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Is the inflation spike just a ‘blip’ on the radar?

Inflation figures released today are likely to see interest rates remain high for longer, according to experts.

The Consumer Price Index climbed 1 per cent in the March quarter and 3.6 per cent annually, according to the latest data from the Australian Bureau of Statistics (ABS).

According to ABS Head of Prices Statistics Michelle Marquardt, the sticky CPI rate was higher than the 0.6 per cent rise in the December 2023 quarter. 

“Annually, the CPI rose 3.6 per cent to the March 2024 quarter,” she said.

“While prices continued to rise for most goods and services, annual CPI inflation was down from 4.1 per cent last quarter and has fallen from the peak of 7.8 per cent in December 2022.”

The most significant contributors to the March quarter rise were education, which was up 5.9 per cent, health (up 2.8 per cent), housing (up 0.7 per cent), and food and non-alcoholic beverages (up 0.9 per cent). 

Ms Marquardt said the quarterly rise in housing was driven by rents, which jumped 2.1 per cent and new homes bought by owner-occupiers, which were up 1.1 per cent. 

“Rental prices rose 2.1 per cent for the quarter in line with low vacancy rates across the capital cities,” she said. 

“Rents continue to increase at their fastest rate in 15 years.”

Higher labour and material costs contributed to price rises this quarter for construction of new dwellings. 

The 1.1 per cent increase is slightly lower than the 1.5 per cent rise in the December 2023 quarter.

Rate cuts could be pushed back

Last month the RBA opted to keep interest rates on hold at 4.35 per cent.

Canstar Group Executive, Financial Services, Steve Mickenbecker described the inflation increase as a “setback”. 

“It puts inflation well above the trajectory needed to return to the Reserve Bank’s target band of between two and three per cent by the end of next year.

“Three months ago the 0.6 percent CPI increase implied a return to the mid-point of the Reserve Bank’s target in 2025.

“The one percent increase for the March quarter will leave the Reserve Bank concerned that we have fallen off the wagon.

“With increases over six per cent for the quarter, secondary and tertiary education expenses have been a large contributor to the March quarter increase.”

Mr Mickenbecker said the 1 per cent CPI increase in the March quarter would not only delay rate cuts into 2025 at best, but put interest rate increases back on the table. 

“The past 18 months have brought home to the community just how stressful inflation can be, something the Reserve Bank was always well aware of,” he said.

“Unfortunately, mortgage holders and renters have felt the worst of that pain and could be up for even more if the March result leads to another cash rate increase.

“A cash rate increase of 0.25 percent adds around $100 on average to the monthly repayment for a $600,000 loan over 30 years. 

“That hurts when prices for almost everything else have gone up again, this time by one percent over the last three months.

“With the likelihood now of a more prolonged period before rate cuts, it is all the more critical that mortgage holders move their loans to as low a rate as they can.”

Cuts to housing taxes needed

HIA Chief Economist Tim Reardon said inflation was increasingly becoming embedded in the economy, which was a “concern”.

“Factors such as housing undersupply are continuing to keep CPI above the RBA’s target and risk a higher interest rate for longer than previously anticipated,” he said.

“Perversely, these structurally higher rates will continue to suppress home building activity and make it increasingly challenging for the Australian Government to build 1.2 million homes over the next five years.

“This target is ambitious, but essential to avoid ongoing rapid increases in rents.”

Mr Reardon said with higher interest rates likely to linger, the government needed to look at reducing the tax import on homes and improving housing supply.

“Government taxes and charges account for as much as 50 per cent of the cost of a new house and land package,” he said. 

“Governments are the biggest impediment to home building in Australia. 

“They cannot continue to blame the consequence of their decisions on foreigners or investors who build homes and make them available for rent or sale.

“State governments increased the taxes on foreign investors a decade ago and we have seen the volume of apartments fall by around 50 per cent.

“The consequence of increasing taxes on homes is that we will get fewer homes built.

“A tax on carbon will lead to less carbon. A tax on homes will also lead to fewer homes.”

It’s not all bad news

But the Real Estate Institute of Australia said the CPI figures were not all doom and gloom.

“Whilst the quarterly increase was up from the December quarter, it is the fifth consecutive quarter of lower annual inflation since the peak of 7.8 per cent in the December 2022 quarter,” REIA President Leanne Pilkington said.

“Australia appears to be experiencing the same final hurdles as the USA in getting inflation back into the target range.

“The important analytical series of trimmed mean, which excludes large price rises and falls, was 4 per cent for the year compared to 4.2 per cent in the December quarter. 

“This is the fifth consecutive decrease in the weighted mean analytical series.”

Ms Pilkington also described the services inflation figure, which has been sticky and of concern to the RBA, as “encouraging”.

“It eased for the third consecutive quarter, to 4.3 per cent down from the December figure of 4.6 per cent and the peak of 6.3 per cent in the June 2023 quarter,” she said.

“The most significant quarterly price rises were rents, up 2.1 per cent, secondary education, up 6.1 per cent, tertiary education, up 6.5 per cent and medical and hospital services, up 2.3 per cent.

“Rents rose 7.8 per cent annually, higher than the 7.3 per cent annual rise in the December 2023 quarter and the highest since March 2009.

“The highest increase in rents in 15 years highlights the need to address supply and the need to keep private investors adding to that supply by not tinkering with current taxation arrangements.”

Ms Pilkington said the CPI data followed other economic analysis, including an increase in unemployment figures, which indicated a slowing economy. 

“The slight increase in the quarterly figure is a blip in the final steps to control inflation,” she said.

“Just as in the USA, it doesn’t mean that interest rates won’t be decreasing but that a little more patience is required.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.