Thoughts on Inflation and RBA's (Possible) Interest Rate Hike

virhlpool on 07/03/2022 - 17:31
Last edited 07/03/2022 - 20:56 by 1 other user

As some of you may know, Canada has been facing a similarly crazy real estate market and overall inflation as the most of Australia, leaving many residents priced out and the others much richer. Toronto's real estate situation has been highly comparable with that of Sydney. However, a recent development is likely to change this to some extent.
Last week, Bank of Canada increased the interest rate and is likely to increase it further to control inflation. See the news here: https://www.reuters.com/business/finance/bank-canada-raises-…

Generally, Canada and Australia follow the US in such matters but this time Canada did it first, if I am not wrong. What does it mean for Australia? How soon do you think RBA is likely to increase rate and by how much over time? How fast do you expect to see the inflation going downwards after the rate hike? Whilst real estate pricing is one aspect of it, my comment is about inflation across everything and not limited to real estate only. I feel that the craziness should be stopped else it won't end well, especially for people from the industries which haven't seen much wage growth at all in last 2-3 years but are paying much higher prices for almost everything.

Financial

Comments

  • Hybroid on 07/03/2022 - 17:39
    +3

    Looking forward to house prices stabilising a bit once interest rates increase. Been to a few auctions recently and there's a significant decrease in turn out and bidding wars which is good. Not expecting prices to plummet really but at least be more stable and reasonable.

    I don't mind inflation in other daily/grocery items so far. Have noticed some increased prices in Coles on stuff I've been buying for years but that's just part of life really. Employer is also pretty good at matching or beating annual CPI salary raises so thankful and lucky there.

    • virhlpool on 07/03/2022 - 17:48

      Not expecting prices to plummet really but at least be more stable and reasonable.

      If they don't plummet at all, how are they going to be anywhere close to reasonable? Stable prices at the current levels won't change the situation. Just a thought, not an argument.

      Have noticed some increased prices in Coles on stuff I've been buying for years but that's just part of life really.

      What hurts more is probably the price increase of big ticket items such as cars, furniture, clothes, shoes, electronics etc and not just groceries. Pressure on shipping (and hence higher cost) adds to the pain of inflation because that is an additional 'delta' on top of the price increase.

      • Hybroid on 07/03/2022 - 17:58
        +2

        What I mean by that is $1.4-1.5m value houses are being sold for ~$1.8m at auction.

        I don't expect them to drop to $1.2m but I would like them go back to the ~$1.4-1.5m price guide range and propertyvalue.com.au appraisal.

      • virhlpool on 07/03/2022 - 18:01
        +1

        I forgot a few important items in the list: Building materials, holidays (airfares and stay), general labour.

  • capslock on 07/03/2022 - 17:41
    +8

    I can't believe our interest rate is still 0.10%. Unemployment is the lowest in 15 years, house prices are at all time highs and petrol is $2/L. What will it actually take for the RBA to raise interest rates? They are scared to even raise it to 0.25% which is still nothing.

    • brendanm on 07/03/2022 - 17:44
      +12

      Unemployment is the lowest in 15 years

      Haha, working 1 hour in the "reference week" counts as "employed".

      • mskeggs on 07/03/2022 - 18:17
        +1

        It was the same 15years ago.

        • brendanm on 07/03/2022 - 18:42
          +6

          Perhaps 15 years ago, 90% of people were working full time. Perhaps these days, 30% of people are working full time, and 40% of people can only get 3 hours a week.

          These figures are obviously made up, but highlight the fact that even if the "unemployment" percentage was identical, the number of people actually able to support themselves from work, can vary extremely wildly, even though they are "employed".

          • mskeggs on 07/03/2022 - 18:46
            +1

            @brendanm: Agreed, but where else to draw the line? If I work 10 hours, and I want to work only 10hours, then I should certainly be counted as employed.

            In any case, to capture your objection, they also produce stats of underemployed people - who work less than they desire, but are still working.

            As you suspect, the rate has been increasing long term.
            Good info here:
            https://www.aph.gov.au/About_Parliament/Parliamentary_Depart…

            • brendanm on 07/03/2022 - 18:49
              +5

              @mskeggs:

              If I work 10 hours, and I want to work only 10hours, then I should certainly be counted as employed.

              Very true.

              As you suspect, the rate has been increasing long term.

