Construction cost pressures ignite
The latest inflation figures showed headline inflation in Australia had increased to 6.1 per cent in the June quarter, the highest in over 20 years, and the figures are impacting the housing market in three critical ways, according to Pete Wargent, co-founder of Australia’s first national network of buyer’s agents, BuyersBuyers.
Mr Wargent said, “firstly we can see that the costs of renovations and building a new home have soared off the back of the HomeBuilder stimulus, very high demand for trades and materials, and supply shortages.”
“The latest inflation figures confirmed that the producer price indexes for the housing construction sector are going to be very ugly. The cost of building a new home has increased by 20 to 30 per cent in many cases, and we are expecting a lift in construction insolvencies, with many projects now being mothballed or scrapped”.
“This has implications for a potential undersupply of dwellings as immigration increases over the next 12 months” Mr Wargent said.
Rental market tightness
The second point of note relates to the rental market, with rental price inflation finally beginning to show up in the initial figures.
Mr Wargent said, “the official inflation figures measure actual rents across the market, rather than asking rents – which have soared over the past year – and as such there is a lag in the official data.”
Figure 1 – Australia rental CPI
“With power and energy costs also now rising, Australia’s headline rate of inflation probably won’t peak until the final quarter of 2022”.
“The ABS figures still have Sydney and Melbourne in negative territory over the year, so there is come catching up for this index to do to reflect what is happening in real time with asking rents for newly signed leases. To some degree the ABS figures reflect weakness in Central Business District rents, with many tenants electing to move to the suburbs or regionally through the pandemic” Mr Wargent said.
Figure 2 – Rental CPI by capital city
“With a huge backlog of visa applications to be processed, and most new arrivals into Australia being renters, we expect to see strength in rents continuing into 2023. There is also some evidence of tenants returning to Sydney and Melbourne in more meaningful numbers now” Mr Wargent said.
Further rate hikes to come
A third aspect of note in the latest figures is that with inflation at the highest level in over two decades, there will inevitably be further rate hikes facing borrowers over the remainder of 2022.
BuyersBuyers CEO Doron Peleg said, “financial markets expect that with inflation still running hot over the remainder of 2022 there will be further tightening to come.”
“The good news for borrowers is that markets weren’t spooked by the June inflation figures, and in fact bond yields have dropped back to their lowest levels since May, suggesting that perhaps the figures weren’t quite as hot as feared.”
Figure 3 – Australia bond yields
“Indeed, markets are pricing for interest rates to be on the way back down next year, which mirrors our view that property buyers have a 6-to-9-month window to buy with less competition to snare a bargain before the market picks up again next year”.
“In our view there is a terrific opportunity to negotiate hard in the second half of 2022 and buy well-located property at a discount” Mr Peleg said.
