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Australian Inflation rate, RBA next meeting, Rental Crisis in Australian cities

Posted by Adrian on January 25, 2007

On February the 6th (Tuesday) the Reserve Bank of Australia will meet to consider lifting interests rates beyond the cash rate of 6.25%, or pausing. After CPI (Consumer price index) figures were released Tuesday 23rd. They showed a drop in the 0.1% in the December quarter 2006 down from an increase of 0.9% in the September quarter 2006. Of course Core inflation is higher than the RBA target range of 3%. Most economists now believe that the RBA will pause rate rise in February. This will of course be an error, as underlying core inflation will continue to rise. Rents and food are still high and business costs and services are high, so is this offset with higher wages? Most likely not, like the US Federal Reserve, the RBA may lapse it’s commitment in keeping prices in check compared with wage growth.

The issue is of course the cooling property market in Australia, which hasn’t at all gone into a recession like the US market. The Australian housing market hasn’t declined in any sharp manner, so there is still a reasonably active housing sector. Although there has been a sharp rise in rental, which in all reports is due to scarcity and demand for rental accommodation. I will make an observation here, and say that rental increase that has contributed to a high core inflation, have been initiated by speculators (real estate agents and investors) to see how high they can adjust rental beyond the value and the spending power of the renter. There has been talk by the Real Estate institutes in Australia that regulating a bidding process for rents may be applicable (as it is going on, apparently unsupervised and regulated) . Further to my observation on the rental hikes, is that although a scarce rental market, which would indicate that their are more owner occupies paying a mortgage, then renters. So therefore there are less renters than the Real Estate Institute assumes. They estimate that hundreds of people are viewing single properties (one report on a news channel mention how 100+ potential renters were taken through one house!) is unfounded and geared towards manipulating and/or causing fear in the market.

There reasons why these reports are untrue, are:

From a sociological and financial perspective, a single person will not pay $200+ for an apartment. We can assume that a bulk of the renters fall between the ages of 20 y.o and 30 y.o, who are working and earning basic wages. Since the housing boom is not completely over. Parents would offer to help their children save for a deposit, rather than pay higher rents. They (Parents) would much rather their children pay off a mortgage (even if it was for a unit), then drop over half their wage into an investors pocket.

Couples will not live in flats/and units. It’s not the most feasible place to maintain a relationship. I doubt many can achieve that, possible out of necessity due to high rents. But risky and unlikely on a large scale.

According to Census (Article found here) more young women are living alone. If there was a competitive aspect in the rental market, it may be with women going into higher rental properties. Young men don’t generally live alone.

Sharing would be an option (mostly women sharing with other women), this would be renting houses that are now sitting in the $400+ range a week. I imagine with a the property market still in existence and no major sell off as yet (from defaults and a recession), there wouldn’t be a lot of houses on the market.

Therefore units flats, even some townhouses will be left for the very few looking. It would be advisable to watch the rental market and offer lower rents, rather than higher rents. The equation for the Australian rental market would be, scarcity in rental property + scarcity in people looking to rent = it equals it’s self out. No excuse for a higher yield in rent.

If the RBA do not increase interest rates on February the 6th, as seen now, the purchasing power of the Aussie Dollar has declined on speculation that the RBA will pause. Investors don’t see it has a strong currency, as cash is still loose, and the asset markets haven’t tightened. The AUD will fall Against all the main currencies. So if you are into the FX markets, you can see this as an advantage and hedge against the AUD. I suspect the Aussie will further decline prior to the RBA meeting, possible down to the 77- 76 range against the USD.

Stocks will rally as the All Ordinaries has climbed on speculation that the RBA may not consider increasing interest rates on Feb 6 2007.




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