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Here’s Why the RBA Will Cut Rates Sooner Than You Think

If you’re finding it difficult to make sense of our economy right now, you’re not alone. Even the experts seem to be struggling with the data that is conflicting, and in uncharted territory.

 

Here’s what we know.

 

Proptrack reports that Sydney’s median house price rose 2.1 per cent to $1,627,625 in the March quarter,. This is the first time the market has exceeded $1.6 million and is now 12.8 per cent higher since bottoming out in December 2022.

 

The median unit price rose 1.9 per cent in the March quarter to reach a new high of $806,137. It has recovered $55,000 of the $59,000 value it lost during the 2022 downturn and is now just $4000 under its December 2021 peak.

 

These rises defy the previously immutable correlation between property prices and interest rates. Normally rates go up, prices stagnate or fall, and vice vera.

 

What’s happening? We stopped building homes for a few years (thanks pandemic), then re-opened our borders and doubled our immigration intake to 690,000 souls.

 

The rule of supply and demand took over.

 

A home is a fundamental necessity so we kept buying houses, increasingly funded by generational wealth transfer and a pause on our savings plan. In fact our household savings are at their lowest point since the GFC.

 

According to the RBA we’ve maintained our spending beyond just buying property to keep inflation persistently above the desired range and employment figures also seem to be holding up well (4%)

 

But if we delve into the inflation, GDP and wage growth figures a little further we might come to a different conclusion.

 

Inflation

The most commonly referenced indicator of inflation is the Consumer Price Index (CPI) which is made up of a basket of eleven categories.

 

Eight categories are essential (housing, groceries, fuel) making up 77% of the index.

We need to eat and drive our cars and if a distant war pushes up the price of wheat and oil we are all forced to spend more. An additional 690,000 migrants also increases overall spend which also drives up the inflation print.

 

The remaining three CPI categories are ‘discretionary’ (recreation, alcohol/tobacco, household furnishings) representing 23% of the basket but they tell a different story. Retail spending alone decreased by .4% in March, and the entire category of discretionary spending decreased by eleven times that figure or 4.4% in April.

 

Gross Domestic Product

We track GDP as a measure of economic health by measuring output across all sectors, mining, tech, construction, etc and calculating both total output and a figure adjusted for population increase.

 

For the year to March 2024 GDP increased by 1.1% total, or -1.3% when adjusted for population. That’s the smallest GDP increase since 1992.

 

In fact adjusted for population growth we have had five negative quarters which is unprecedented since we began tracking GDP in 1972.

 

Employment strongly correlates to GDP so we could now expect unemployment to tick upward.

 

Wage Growth

The push for wage increases are making headlines and understandably so. In the March quarter wages grew by .6% yet the average cost of things we spend our money on (bills, food) increased by 1% effectively putting wage growth in the red.

 

This trend has been occurring for some time and it infers that our standard of living is slowly being eroded, and that we’re using our savings to stay afloat.

 

So back to the original question. When will rates be cut?

 

I would suggest it can’t be long before the ‘real’ numbers behind the data shine through, expressed as a spike in unemployment, an official slide into recession, a drop in inflation, or all three.

 

That should prompt the RBA to act quickly to cut rates, and the wild property ride will begin.

SOURCES: RBA, ABS, Proptrack

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