Australia is a balloon…
It’s also quite similar to a football. Or, you could even think of it as one of those blow-up pool unicorns.
The more you blow up a balloon, a footy or a plastic pool toy, what’s going to happen?
Eventually it’ll get to the point where it explodes – capitulating into a sorry shape, failing to live up to its useful purpose. We don’t want to be lounging comfortably on our pool unicorn, for it to explode underneath us.
When you blow up said object, what are we doing?
We’re INFLATING it.
The more something inflates, the more likely things are to go badly. Does this remind you of a certain oddly shaped, large nation you may live in?
Over the past 3 years, Australia (along with most of the world) has experienced economic inflation. So, other than blowing up a ball, and it eventually explodes…
What exactly does inflation mean?
According to the Reserve Bank of Australia (RBA), inflation is the economic event that occurs through increases in the prices of goods and, due to changes in supply and demand – our two favourite economic indicators.
Over the past few years, we’ve seen the effects of inflation in each and every facet of life – whether it be heading to the supermarket for your weekly grocery shop, filling up your car, or even heading to Bunnings for a sausage in bread. It’s been the key to the cost of living crisis that we’re facing as we speak.
After peaking at 7.8% back in December of 2022, the CPI (the RBA’s inflation measure – the Consumer Price Index) has been gradually decreasing, where it sits at 5.4% as of the last report in November 2023. Unfortunately, This doesn’t mean prices are decreasing. What it means instead is that prices are increasing at a SLOWER rate.
That being said, typically, a bit of inflation is good, the RBA likes to keep things in the range of 2% to 3% per year. It keeps the economy going, ensures people are spending money, and fosters growth along the way. Much like your footy, or pool toy, we need to pump some more air (or money) into things as we go along – just not too much though, as we’ve seen in other parts of the world. Recently countries like Turkey and Sri Lanka have seen massively high inflation, at almost 80%, causing a burst of their economic balloons.
Why is inflation occurring?
Simply, it stems from the economic strategy the government used to combat COVID. Across Australia, with lockdowns, isolation orders and an increase in strain on the health system, government spending went up, and interest rates went down. Ultimately, through schemes like Job Keeper, policymakers wanted the economy to stay on its feet by ensuring people could still spend money. Off the back of this though, extra money in the economy meant that demand rose, and in turn, so have prices. Paired with massive labour shortages, this has sparked inflation leading us to the point where we are today.
There’s known to be a lagging effect of the economy on the Consumer Price Index – and by increasing interest rates throughout 2022 and some of 2023, it has helped to spur a decrease in that CPI value, one that we are very likely to continue to see decrease as we move forward.
As we head through 2024, we’re in the position now where inflation is heading down, and interest rates (the tool to minimise inflation) are stabilising.
So, as a property investment enthusiast, you’re probably wondering…
What does this mean for me as a property investor?
- The Cost to build is STILL rising
As you may have seen, building companies, large and small have been going under over the past couple of years due to increased prices. The big projects they signed off a couple of years ago are now costing SO much more to build, meaning things just can’t be done.
This further shortens the supply of new properties. In fact, the number of approvals for new builds was at a 10 year low of 164,000. Ultimately, it is all the more necessary to have the procedure in place to find a quality property in a great location.
- Demand will go UP
The ANZ and Roy Morgan have just released a report from their most recent polls, including some results that highlight that consumer confidence is at its highest since February of last year.
What does it mean?
Well, plainly, consumer confidence is a measure of how optimistic (or pessimistic) the population is when considering their financial future. With increased consumer confidence, as a result of slowing interest rates and inflation, it comes hand in hand with people being comfortable spending more money…
Which brings more demand in the market.
Alongside this, there are calls for the mortgage serviceability buffer to be reviewed. The figure (currently at 3%) is used to calculate whether someone can pay back a loan, if the rate is 3% (the buffer) higher than the actual rate.
Ultimately, by reducing this, it will lift borrowing capacity and further increase market demand.
- Prices will continue to increase.
With growing demand, and limited supply – as basic economics suggests – prices can only rise. As you may have just seen, Brisbane took over Melbourne as Australia’s second most expensive city (by median dwelling cost). Alongside this, prices have recovered to above peak record levels. According to Domain’s 2023 End of Year Wrap, the median house price is Aussie capital cities reached a new record high of $1,084,855 – meaning the recovery in the market (which we predicted) is incredibly resilient!
So if there’s anything you should take away from this chat – it is consistency and strategy over the long-term that will provide you with the best outcomes.
In the short term, these inflation figures, and their associated concepts highlight the immense opportunity for savvy investors to enter the market.
After all, as they say – the best day to invest was yesterday.
Want to chat more about how we can help you to smash your financial goals through property investment?
Reach out HERE, or give us a call on 1300 776 735 – we’d love to hear from you!