RBA Cash Rate Increase Update - May 2023

On Wednesday the 3rd of May, the cash rate of 3.85% becomes effective. The Reserve Bank of Australia’s (RBA) announcement to increase the cash rate by 25 basis points has put a hold on the joy recently felt by mortgage holders. Read on for an overview of the key market events that unfolded in April.

Outstanding news for mortgage holders has finally been broken! April delivered much-anticipated relief for Australian real estate investors as the cash rate was officially paused at 3.60%, the highest since 2012. This pause comes at the end of 10 consecutive rate rises administered by the RBA. Such an extended stretch of rises is a record-breaking move by the central bank. The RBA board has been deciding to increase the cash rate target by 25 or 50 basis points at every one of their monthly meetings since May 2022. 

Before we continue, it may help to recollect why the RBA decides to increase or decrease the cash rate. The RBA uses the cash rate as a means of attempting to influence inflation. Currently, at 7% (measured annually for the year to March, inflation is well in excess of where the RBA aims for it to be, which is 2 to 3 per cent on average. Through increasing the cash rate, or as it is otherwise known, tightening monetary policy, the RBA hopes to decrease inflation and ultimately have it return to the 2 to 3 per cent range.

The relationship between cash rate and inflation is imperfect. However, it is the most powerful tool the RBA has to influence the economy. Fortunately, we are starting to see some promising data emerge that could be interpreted as the extended sequence of cash rate rises, having their desired impact. The Australian monthly Consumer Price Index (CPI) measures the year-on-year change in the price of goods monthly and is used to gauge inflation.

January and February of 2023 have recorded lower CPI figures than their respective previous months, leading to a mini downward trend emerging (see Table 1 for values published by the Australian Bureau of Statistics. Meaning the index indicates that inflation is slowing.

Table 1: All group's Monthly CPI indicator, Australia's annual movements (%)

To provide more context regarding the RBA, consider its three objectives when it comes to monetary policy:

1. The stability of the currency of Australia

2. The maintenance of full employment in Australia

3. The economic prosperity and welfare of the people of Australia

In an attempt to ensure these objectives, get the focus they deserve, the RBA has announced that a second board will be created. Recently, the Australian Financial Review published an article providing in-depth commentary about the creation of this second board. The article advises that one board will handle the bank’s governance, and one will be dedicated to setting interest rates. According to this article, it seems these structural changes have been brought forth after independent reviewers’ recommendations and will be implemented later this year or next year.

Regardless of whether you follow economic news or tend to avoid getting caught up in the headlines, the RBA is a critical force in how our economy operates, which has a bearing on us all. One key criticism of the RBA is that the current board lacks adequate experience in economics and monetary policy. Once a second board is instated, it will be interesting to see the credentials of the individuals that fill it and how they affect monetary policy.

If you're interested in learning more about the cash rate or what can be done to leverage your position, please feel free to contact us!

Federal Budget 2023

The foundation for the 2023 Federal Budget includes housing, national infrastructure, upskilling workers and supporting renters at its core.

This year’s Federal Budget for the fiscal year 2023-2024 aims to stimulate economic growth through significant investments in infrastructure projects, including roads, railways and ports. This will not only create jobs and skilled workers but will also improve connectivity and efficiency, especially for those looking to live or invest in new housing developments.

 The budget announced its commitment to providing more supply from 2023 and the continuation of home Guarantee Schemes. New initiatives were also announced around adjustments to the Commonwealth Rent Assistance (CRA) and Build to Rent (BTR) development incentives. 

 The national median rent has increased to $113 per fortnight in the year to April, advertised rents have soared 11% year-on-year, and vacancy rates are at historic lows. In turn, the additional CRA support allows renters to afford leases within areas they may not have been able to afford previously and provides investors with a sigh of relief, knowing that the market will remain strong when obtaining tenants. 

 For investors, the budget outlines a reduction in the withholding tax rate for eligible fund payments from managed investment trusts attributed to newly constructed build-to-rent developments from 30% to 15%. 

 Another key standout is Labor's effort to foster a skilled workforce, including significant funding for job training programs and apprenticeships. The housing sector has been screaming out for skilled workers mainly due to the aftereffects of the pandemic. This new information comes with welcomed arms for many involved within the building industry. 

It’s clear that Labour continues to look after the country's backbone, the working class and those that, in Albanese’s words, “every Australian deserves the right to a fair go”. Backing this promise is very evident within this year’s budget, as shown in our summary.

Those that came out on top

The Build-To-Rent Sector: The managed investment trust withholding tax will be reduced from 30 to 15 per cent for newly constructed build-to-rent developments, and the capital works tax deduction rate will be increased from 2.5 per cent to 4 per cent at a cost of $30 million. The dwellings need to be held under single ownership for at least 10 years, and landlords must offer a term of at least three years for each dwelling. The government expects the scheme will deliver 150,000 rental properties over 10 years.

