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Tag: Housing

  • With interest rates set to rise another 3 times, no wonder consumers are feeling grim

    Right now Australian consumers have less confidence than they did in April 2020 when the entire world was locked down and the pandemic was raging without any prospect of a vaccine.

    That might suggest that Australians are overly pessimistic, especially given unemployment is at generational lows of 3.5%, but when you look at the statements of the Reserve Bank and its projections for the next 2 years, it is little wonder Australians are worried.

    Last week the RBA not only lifted the cash rate for the 9th straight time, it signalled that there would be a plural number of rises to come. In response, the market now anticipates at least three more rate rises, with a slight chance of 4 more. That would be easily the fastest and largest raising of interest rates since the late 1980s. And Australians are well aware of what occurred after the 1980s rate rises.

    Indeed even the Reserve Bank is anticipating a sharp slowing of the economy. While not suggesting a recession is imminent, in its latest Statement on Monetary Policy the RBA forecast 2 straight years of GDP growth of less than 1.8%. That would equal the record length of less than 2% growth during the 1990s recession. In reality, anytime Australia’s economy has grown by less than 2% for just one year there has been either a recession or near recession conditions such as during the GFC.

    Australians are right to be wary especially as their standard of living has suffered a sharp decline in the past year as incomes fail to keep up with inflation.

    The Reserve Bank of course does need to be concerned about inflation but given the expectations of recessions of slight contractions in the UK, USA and Europe the risk of a recession should be weighed much higher than they currently are.

    The post With interest rates set to rise another 3 times, no wonder consumers are feeling grim appeared first on The Australia Institute's Centre for Future Work.

  • The Reserve Bank is betting that monetary policy is not powerful

    On Tuesday the Reserve Bank lifted the cash rate to 3.35%, making for a total increase of 325 basis points since May last year. That rise is the fastest since the rises prior to the 1990s recession. And yet, as policy director Greg Jericho, notes in his Guardian Australia column, the Reserve Bank still think more is needed.

    The Governor’s statement concluded that “the Board expects that further increases in interest rates will be needed over the months ahead”. The use of the plural “increases” was a change from the language used in December. This is despite the bank and most economists acknowledging that inflation peaked in December and that global inflation is now falling.

    The RBA acknowledges that the full impact of the rate rises has yet to flow through, and how remains wedded to the policy that the economy is running too hot, despite wage growth likely still in the low 3% range. Most households have yet to feel the impact of around a third of the total amount of the rate rises thus far. With more rate rises forecast to come, that suggests a further increase of around $400 a month in mortgage repayments on a $500,000 loan even before any more rate rises occur. That would suggest a 45% increase in mortgage repayments since April.

    This drastic raising in rates will serve to slow an already slowing economy. The December quarter retail trade figures showed that retail turnover volume was down for the fourth straight quarter, and forecasts for GDP growth estimate very weak growth for two years.

    That the Reserve Bank continue to hike rates without pause suggests a lack of faith in its biggest weapon to reduce inflation, and also that it can finesse rate rises and economic growth. There is no need to keep hurting households without relief or pause – especially given so much of the rate rises remain yet to be felt.

    The post The Reserve Bank is betting that monetary policy is not powerful appeared first on The Australia Institute's Centre for Future Work.

  • As interest rate rises bite, the Reserve Bank should not raise rates next week

    Since May last year, the Reserve Bank has increased the cash rate from 0.1% to 3.1%. The latest cost of living data released this week reveals that this has incurred a 61% rise in mortgage repayments for the typical employee household.

    As policy director, Greg Jericho notes in his Guardian Australia column, this increase has had a dramatic effect on people’s ability to spend money elsewhere. The latest retail trade data released on Tuesday showed a dramatic fall in retail spending in December. The 3.9% fall in the nominal amount spent is increased once you consider the inflation. Even if you account for the tendency for monthly figures to be erratic, the last three months of 2022 saw a stalling of retail spending and a decline in real terms.

