The Great Inflation

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‘The Great Inflation’ is a term coined by Christopher Joye, the Managing Director of Rismark International (RP Data – Rismark reports fame) to help define the period we are about to enter in Australia. There has been a set of circumstances brewing that will drive inflation and therefore interest rates in Australia for some time. The Budget has not done anything to alleviate this and while this will create some challenges, there will also be some wonderful positives as well.

Last night’s budget articulated the undeniable strong fundamentals underpinning our economy. Inflation is running well above the RBA’s target band, unemployment is falling creating even more pressure on wage price claims, our Gross National Income (we often focus on GDP and miss this important measure) is growing at around 9% pa and despite ‘tough love’ claims by the government, the budget is effectively neutral over 4 years (the centerpiece of the $22B in cuts is actually less than that, its over 4 years while at the same time increasing spending by around $18B!). With the RBA’s single focus of price stability by keeping inflation within the target band, this means interest rates are going up.

Before you panic, it’s not all bad news for property. Yes the property market is affected by interest rates, but not in isolation. Let’s look at the ‘medians’ and then how you can still do well in this market.

If we assume a full 1% interest rate hike the next year (and some analysts are still suggesting the next movement is down not up) at the current rate of wage growth in a year’s time a person with a median wage and a median mortgage would be around $200 per month better off! Why, because wages are already outstripping CPI and interest rates. What this translates to is increasing affordability. In some areas the median wage will grow even faster due to labour shortages as the local economy expands (keep in mind that wage price growth is likely to increase and as for how many rate rises we have, the Commonwealth Bank has just dropped some of their fixed rates!)

Something else to keep in mind is that as rates rise this may briefly slow the supply of housing, which will obviously then put additional upwards pressure on rents = good for investors. This has already begun in some areas and we expect to see very robust rental growth over the next few years improving investor yields.

So, how do you make money in this market. No different to any other market. Don’t get caught in the media hype (boom, bubble or bust talk) and look at the market fundamentals and identify those areas that have increasing affordability and demand for housing with insufficient supply. Medians and averages are just that – it simply means that there are areas that are performing much better and much worse. With the current changes afoot in our economy it’s also about understanding how that will affect the various States and regions.

Mid last year we identified an area that has all of these features (expanding economy, skilled labour shortages, undersupply of property) and secured opportunities that we have released to our clients early this year. In the interim, that area has seen a 9.7% growth in prices. While the media is preaching the doom of falling prices, our clients have been making money so it’s all about doing your research and understanding the ‘real market’ regionally.

We are in the Great Inflation – you can see that as a negative or a positive but the truth is that money will be made through property because of it. To make the most of it, don’t buy into the negativity that the media will try to associate with this and go out of your way to look through the hype to discover the real gems beneath that will come from it.

The ‘today’ train is leaving the station on the Great Inflation line for those who want to buy a ticket… I would recommend you don’t miss it because the later train you take will cost you more to ride and might not get you to your destination.