Flashnote: It's hard for the RBA to walk away from 4Q inflation numbers
There’s no doubt inflation is becoming an issue given the 3.5% annualised growth rate printed today. It’s hard to see how the Reserve Bank of Australia (RBA) walks away and we reiterate our view last week that interest rates will rise sooner than expected, probably in the second half of this year. The RBA is once again stuck in reverse.
Fuel and housing are the big contributors. It doesn’t feel like either of those components will ease, given that Russia is knocking on the door of Ukrain and the global economy is recovering from disruptions last year.
Housing is another interesting element. Housing inflation has a lagging effect. We’re watching rents very closely and see upward pricing pressure this year. Rising rents and a housing affordability crisis that comes along with it could be the big shock of 2022.
Here is a chart from the United States that shows the lag factor between inflation in house prices and rents. We’re already seeing early signs of capital city rental pressures from pandemic lows and lower construction activity, particularly in inner city apartments, will add to that mix.
Bottom line: Interest rates are going higher and this will continue to dampen stock markets and real estate markets. We think 2022 will be a year dominated by rising rents, particularly in residential markets on the east coast of Australia. Technology and innovation have a dampening effect on inflation, however the extent of this is not enough to offset rises elsewhere.
Residential real estate prices seem to have already peaked in 2021, it will be difficult to see price growth this year and we could actually see markets like Brisbane coming back from their inflated levels. We prefer Sydney and Melbourne, particularly in areas with rental growth ability.
Peter Esho is a Co-Founder at Wealthi and writes regular insights at peteresho.com