Will this interest rate rise finally take the heat off property prices?

Sascha: [00:00:02] Welcome to The Dive, the podcast that asks Who said business news needs to be all business? I'm your host, Sascha Kelly. On Melbourne Cup Day earlier this week, there was one safe bet and that was that. Michelle Bullock and the RBA would raise interest rates once again and they did by 25 basis points or 0.25 of a percent if like me, basis points didn't mean much to you before reading financial media. The 25 point increase to 4.35% is going to be a bitter pill for borrowers to swallow, and in some ways it just feels like the economic stakes have never been so high. It's Friday, the 10th of November, and today I want to know when so many of us are feeling the pinch. Why is the RBA still raising rates and what effect are they hoping it'll happen? To talk about this today. I'm joined by Jennifer Duke, who's Capital Briefs economics correspondent. Jennifer, welcome to the dive. 

Jennifer: [00:01:00] Thank you for having me back. 

Sascha: [00:01:01] Now, it's probably the most basic question, but when so many people are already feeling enormous pressure from cost of living, you know, we're all very aware of how tight money is at the moment. Why did the RBA raise rates again? 

Jennifer: [00:01:16] Oh, I know that it's going to annoy an awful lot of people, but that cost of living pressure is exactly why the Reserve Bank has been increasing rates and why they made the decision that they did earlier this week. So it was a 25 basis point rise and all the big four banks were expecting it. And the data point that everyone had to look at was actually put out a couple of weeks ago, and that was those inflation figures. The Consumer Price Index was up about 5.4% in the year to September, and that was about 0.2 percentage points higher than what the Reserve Bank was expecting. And that seems tiny to most normal humans, but to economists it seems massive and it tells them that actually inflation isn't slowing as fast as they wanted. And so they have to increase interest rates to take some more heat out of the economy. So that's why they did it. As painful as it is to so many people. 

Sascha: [00:02:04] When we talking about inflation. Just give me a little bit of background. What are the main baskets that we're looking at that are adding to that kind of. Well, because it's thrown around so much, but it's actually what is it? 

Jennifer: [00:02:15] Yeah, that's a really good question. So you're right, It is this basket of goods effects and it looks at everything from the stuff you can actually shove into a basket. So your groceries and things like that, but also haircuts and rent and fuel prices. It doesn't include mortgage interest because obviously that sort of affected by the interest rate. So that would be kind of counterintuitive and and tricky. But it does look at all your fruit and tobacco, your furnishings, education, recreation every time you go on holiday, even like your insurances and stuff like that, that all feeds into this alleged basket of goods that you're shopping for each month and pops up in these figures. 

Sascha: [00:02:53] We're going to dig into property in a second. But before we do that, you did say that this was off reports that the RBA had seen. That was forecast today. We're recording ahead of time. But when this episode is released, there will be a new statement on monetary policy that's published. What are we expecting to learn in this paper? Do we have some idea of what the expectations of what those results are going to be? And are there some wild cards that we need to be paying attention to?

Jennifer: [00:03:21] Yeah, absolutely. So in economics circle, this is called the swamp. It's a huge deal. He's still for economists and it's about 80 pages. So it is a massive piece of work. It's only released every quarter. And what this does is it sets out the Reserve Bank's best view on what's going on in the economy right now and also some forecasts for the next two years. And is everything from wage prices, inflation, unemployment, how how real wages are going to perform based on those figures, household consumption and business investment? It's a big chunk of work. I mean, those forecasts aren't always right. We've seen that happen regularly with Reserve Bank, but it is the as Lisa Ellis, the former Reserve Bank assistant governor, recently described it to me, it is like the least worst best guess, if you know what I mean. So that's kind of the way to look at it. I thought that was a terrific turn of phrase. And so basically what we know already was a little bit that came out in that interest rate announcement. So they free, I guess, previewed some of the some they're saying that inflation's going to hit about 3.5% by the end of next year and it will be at the top of that target band. So they want it to be 2 to 3%, they'll hit the top end of that by the end of 2025. They also told us that there's going to be slightly higher than previously expected unemployment, but we'll have to see how the full range of figures comes out to see how that's going to look on a kind of half yearly basis. They haven't given us that much more than that. But I would say the most interesting stuff usually actually comes through the report itself. So the forecasts come in this big table at the back and everyone rushes straight to them and gets very excited. But there's this like other 78 pages of stuff where it's like, here's our view on the international economy, his view on the domestic economy. And they look at things like risk. In the household sector and also what's happening with China and how that might affect us. And it's a little bit more qualitative, but it's much deeper and much more interesting. And also, they have this massive liaison network. Many people know about this, but the Reserve Bank has these economists who they send out to speak to businesses on the ground across the different states, and they basically tell us what's really going on that we might not have picked up in the data right now. And that kind of comes out through this. So lots lots of stuff in there. I'm very excited.

Sascha: [00:05:27] You say it's 80 pages, though, but this is kind of where I find this fascinating tension in economics is that like there's all this data and then they just seem to have this really blunt and one kind of tool for all, which is just the cash rate and interest rates, whether they raise it or put it down. Is there some kind of internal pressure that they feel about the fact that that is their main tool?

Jennifer: [00:05:49] Look, it's interesting. I would say that in fairness, most central banks seem to have the same tool and it has worked really well for us to date. The Reserve Bank review kind of showed us that it has been pretty good at keeping the economy on track. What I would say is that that does need to be more coordination with the federal government, like if they're going to be looking at ways to relieve cost of living pressures, that has to be coordinated with the overall direction the Reserve Bank's pushing in. Otherwise they can have to do things to kind of counteract that. So the more money that gets pushed in the economy from the government, the more cash that we will have when the Reserve Bank is trying to take it up. Our interest rates like that could obviously have some interesting effects. So I think that's more kind of curious. But I would say there's been a lot more commentary now about whether this blunt tool will work when the pressures are external to Australia, when they're coming from overseas, when it isn't just consumption, when it's supply chain problems, things like that. So that that is getting technical and difficult. And I'm sure we'll see reams of science written on the subject for years to come. 

