Breaking Square | 25/09

You may have heard, headline inflation hit 2.7%, so lets cut rates and crack the champagne.. well, maybe it’s too soon to be popping corks.

Whilst the headline number is back in the RBA’s range of 2-3%, the RBA looks at the underlining numbers, stripping out volatile segments of the economy and the recent electricity rebates, so with that in mind, inflation is not back within the target bands of 2-3%.

The debate that is currently going on is terrible and does nothing to create confidence. Whilst the RBA may have got it wrong on interest rates; in terms of not raising earlier and higher; having a government blaming them for “smashing the economy” is wreckless and only serves their narrative and diminishes the confidence in the RBA.

Our labour market is running hot and with high immigration, we should theoretically have unemployment around 6%; the number of jobs created is a miracle. In the first 7 months of this year, 318,000 jobs have been created, our average prior to Covid was 17,000 per month. This is one of the main reasons the RBA is holding off on cutting rates.

The experiment, as described by the Deputy Governor of the RBA, Andrew Hauser, suggested the RBA needed to lock in and maintain the employment gains achieved since Covid, hence why they went late and low in raising rates compared to the rest of the world – well they have accomplished this in spades and then some. This slow burn may leave us exposed and with the window of opportunity to sort this is closing, they may regret not going harder and earlier, as suggested by Warren Hogan, Chief Economist, Judo Bank.

The other issue at hand is our economy has no capacity for growth, hence the dismal GDP numbers. If there is no capacity, you can’t have growth. The only thing a rate cut would do, is place more pressure where it is not needed and that would then become a train wreck, that is when real pain will be felt.

Inflation just doesn’t go away, we don’t wake up and say, surprise, all gone now. Our economy is 80% services and with money pouring into public services, government spending is adding to the dilemma. Warren Hogan still maintains the RBA needs to lift rates in November and December. He still contends that this is the only way to knock inflation quickly on its head.

The fear is, we drag this out or worse, the RBA bows to public and government pressure and lower rates, only to watch inflation drive higher, as it will, and then have no choice but to go really hard and raise again – de ja vu late 70’s.

I believe the debate needs to change towards real tax reform, the burden on personal income tax is oppressive and does not reward hard work. The GST needs to be reviewed and some state taxes need to be abolished. Show me a politician that will take that on and I will support them. In the current climate, I think we have none and buckley’s – if only we still had a Bob Hawke or John Howard in the ranks.

It appears the planets may be circling to align themselves against property investors. First we have changes in the tenancy legislation that favours tenants and now the federal government is hinting that Negative Gearing and CGT discounts may be reviewed, which is code for, they need support from the Greens and given the mood in the community relating to the housing crisis, now may be the time to bring it to the next election – stay tuned I guess.

Sorry if this all appears to be doom and gloom, however we are at a critical point and we need to stay alert to what is really happening. Of course we all hope economist like Warren Hogan are wrong, so does he, but as he says, it’s just numbers and they don’t lie. As we have witness since Covid, anything can happen and situations can turn on a dime. So cross fingers, have that glass of champagne and just get on with what we can control.

Before I go, I will be writing to all our tenants to remind them to clean a/c filters and do outdoor cleaning after winter as we typically get the build up of green mould on south facing surfaces along with some other general tips to be mindful of.

Last, but not least. Kim Olsen Property Team at the recent Ray White Queensland Awards was named Number 7 sales team in the state. Queensland is Ray White’s home state and largest market, so quite an achievement. I get to see first hand how hard her team works and it’s no surprise that they have been very successful.

Until next week, stay safe and be kind.