              This is the problem. As per usual, the politicians use manipulated facts and weasel words to paint everything as just lovely, when I'm sure there are lots of people who would beg to differ.

              Especially now, with the ridiculous cost of fuel etc, I feel sorry for people who have to drive for an hour, to do a 3 hours shift, to try and make ends meet.

      • pharkurnell on 07/03/2022 - 18:22
        +3

        I'd like to see genuine fulltime employment numbers - not the 1 hour a "insert time" numbers.

        • virhlpool on 07/03/2022 - 18:25
          +1

          Plus, the full-time employment alone doesn't mean anything if the wages haven't increased for ages.

        • mskeggs on 07/03/2022 - 18:48

          These figures are available too. But it is important to remember many people don’t want to work full time (probably even more than those who work part time and want full time).
          This background on underemployment is a good place to start.
          https://www.aph.gov.au/About_Parliament/Parliamentary_Depart…

          • donga100 on 07/03/2022 - 20:13
            +1

            @mskeggs: Here are the most recent stats. 4.2% unemployed + 6.7% underemployed.

            • mskeggs on 07/03/2022 - 20:28

              @donga100: Thanks.
              I think there is also room to consider people who don't show up in the numbers because they aren't working or looking for work. I know people who want good full time jobs, and part time, patch-together, casual work isn't a suitable alternative.
              These people often don't make it onto the stats, but you can get a feel for it from surveys like the Roy Morgan one:
              https://www.roymorgan.com/findings/8894-australian-unemploym….

              It shows about 8% of people consider themselves unemployed, and I think is a reasonable estimate of the discouraged people like older workers made redundant, or people with health/disability issues who want to work, but cannot find suitable employment that beats welfare etc.

    • virhlpool on 07/03/2022 - 17:52

      What will it actually take for the RBA to raise interest rates?

      That's a fair question. Hope 'completion of election' isn't the right answer and RBA probably has more power than that to do a right thing for the country at the right time.

      • sjj89 on 07/03/2022 - 20:38

        It’s definitely ‘completion of election’ so Labor can be blamed for it

    • Ghost47 on 07/03/2022 - 18:39
      +11

      They are scared to raise it because there are fools out there who took out monster sized mortgages and will risk defaulting if rates go up. Some of these fools probably went to the BoMD for help too, exposing them to risk if rates go up. Banks are already raising rates even though the RBA continues to kick the can down the road.

      As a society it seems we must cater the lowest common denominator.

      I personally hope rates go up and people who go to auctions and see two idiots outbidding each other into the millions actually start to think “wow these people are serious morons, this place (and the land) is not worth slaving over a job for 30 years, sacrificing having kids, sacrificing holidays, eating rice and beans etc. just to pay off.” I’ve said it before and I’ll say it again, buying a house 30-40km from the Sydney or Melbourne CBD’s for $1 mil is, in my opinion, the same as buying apples for $100/kg. It’s frankly dumb.

      • fantombloo on 07/03/2022 - 19:16
        +4

        buying a house 30-40km from the Sydney or Melbourne CBD’s for $1 mil is, in my opinion, the same as buying apples for $100/kg. It’s frankly dumb.

        Absolutely. All the benefits of tech and other modernisation should be making our lives simpler and increasing our freedoms yet we've decided to enslave ourselves to large debts which only serve the banks and the state. Totally unnecessary, but if enough people want it then it happens.

        • rektrading on 07/03/2022 - 19:24

          I expect this to get neg to oblivion.
          https://www.ozbargain.com.au/comment/11834882/redir

          • fantombloo on 07/03/2022 - 20:02
            +4

            @rektrading: Sorry dude, what I'm saying has nothing to do with what you're saying.

            • rektrading on 07/03/2022 - 20:23
              -1

              @fantombloo:

              All the benefits of tech and other modernisation should be making our lives simpler and increasing our freedoms yet

              My situation ✔️ this box. WFH and solely reliant on technology. I'm free to work 24/7/365d from anywhere in the 🌎. There is nobody to report to other than the person in the mirror.

              we've decided to enslave ourselves to large debts which only serve the banks and the state.

              I also ✔️ this box. No personal loans or credit cards to worry about. The only debt position is for cheap funding to buy hard assets for growth and to beat inflation.

              People aren't truly free unless they can call the office the next day at 09:00 and say I quit without worrying about how they will pay the bills.