    Clearly, the rate rises are forcing people to spend less on retail items and other discretionary purchases. This of course is the intended impact. Raising interest rates increases the cost of borrowing and reduces the level of demand in the economy. But the danger is that the Reserve Bank increases interest rates so fast and so greatly that it slows demand by more than is needed.

    Given the impact of the 300 basis points rises has yet to fully flow through as current mortgage holders typically see their interest rates rise only a month or two after each increase by the Reserve Bank we can expect the cost of mortgage repayment to keep rising in the first quarter of this year.

    With the data already showing the pain of rate rises is causing changes in household spending. The Reserve Bank shod not raise the cash rate when it meets next week, but wait to see the full impact flow through to the economy. After a 300 basis points rise in 8 months no one can suggest the Reserve Bank has been too timid. The fast increase now gives them room to wait and observe rather than keep slamming on the brakes.

    The post As interest rate rises bite, the Reserve Bank should not raise rates next week appeared first on The Australia Institute's Centre for Future Work.

  • With household incomes set to fall, we need to think about what matters in the economy

    As Labor Market and Fiscal Policy Director Greg Jericho notes in his Guardian Australia column the Reserve Bank in last week’s Statement on Monetary Policy, has forecast GDP growth to slow to levels normally associated with recessions – even if the RBA is not actually forecasting a recession.

    However, in one area the RBA is not hedging at all – that of real household disposable income. This measure, which essentially examines the living standards of the average household, is forecast to decline at a pace as bad as any experienced in the past 60 years.

    While a fall in household incomes was always expected given the abnormal level of stimulus that occurred during the pandemic, the fall is predicted to be much greater than just going back to where we were. The Reserve Bank predict incomes will fall well below the pre-pandemic trend level.

    That such a drastic fall has received little coverage highlights that the orthodox commentary and debate around the economy largely focuses on aspects that minimise workers and households in place of corporations and the “broader” economy of GDP.

    The cost of taming inflation is too often discussed in terms of whether it will send the economy into a recession, without examining if that measure misses the real-life experience of most people.

    If the RBA forecast comes true, inflation will have been brought back to the RBA target, GDP will have kept growing, but household living standards will have plunged.

    The post With household incomes set to fall, we need to think about what matters in the economy appeared first on The Australia Institute's Centre for Future Work.

  • Would further interest rate rises do more harm than good?

    Over the past year, the main driver of inflation has been house prices accounting for a quarter of the 7.3% rise in the CPI. And yet we know that house price growth is now either slowing dramatically or even falling in some areas. The RBA has also noted that commodity prices are falling and supply-side issues are being dealt with and that these aspects, which are not influenced by interest rates, will reduce inflation next year.

    At the same time, the Reserve Bank continues to sound warnings of a wage-price spiral despite any evidence of such a thing occurring. Indeed the latest CPI figures show that overwhelmingly inflation is driven by the price rises of goods rather than services. This is important because service prices and wages are strongly linked.

    More rate rises will certainly continue to reduce demand in the economy as the cost of servicing a mortgage rises. But to what end? The main factors driving inflation are easing, wages have not risen above 3% yet, let alone to a rate anywhere near inflation.

    Even if wages were to rise in line with the historical link with service prices, in September they would have risen 3.5% – a level very much consistent with inflation growth of between 2% and 3%. And yet we know that wages are unlikely to rise that fast. The most recent estimates have it closer to 2.8%.

    The great risk now is that further rate rises will only hurt the economy for little gain and see wages growth stunted before they even get to a level that would see real wages rising.

    The post Would further interest rate rises do more harm than good? appeared first on The Australia Institute's Centre for Future Work.

  • Webinar on Wages, Prices, and Power

    Jim Stanford (Economist and Director) and Greg Jericho (Policy Director, Labour Market and Fiscal) from the Centre for Future Work are providing keynote presentations as part of this series. Below is a recording of the first of these presentations, presented by Jim.