Sascha: [00:06:44] It's interesting that you said that they're working, you know, in coordination or in response to government policy. What are the kind of primary policies that are working in opposition to that at the moment? 

Jennifer: [00:06:54] I would say right now that there's too many. I mean, like personally, if I was to have an opinion on it, always dangerous territory when it comes to politics, I would say that it looks to me as though the cost of living measures we've seen so far have been pretty, pretty targeted. The one that I'm really interested in is what happens with stage three next year, those stage three tax cuts that pull quite a lot of money back into the economy. I've spoken to so many different economists about this and there is a bit of a split going on, and it's all about where the economy's actually going to be by mid-next year when this kicks in. Because if we're still running really hot on inflation, we really don't want more dollars going back into people's pockets. That seems disturbing. But if we are actually slowing it down and some economists think that we're actually going to be in a pretty dodgy economy in six years, the technical price will the economy. If that happens, then we might actually want the stimulus from that, from those extra dollars floating around. And that's before you consider, you know, should it go to richer people and all that kind of stuff. So that's to me where the big question lies at the moment. 

Sascha: [00:07:51] More of my chat with Jennifer in just a moment. And we turn to the age old question, how this is going to affect property prices. Welcome back to the Dive. I'm your host, Sascha Kelly. I've been chatting to Capital Braves economics correspondent Jennifer Duke about all things to do with interest rates. But before we get back into that chat, can you do me a favour right now? Can you give us a five star review? I don't really understand how the algorithm works, but I just know that it does. If you give us a five star review in your podcast player, it makes all the difference in terms of getting our podcast in front of fresh ideas. I promise that's the last time I'll ask for this episode. Now let's get back to my conversation with Jennifer. Let's turn to property, which is, of course, what everyone always wants to find out about. I think this has just been a fascinating story to watch because despite higher interest rates and as we've said anecdotally stretched household budgets, property prices are just continuing to climb. So I feel this is the eternal question that we always ask. But will this interest rate rise finally knock the heat out of the market? 

Jennifer: [00:09:05] Is such a good question, and I wish I had a crystal ball for this one, because I you know, I would absolutely love to know what I what I can say is that cold logic, who are the biggest kind of property research house in the country? I think alongside domain, they put out a bit of a statement after the interest rate decision and said that they think it will take some of the heat out. Probably isn't going to completely derail sort of what's going on. But we're not going to see necessarily as hot a market as we would otherwise. And that makes sense. And the interesting thing about that is that the rate rise is sort of happening at the same time as this other phenomenon, which wasn't happening previously, which is where we're suddenly getting a lot more people selling. And that's because of the price rises, there's been much more confidence. So is the kind of back out to spring summer. And so because there's much more stock on the market that increases the supply. And then when you're getting the interest rate effect at the same time, that suggests that the heat might come out a bit more because one of the reasons that the property market was going so crazy previously was because everyone just didn't sell when prices started slipping. And that kind of created this false demand effect, I suppose you could call it, and the prices kind of went up again. So maybe we'll see that happen in reverse. It's possible. I'm really not sure, but it'll be interesting to see what happens from here on out over summer. 

Sascha: [00:10:15] And of course, we're kind of halfway through. I don't have the numbers top of hand, but we're halfway through this kind of mortgage cliff phase when a lot of people are starting to roll off those fixed rates that they had set back in the pandemic when interest rates were at record lows. 

Jennifer: [00:10:30] Yeah, this topic always fills me with a little bit of fear because on the one hand, the things that you hear from the Reserve Bank sound sort of rosy. They're like, We're halfway through it. Everything seems okay. People are adjusting their budgets, but we do know there is this portion. I don't have the percentage off of my head either, but it was quite significant. Like it's not a majority, but to me it's significant enough that you're worried for those households and thinking they're going to have to sell their properties, the market, something's going to have to happen. So I think there's going to be some kind of friction in this process. I just don't think it's a cliff. It's a bit of a bump, as previously described to me, as a bit of a speed bump. I think that's probably an appropriate description for it. I hope I'm right because any kind of remortgage, Cliff, is disturbing for the 30% of people who have a property, pretty much anyone else whose interest in getting into the market and anyone who's related, someone who has a property with all their wealth tied up in it. So, yeah, you know, it's a really tricky position. I would also say, though, that we don't really know what's going to happen with rates next year, and I think that's playing in a lot of people's minds because I don't think the Reserve Bank, even a couple of months ago were necessarily expecting to have to do this rate hike. It's just the data has forced their hand, basically. And I think that while we're now hearing or the economists say that's probably enough, probably no more, we've heard that three months ago. Will this happen again? And maybe that changes that risk profile all over again. 

Sascha: [00:11:51] Yeah, well, Jennifer, I've been loving the metaphors that you've brought for the conversation today. And I'll say, I know it's ahead of time, but today will be the day that you'll finally get to dig into that 80 page report. So I hope you have a lovely Friday reading all the focus. And I know we'll get you back on the chart to help us decipher that in future. So thanks again for your time today. 

Jennifer: [00:12:12] Thanks so much for having me.

Sascha: [00:12:14] And we'll leave it there for today. Thank you for joining me on the dive today. I'm going to be back in the feed on Monday talking to Bryce, my colleague here at Equity Mates, who wants to dig into what happened at the end of the San Bankman-fried trial, the biggest financial fraud case of all time. We're going to get into the nuts and bolts of what he's been found guilty of. Until then, thanks so much for joining me today.