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CPI figures extinguish rate hopes, but more pain is on the horizon
Opinion: Today’s inflation figures have all but destroyed any hope of an interest rate cut for those millions of Australians in mortgage stress. And I fear the worst is yet to come. Far from weathering the storm, the economy is being steered into one, writes REB editor Liam Garman.
Today’s consumer price index (CPI) figures hit hard for the nearly two million Australians in mortgage stress. Yet with living costs surging, it’s hard to imagine that many are surprised. Nor will anyone in finance be shocked.
With sticky inflation driven by government spending and years of cheap capital, the likelihood of further rate hikes has long been priced into bond markets.
Australia’s underlying economic fundamentals tell a grim story.
Business insolvencies have surged 39 per cent in the past year, and economic forecasts from our major trading partners spell trouble: If China’s property market falters, demand for Australian coal and iron could fall sharply.
And yet this looming economic cliff is, in many ways, one of our own making.
When demand runs wild, we all feel the crunch
Electricity was the main driver of today’s CPI. Prices jumped 37.1 per cent over the past year after government rebates that had hidden the true cost of energy generation expired.
And, of course, ranking behind electricity was the increase in housing costs.
The priority of successive federal and state governments has been to achieve the Australian dream of home ownership by stimulating demand – through cash giveaways, cheap credit and botched schemes.
Readers of this masthead know more than anyone that this only serves to drive prices up, and without commensurate increases in earnings, kicks the affordability can down the road.
The vaunted first home guarantee scheme, which has no doubt helped many first home buyers enter the market, has created a ticking time bomb for young Australians.
In October, it was revealed that one in 10 houses was purchased using the guarantee – resulting in monthly house price growth outpacing the government’s muted 0.6 per cent growth projection over six years.
So unsure of the Federal government’s projections, the Insurance Council of Australia projected that some segments of the market could grow by 10 per cent in the first year of the scheme.
Driven by fear of missing out (FOMO) and armed with a 95 per cent mortgage, coupled with transaction costs on either side of the sale process, thousands of young Australians are now at risk of negative equity.
Especially those in major cities who flood into defect-ridden new apartments, with little to no capital growth on the horizon.
The risk of negative equity creates a multi-billion-dollar liability for public finances.
If the global financial crisis (GFC) was anything to learn from, it’s worth listening to insurers when they reveal concerns about the influx of cheap credit in the housing market.
But until supply comes to the table, CPI will continue to rise, and disposable income will collapse.
Currently, Australia is 22 per cent behind national housing targets. Meanwhile, migration remains at near record levels – and student migration is tipped to surge next year.
Excessive government spending is leaving us poorer and more vulnerable
The Reserve Bank of Australia warned in September that out-of-control spending from federal and state governments, including public-sector wage growth, helped stimulate ongoing inflation.
Australia’s M3 money supply has grown 25 per cent in just three years, underscoring the scale of money in the system.
As we project a $42 billion deficit for 2025-2026, the federal government will be paying over $30 billion in interest a year. Soon, Victoria alone will pay nearly $10 billion a year in interest.
Borrowing to finance long-term growth is not a problem, provided you have the growth rates to compensate for the interest on the debt. But without government spending, the Australian economy has been going backwards for some time.
This leaves us vulnerable to global shocks, minimising our ability to respond with fiscal stimulus to grow the economy should Australia be battered by economic headwinds.
As we sail into the storm, our rudder is broken and our sail ripped
Flush with revenue from minerals and stamp duty, some economists would have you believe Australia navigated the economic and financial headwinds of COVID-19 unscathed.
But that view ignores the fragility beneath the surface. The storm is still on the horizon.
China’s domestic market is showing little appetite for Australian coal and iron, and a sliding dollar compounds the challenge.
Meanwhile, vulnerable young Australians are carrying 95 per cent mortgages into a housing market propped up by cheap credit and government stimulus. Our economic complexity, a measure of how diversified and resilient an economy is, ranks behind countries like Botswana.
Put simply: The ship is not only exposed to economic headwinds, it is poorly rigged to weather them.
Without urgent structural reform, balanced fiscal policy, and a focus on supply rather than just demand, ordinary Australians will bear the brunt of the next shock.