Markets
Local: The ASX200 index fell -6.2% over September, as investors priced in the most aggressive rate hiking cycle since the 1990’s from the RBA.
Global: The S&P 500 also lost ground, dropping -9.2%.
Gold: Spot price for Gold continued to trend lower, moving down US $44 to US $1,672 amid US dollar strength and higher real rates.
Iron Ore: Iron Ore price dropped US $1 to US$98/Mt.
Oil: Brent Oil price also declined US $9 to reach US $88/bbl amid a deteriorating demand outlook.
Property
Housing: CoreLogic reported a further fall in housing values through the first month of spring, with the national Home Value Index (HVI) recording a -1.4% decline in September. Although values continue to trend lower, the rate of decline eased from a -1.6% fall in August.
The loss of momentum in the pace of value decline was evident across most of the capital cities and broad rest-of-state regions, with a few exceptions. Housing value falls accelerated in Adelaide and Perth this month, however both cities continue to record only a mild reduction in values relative to the other capitals (down -0.2% and -0.4% respectively in September). Sydney’s monthly rate of decline eased from -2.3% in August to -1.8% in September, Melbourne tapered from -1.2% to -1.1% and Brisbane falls went from -1.8% to -1.7%. Darwin remains the only capital city where housing values haven’t started to trend lower, although dwelling values remain -10.1% below the 2014 peak.
Economy
Interest Rates: The RBA Cash rate has now had 6 consecutive rate rises. A slightly more conservative rise of 0.25% at the start of October has pushed the cash rate to 2.6%. With more rate rises likely before year end.
Retail Sales: Retail sales in Australia rose by 0.6% MoM to a fresh record level of AUD 34.88 billion in August 2022.
Bond Yields: Australian government 10-year bond rose again by 29 bps to 3.89% from the previous month. The US 10-year bond also rose significantly by 67 bps to 3.80% as Bond markets also reflected a hawkish outlook.
Exchange Rate: The Aussie dollar fell again over September against both the American dollar, at $0.650, and the Euro at $0.662.
Inflation: The Australian inflation rate in August reached an annual rate of 6.8%, down from 7% reported in July.
Consumer Confidence: The Westpac Melbourne Institute Index of Consumer Sentiment rose by 3.9% from 81.2 in August to 84.4 in September. Consumers may be a little less fearful, but confidence remains very weak. As noted previously, we have only seen sentiment at these low levels in the past during recessions or major economic disturbances such as the COVID pandemic or the GFC. The September rise might be heralded as the likely start of a sustained revival. As welcome as that would be, it seems premature given ongoing challenges, especially around inflation, and prospects of further interest rate rises.
Employment: The seasonally adjusted unemployment rate rose to 3.5% in August 2022. With employment increasing by 33,000 people and unemployment by 14,000, the unemployment rate rose 0.1 percentage points to 3.5% in August, returning to the same rate as June.
US Employment: Total nonfarm payroll employment increased by 263,000 in September, and the unemployment rate edged down to 3.5 percent. Notable job gains occurred in leisure, hospitality, and health care.
Agriculture: The gross value of agricultural production is forecast to be $81.8 billion in 2022–23, down 4% from the record $85.3 billion of 2021–22. Another near-record Australian crop harvest is forecast with good soil moisture stores and a wetter than average outlook for spring. Global supply of cereals continues to be tight, so high prices are forecast to persist.
Purchasing Managers Index: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) rose 0.9 points to 50.2 points in September 2022, indicating stable conditions. This is the second month of broadly stable conditions, following positive results since February 2022. Results above 50 points indicate expansion, with higher results indicating a faster rate of expansion.
Sources: ABS, AFR, AWE, BLS, CoreLogic, Macquarie MWM Research, RBA, TradingEconomics, UBS
Comment
The Housing Market Downturn
Based on current predictions, the cash rate in Australia is expected to peak up to 3.35%, with inflation possibly pushing as high as 7-8% by year end with the potential for it not to fall until 2024.
With the cash rate expected to reach these worrying levels, Aussies could see their mortgage payments get significantly more expensive. Analysis conducted by Canstar gives a brief overview of how much your home loan could increase by, relative to the size of the mortgage.
Source: Canstar
This would mean people with a $500,000 home loan might find themselves paying $757 per month extra, while people with a $1.5 million mortgage could face $2,272 in additional monthly repayments, relative to the start of July.
Housing credit approvals will take a significant hit with the increase in the cash rate, causing problems for new owner occupiers and potential investors.
Sources: ABS, CoreLogic
Source: CoreLogic
A 15% peak to trough decline would roughly take CoreLogic’s combined capitals index back to March 2021 levels, it is expected the downturn will continue to play out through the remainder of the year, and possibly into 2023.
CoreLogic’s research director, Tim Lawless, said It’s hard to see housing prices stabilising until interest rates find a ceiling and consumer sentiment starts to improve. From current levels, interest rates are likely to increase by at least another 75 basis points and there is a good chance advertised stock levels will accumulate through the spring selling season, providing more choice for buyers and adding further downwards pressure on housing values.
With higher interest rates the amount of buyers that can borrow from the banks is declining. Most new finance applications are now subject to a ‘stress test’ meaning borrowers must be able to meet certain principal and interest rate payments should rates increase. This is currently around the 7.5% mark and rising. In addition, the cost of living numbers are being factored into these figures. Serviceability calculations are also rising due to inflation further depressing borrowers loan capacities.
Sources: Australian Bureau of Statistics, Canstar, CoreLogic