              • fantombloo on 07/03/2022 - 20:52
                +2

                @rektrading: Good for you. My comments and concerns refer to greater society, not to select individuals like you.

                • rektrading on 07/03/2022 - 21:04

                  @fantombloo: It doesn't have to be individuals.

                  Rona has a test case that showed that people can opt-out of the 9 to 5 rat race. Millions of people changed their jobs searching for a better lifestyle.

                  With the Great Resignation, Australians are ditching pre-COVID burnout and pursuing better work-life balance
                  By James Norman Posted Sat 30 Oct 2021 at 5:15amSaturday 30 Oct 2021 at 5:15am, updated Wed 3 Nov 2021 at 2:26pm

                  The Great Resignation taking hold
                  The phenomenon of the Great Resignation has been well documented. According to Microsoft research, more than 40 per cent of workers globally are considering giving their jobs the sack this year. In the US alone, 4.3 million people quit their jobs in August, according to the latest US Bureau of Labor report.
                  https://www.abc.net.au/news/2021-10-30/great-resignation-aus…

      • virhlpool on 07/03/2022 - 22:24

        I’ve said it before and I’ll say it again, buying a house 30-40km from the Sydney or Melbourne CBD’s for $1 mil is, in my opinion, the same as buying apples for $100/kg. It’s frankly dumb.

        It's a long debate but what are alternative options and why isn't government working on them if there are any? Firstly, moving to cheaper towns doesn't help most of the people who are into corporate jobs (WFH is never a permanent solution for the most industries). Secondly, people choose areas based on convenience i.e. commute, shopping, school, hospital and so on. Apparently, to make all areas equally attractive, government will need to work on providing equal quality infra and facilities in all areas, which isn't the case right now (e.g. schools). So, whilst I am in total agreement with your comment, I am not sure what could be the solution for an individual, if other factors remain the same.

      • johnnygolden on 07/03/2022 - 22:26

        They are scared to raise it because there are fools out there who took out monster sized mortgages and will risk defaulting if rates go up.

        This was the calculus that led me to finally give in and buy in 2019 - i.e. that the consequences of a house price crash had become so extreme that the RBA and governments will do ANYTHING to counteract it.

        Everything that has happened since the pandemic began is consistent with this hypothesis.

        (For the record, I think this is terrible for society and I don't actually think prices can stay high forever.)

    • brendanm on 07/03/2022 - 18:45
      +6

      Sure wouldn't help the sick, unemployed, hospitals, schools etc.

        • brendanm on 07/03/2022 - 18:55
          +6

          Yes, America had no taxation before 1913 🙄.

          Do you think the number of services being provided have increased, or decreased, since 1912?

            • brendanm on 07/03/2022 - 19:07

              @timesarehardd: I know you are. Did you miss the bit -

              Do you think the number of services being provided have increased, or decreased, since 1912?

              I agree with you that corporates should pay more tax (or at least not "avoid" the tax they are meant to pay), however you won't find any politicians keen to stop themselves and their mates getting to keep more money

              As it sits, income tax is needed to provide the services. I also think some of them are a completely waste of time and money, however others are very beneficial.

          • virhlpool on 07/03/2022 - 22:25

            @brendanm: I guess some oil-rich economies don't have tax either and they do have decent quality of life (though they don't have democracy if that matters).

  • rektrading on 07/03/2022 - 17:49

    Real property prices aren't included in the inflation data.

    • virhlpool on 07/03/2022 - 17:50

      Agree, except that both are closely linked with the interest rates I reckon.

    • mskeggs on 07/03/2022 - 18:20
      +2

      Building costs and rents are, which is the “cost” of housing yourself. The land value (and other investments like shares and bonds) don’t contribute to CPI either, as they aren’t consumption.

      • rektrading on 07/03/2022 - 18:55

        Existing freestanding real estate in Australia went up by +20%. The rental price didn't go up by +20%.

        Buying hard assets is the only risk management that can counter inflation.

        • mskeggs on 07/03/2022 - 20:00

          I don't disagree, but the reason they aren't included in CPI calculations are reasonable.

  • rektrading on 07/03/2022 - 17:59
    -3

    Buying hard assets 🔧 inflation.

  • AustriaBargain on 07/03/2022 - 18:16
    +1

    I don't think I'm rich enough to have a preference on whether I want higher or lower interest rates.

