understand the unique needs of expatriate borrowers and can tailor solutions to suit individual circumstances.
Exploring Alternative Financing Options
Expatriates may explore alternative financing options, such as non-bank lenders or international banks with a presence in Australia. These institutions may offer more flexible lending criteria and competitive interest rates tailored to expatriate borrowers.
Seeking Professional Advice
Seeking advice from financial advisors, tax specialists, and legal professionals can help expatriates navigate the complexities of off-the-plan finance and ensure compliance with regulatory requirements.
Securing finance for off-the-plan properties as an Australian expatriate requires careful consideration of the current finance landscape, potential challenges, and available strategies. By staying informed, seeking expert advice, and partnering with specialist mortgage brokers, expatriates can overcome financing hurdles and successfully invest in off-the-plan properties in Australia.
Specialist Mortgage, a part of the SMATS Group, specialises in providing tailored mortgage solutions for Australian expats and foreign investors. The team of experts led by Helen Avis, have consistently provided tailored mortgage solutions to clients worldwide, helping them achieve their property ownership dreams.
With a focus on personalised service and in-depth industry knowledge, Specialist Mortgage has established itself as a leader in expatriate and foreign national home loans.
