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Is higher inflation the end of low interest rates?

·4-min read
Prospective buyers attend an auction of a residential property. (Getty Images)
Auction clearance rates in Sydney were still strong last weekend. (Getty Images)

With the latest inflation figures showing an uplift to 2.1 per cent - which is within the RBA’s 2-3 per cent window for inflation - the media has been rife with speculation the Reserve Bank will hike up interest rates sooner than expected.

In fact, the money markets have sent three-year bond rates into the stratosphere and are pricing in the chances of an interest rate rise in February next year at 75 per cent, and traders are gambling that four more rate rises will follow in 2022 alone.

If the money markets are correct, that would send borrowing rates higher at a time when small businesses around Australia are trying to recover from the pandemic lockdowns, particularly in our two most populous states.

So is a rate rise on the cards and what would this do to our property markets at a time when soaring property prices are stretching affordability limits?

These are some of the questions I ask Dr Andrew Wilson, Australia’s leading housing market economist and chief economist of My Housing Market in this week’s Property Insiders chat for Yahoo Finance.

Is this the end of low interest rates?

As inflation rises across the world – including in the US, UK and New Zealand – Australia is the latest country to join the chaos.

Supply chain disruptions, soaring energy prices and labour shortages due to COVID-19-related restrictions have all merged to drive up the cost of goods such as fuel, rent prices and new dwellings, with core inflation increasing to 2.1 per cent in the September quarter.

The RBA had predicted inflation would not reach 2 per cent until mid-2023 and that, as a result, it could maintain cash rates at 0.1 per cent until 2024.

Following the release of these inflation numbers, the bond market began to bet against the RBA, predicting a cash-rate rise will come much sooner than 2024.

However, wages growth is still a long way from 3 per cent, so despite all the media commentary telling us to expect interest rates will rise soon, don’t count on it.

But you might just start to see fixed mortgage rates creeping a bit higher over the next year.

Chart showing property changes.
(Source: provided)

While the major contributors to headline inflation in the quarter were new dwelling construction and automotive fuel, rising rents were one of the contributors to higher inflation.

Rents rose just over 0.2 per cent in the quarter as declining rent in Melbourne and Sydney offset strong rental growth in other cities.

A graphic showing how rent increases have contributed to inflation.
(Source: provided)

No move... yet

Speaking before a Senate committee last week, Reserve Bank of Australia deputy governor Guy Debelle acknowledged that while ultra-low interest rates had contributed to record-high house prices, the RBA still maintained jobs would be endangered if rates were lifted too soon.

The deputy governor maintained the position that accommodative interest rates had supported the return of Australian jobs after successive COVID-19 lockdowns

Sydney’s auction market rebounds despite listing surge

Sydney's weekend auction market bounced back on Saturday with the clearance rate rising above 80 per cent despite a wave of new listings challenging the local market.

Sydney 81 per cent weekend clearance rate was higher than the previous week (77 per cent) and above the 79.1 per cent recorded over the same weekend last year.

Significantly higher auction numbers over recent weekends continue impacting clearance rates, although results clearly remain in favour of most sellers.

Auction numbers were the highest since lockdowns impacted the market in early July.

The following chart from Dr Andrew Wilson shows the Sydney auction clearance trend:

Chart showing property changes.
(Source: provided)

More strong results in Melbourne’s auction market

The Melbourne weekend auction market reported another boom-time result this weekend with the market now in full recovery mode following the easing of lockdown restrictions.

Melbourne reported its first consecutive weekend of clearance rates above 80 per cent since early May, despite a flood of listings.

Melbourne recorded a clearance rate of 80.5 per cent on Saturday, which was similar to the previous weekend's 80.4 per cent and higher than 78 per cent reached over the same weekend last year.

The following chart from Dr Andrew Wilson shows the Melbourne auction clearance trend:

Chart showing property changes.
(Source: provided)

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