    • virhlpool on 07/03/2022 - 18:24

      Ah! Didn't know that people who aren't rich enough aren't supposed to care about cost of living. I am probably living my life a wrong way. ;)

      • AustriaBargain on 07/03/2022 - 19:01
        +1

        I guess I'm not rich enough to believe I can influence the national cost of living either. My amount of wealth doesn't buy enough power I suppose.

  • Ocker on 07/03/2022 - 18:36
    +2

    I have been calling much higher inflation for some 18 months now.
    My current forecast for year end is underlying inflation at around 4% and a RBA cash rate of 2%. The flow-on impact to home loan rates will not be pretty.

    • TheMindsetTraveller on 07/03/2022 - 20:17

      Let us calculate some rough numbers here;

      Today:-
      Property $1,250,000
      Loan $1,000,000 (80% LVR)
      Fixed Rate 2% p.a
      Monthly repayment: $3,700 (assuming 30 years)

      Let us assume the fixed rate comes to an end, and variable rates are like 4%
      Monthly repayment goes up to $4,750

      So over $1,000 per month increase.

      To borrow, $1,000,000 one would need to have an income of around $166,667.

      That is around $10,000 per month after tax.

      So yes, from $3700 to $4750 may/is/looks bad, but the person on that income should be OK to service that loan - unless they have children in private school and/or other large ticket debt/loans.

      • virhlpool on 07/03/2022 - 22:30

        So yes, from $3700 to $4750 may/is/looks bad, but the person on that income should be OK to service that loan - unless they have children in private school and/or other large ticket debt/loans.

        This goes with a lot of assumptions though. First one is that the person isn't on the edge i.e. in the tight financial situation. If they didn't have $1000 extra after monthly repayment, then it could be tough. Also, they could again go into a fixed interest-only loan for another 2-3 years if that option is available then.

        • stirlo on 07/03/2022 - 23:19
          +1

          Plus it’s much easier to cut $1000 a month from expenses when earning $10k per month than it is to cut $100 when earning $1k. The expenses those making this kind of money have are highly discretionary. You will alway sell your fancy new car or cancel your overseas holiday before selling your house at a loss…

      • stirlo on 07/03/2022 - 23:16
        -1

        Also of the $3700 only around $1700 is going on interest. The remaining $2000 is repayment of principal building equity…

  • Gratt on 07/03/2022 - 18:43
    +3

    Governments throughout the world have put a lot of extra money into economies at a time when production is not at its highest. The result is more money than goods, houses etc. Market forces drive prices up. Interest rates are increasing as a braking mechanism to control price rises. The government has less control over this than you would think. Substantial rate rises are likely. My guestimate would be cash rates over 3.5% next year and 7% plus the following year if the new rates don't contain inflation. If you think about people won't put money in banks unless they can expect a return that at least matches inflation. Instead they pour money into domestic goods, the Stock market and into residential property driving prices up artificially.

    Governments have little real control and will be able to tinkle around the edges only slightly.

    • AustriaBargain on 07/03/2022 - 19:03

      production may not be the highest it has ever been, but if more goods are being traded between countries than ever before then it doesn't really matter.

    • TEER3X on 07/03/2022 - 19:47
      +1

      Rates definitely not going to 7% within 2 years, that will destroy our economy, and small incremental increases will likely have the desired effect.

      We could be headed for a recession with the oil price spiking to over $120 a barrel, but only if those prices are sustained.

  • JimmyF on 07/03/2022 - 19:34

    Thoughts on inflation and RBA's interest rate hike

    Yes we are having huge inflation atm

    Yes we'll have rate hikes for sure!

    • rektrading on 07/03/2022 - 19:42

      Are people really going to bank on the feds to raise the cash rate to fight inflation?

      • JimmyF on 07/03/2022 - 21:18
        +1

        Not till after the libs lose the election so they can then scream it is all labours fault the interest rates are going up!

        • virhlpool on 07/03/2022 - 22:35
          +1

          Are people that stupid?

          • JimmyF on 07/03/2022 - 22:57
            +6

            @virhlpool: Yep…. MSM will start its endless labour bashing till the libs are back in. Just look at the MSM reporting of labours 'debt' levels compared to how they report the current lib debt levels. Labours was crippling, yet libs 10x levels are 'manageable'. Hmmmm

          • ozbjunkie on 09/03/2022 - 12:10

            @virhlpool: No, they are, collectively, often stupider.