    For other resources on inflation, how it is undermining real living standards for workers, and how to fix it (without throwing the whole economy into recession – an even bigger risk!), please see:

    The Wages Crisis: Revisited (Centre for Future Work overview of falling real wages, by Andrew Stewart, Jim Stanford, and Tess Hardy)

    An Economy That Works for People (ACTU Macroeconomics Discussion Paper)

    “The Cure of Inflation Looks Worse than the Disease“ (latest Guardian Australia column by Greg Jericho)

    The post Webinar on Wages, Prices, and Power appeared first on The Australia Institute's Centre for Future Work.

  • They didn’t cause the inflation, but workers are expected to cure it

    In his Guardian column, Policy Director Greg Jericho notes that given real wages have already fallen for 2 straight years any further falls will take workers’ purchasing power backwards to where it was more than a decade ago. This however is viewed as being “worse than the alternative” of inflation growth above 3%.

    He notes that over the past 2 years the profit margins of many industries, and most especially the mining industry, have risen and have themselves fuelled inflation. But company profits are never expected to suffer, wages however are always viewed as either the culprit of inflation or the means to reduce it. The vast increase in mining profits, largely due to the Russian invasion of Ukraine, also highlights the urgent need for a windfall profits tax.

    Using the RBA’s own estimates Jericho calcuates that by the end of next year real wages will be back at 2008 levels and even with the most optimistic outlook they will not return to 2019 levels until 2030.

    The Reserve Bank’s strategy of sharply increasing interest rates risk slowing the economy into a recession even though real wages are already falling faster and for longer than they have in modern times.

    The post They didn’t cause the inflation, but workers are expected to cure it appeared first on The Australia Institute's Centre for Future Work.

  • The latest data shows just how bad housing affordability is

    But while the latest data from the ABS shows prices fell on average 2% across the nation in the June quarter, policy director Greg Jericho notes in his Guardian column that price remains well above what they were prior the pandemic.

    During the GFC the majority of the stimulus measures directed towards construction were on public works – most notably the Building the Education Revolution. During the pandemic, however, the Morrison government targeted the housing market with its HomeBuilder program in conjunction with the Reserve Bank’s cutting interest rates. These served to set fire to the market as prices soared and affordability plummeted.

    In June 2020, the average dwelling price in Australia was $689,400. That was around 13.4 times the average annual household disposable income of $51,487. Now the average household disposable income is up to $56,129, while the average dwelling price is now some 16.4 times that at $921,500.

    Even worse, ten years ago the average dwelling price was just 11.4 times.

    Housing policy has for too long been driven by keeping prices rising, and combined with flat income growth, it has seen a generation of Australians left out of the housing market.

    The post The latest data shows just how bad housing affordability is appeared first on The Australia Institute's Centre for Future Work.

  • Enterprise Bargaining System no Longer Fit for Purpose

    The new Commonwealth government has pledged to find ways to strengthen collective bargaining. In this feature interview with the ABC’s national economics program The Business, Senior Economist Alison Pennington discusses the reasons why the current system is not working, and some of the reforms that will be required to support bargaining and lift wages.

    Alison Pennington on ABC

    The post Enterprise Bargaining System no Longer Fit for Purpose appeared first on The Australia Institute's Centre for Future Work.

  • Real wages plummet and will take years to recover

    Labour market policy director, Greg Jericho notes in his Guardian Australia column that the fall in real wages has been the worst since the introduction of the GST and in the first 3 months of this year real wages fell 1.5%.

    So steep has been the fall that real wages are now back essentially to where they were at the time of the September 2013 election.

    The fall highlights that talk about Australia having recovered from the pandemic ignores the most basic aspect of the economy – the living standards of workers from their wages.

    The fall is such that even with the RBA’s estimates of solid wage growth recovery over the next two years, should Australia return to pre-pandemic trend real wages growth, it would take till 2031 to recover workers purchasing power back to the levels of 2020.

    That would we a lost decade of living standards.

    The post Real wages plummet and will take years to recover appeared first on The Australia Institute's Centre for Future Work.