  • El-Rhi on 08/03/2022 - 06:40
    +6

    RBA has lost the plot by not moving rates earlier. This is the same as the Fed in the US (7% inflation). Rates should be around 1% - 1.5% by now and unfortunately now there is nowhere to move down once the oil and energy price shock filters through the economy.

    0.1% rates were supposed to be emergency levels which should have ended 12 months ago regardless of the inflation level.

    • rektrading on 08/03/2022 - 07:21
      -2

      The cash rate is good where it is. Actually, it could do with a damp to zero.

      • snooksy on 08/03/2022 - 08:15
        +1

        I disagree. The underemployment rate is still sticky. People are also carrying more debt than ever so getting a little bit of inflation into the market will help to push up wages a bit and then will also mean there is a bit of a buffer there when rates do go up a little bit. Ideally we want to get the most people into stable work. A lot of spending is discretionary so there’s plenty of things that people can cut back on. In the 1990’s when rates went to 20% people stopped spending except on the necessities such as weekly food shopping, bills and petrol. We are nowhere near that kind of belt tightening. The RBA is right to stay on course until it’s necessary to raise rates. Underemployment is still high post Covid.

        • rektrading on 08/03/2022 - 09:08
          +1

          Disagreeing is good.

          🇦🇺 has a $1,478,930M debt bill. The feds are already getting rekt by the interest trying to pay it back now. They'll be fubar if they raise the cash rate.

          https://australiandebtclock.com.au/

  • snooksy on 08/03/2022 - 08:08

    A couple of small rate rises will be fine. People are supposed to give themselves a buffer when they purchase a home. It’s never wise to borrow more mo way than you can afford. For the small percentage of people who can’t make payments then they can sell and these properties will be absorbed. I don’t think there will be any changes to the housing market. House prices should trend up slower for the next couple of years before the next boom. Raises will catch up a bit and then people will again be able to borrow more. We have to remember that interest rates are the lowest they have ever been and most people have disposable income they spend on tablets, mobile phones, entertainment, subscriptions, holidays, new cars, eating out, etc. There’s plenty of places people can cut some fat to afford their mortgage repayments. Our lifestyles have never been so good so not to worry.

  • TheOtherLeft on 08/03/2022 - 08:36
    +6

    The RBA raising interest rates???? HAHAHAHAHA

  • cashless on 08/03/2022 - 08:46
    +1

    Thoughts on inflation

    Looks like umbrellas are going up. Meanwhile drainpipes are going down

  • afah0447 on 08/03/2022 - 11:00

    The international macroeconomic IS-LM model shows that the rest of the world follows the US when setting interest rates. It just a matter of time till they increase. But this is obvious without a model.

  • El-Rhi on 08/03/2022 - 11:40
    +1

    The RBA will also make substantial losses if rates increase before June 2024, which ultimately flows through to the federal government. This is also one of the key reasons why the RBA is refusing to raise rates, despite indications of inflation above its target

  • rektrading on 08/03/2022 - 11:52

    Why do so many posters want the cash rate to go up?

    Do they think that they'll benefit from a +0.25% rise?

    • virhlpool on 08/03/2022 - 12:00

      Why only 0.25% rise? More the better for the current inflation. Isn't it?

      • rektrading on 08/03/2022 - 12:03

        Powell has already said +0.25% in March 2022. Lowe won't try and outdo his boss.

  • LFO on 08/03/2022 - 14:27

    It is not (high) inflation what will stop Real Estate pricing.

    It is cheap money with low interest rate the biggest culprit.

    Also lack of "punishing" taxation for those buy Real Estate to speculate, negative gearing, no death taxes for family home and etc.

    (Low) Interest rate (cash rate) is the elephant in the room.

    Not many "investors" bought houses when interest rate was close to 18%.

    • rektrading on 08/03/2022 - 14:42
      +1

      Not many "investors" bought houses when interest rate was close to 18%.

      The interest rate on savings accounts back then was much higher than today. People didn't have to buy real property to grow their savings.

      There is no incentive for people to keep fiat 💵 nowadays with the banks paying zero interest.

      They're likely to lose an unofficial purchasing of between -1% to -3% per quarter if they hodl fiat 💵.

      • LFO on 09/03/2022 - 22:47

        There are other options than cash term deposits.

        People buy houses because mortgage loans are cheap and easy to get.

        They will buy anything else if able to get cheap mortgages for that anything else as well.

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