Renters: Renters won with $2.7 billion funnelled towards increasing the maximum payment rates of Commonwealth Rent Assistance by 15 per cent, up to $31.36. That takes the maximum fortnightly payment from $208.74 to $240. However, it comes against record-breaking rent hikes across Australia’s capital cities, which – in the year to May – soared 11.7 per cent. An additional $2 billion will be directed to the National Housing Finance and Investment Corporation, which has an investment mandate to deliver at least 1200 social and affordable housing homes to each state and territory within five years.

First Home Buyers: From July 1, access to the Home Guarantee Scheme will be expanded to allow any two people, including siblings and friends, to purchase an eligible home with a 5 per cent deposit! Non-first-home buyers who have not owned a property for 10 years will also be able to access the scheme. Housing Minister Julie Collins said, “this measure was designed to support older women who may have lost their property in a divorce or relationship breakdown”.

Small Businesses: As many as 3.8 million small businesses with a turnover of up to $10 million will be able to write off the value of new equipment worth up to $20,000. Small businesses investing in energy-efficient equipment and facilities could be eligible for further tax deductions of up to $20,000. Businesses with a turnover of up to $50 million will get a one-off payment of $650 off their power bills and a 20 per cent deduction to electrify cooling and heating systems, install new batteries and heat pumps, and replace ageing tools. They will also be able to deduct the cost of these assets from their tax bills for the first year in which it is installed or used.

Those that fared poorly

Super millionaires: Earnings on superannuation balances greater than $3 million will be taxed at 30 per cent from July 2025, up from the current concessional tax rate of 15 per cent. Treasury expects the measure to impact 80,000 people, or 0.5 per cent of superannuation members, but this will grow as the cap is not indexed. It will bring in $2.3 billion in revenue in its first full year of receipts.

Consultants: A new Treasury evaluation unit, costing $10 million over the next four years, is expected to recoup up to $200 million in consultant savings as the federal government targets waste and ineffective programs. Increases to the public service headcount are also geared at shifting away from using consultants for government work. 

Scammers: $86.5 million over four years will be directed to fighting scams and online fraud. That includes $58 million for the creation of a National Anti-Scam Centre within the consumer watchdog within the next three years and $17.6 million for the Australian Securities and Investments Commission to take down phishing websites.

In summary, the 2023-24 Federal Budget mainly emphasises on economic growth, job creation, national infrastructure, upskilling workers, supporting renters and creating social welfare at its core. This budget demonstrates this government's commitment to building a stronger, more resilient and inclusive Australia. 

Apartments Are Back

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Inner-city apartment markets are growing in appeal

Land and property in regional centres of Australia have become both expensive and scarce. With small blocks of land costing more than the average Australian can afford, inner-city apartment markets are back and growing in appeal.

Houses in regional areas with easy access to capital cities continue to be in strong demand although finding an affordable deal is challenging to say the least. Up until recently, buying property in regional areas was somewhat affordable, as was purchasing in metropolitan suburban areas like Pakenham or Clyde. Although today the market has changed.

With new developments being scarce, demand being high, and construction costs across the board increasing by about 30%, finding a piece of land, let alone an affordable property, is becoming increasingly difficult.

Additionally, it’s unlikely you would find a block bigger than about 300m2, which would still cost around the $600,000 to $700,000 mark. For those who have managed to find land, it’s likely to will take 1 to 2 years to title due to high demand and very limited supply.

With all of this in mind, what we’re seeing is that a large two-bedroom apartment in an inner-city area like Ivanhoe (VIC), Essendon (VIC), Coolum (QLD), or Indooripilly (QLD) is in many cases a better buy than what regional centres currently have on offer.

Market Trends

According to Corelogic, property values in Melbourne rose 16.3% over the year to November and Brisbane’s house prices increased by a staggering 27.9% during the same period.

A typical Melbourne home is now about $187,000 more expensive than it was at the beginning of January, while units have experienced a gain of $49,000. As of November, Brisbane’s median house price was sitting at $757,000.

While inner-city apartment vacancies have been high, in part due to the loss of the international student market, this is forecast to begin changing. More than 200,000 international students can now return to Australia (as of December) without an exemption after our borders have been closed to them since March last year.

In regards to population changes, there were 18,907 people who moved to Victoria from January to March of this year, but 23,771 residents left the state. NSW experienced the next biggest fall in interstate migration, with 30,684 departures compared to 26,221 arrivals. Since the start of the pandemic, 22,651 people have left Melbourne for other parts of Victoria. In total, Melbourne has lost 34,366 residents, including 3682 who have made the move to Brisbane.

Brisbane’s population grew by 1.9% during 2019-20, recording the highest growth rate of all capital cities, according to the Australian Bureau of Statistics. Queensland experienced a net gain of 28,500 people from interstate in the March quarter and 21,465 departures. Queensland’s population is expected to surge by more than a quarter of a million people in the next four years according to forecasts in the federal budget, as people flood in from other states.

While there has been a lot of movement over the past couple of years, the forecast for Australia’s population is looking positive and is projected to reach 29.1 million by the end of June in 2032. Natural increase is forecast to drive all of Australia's population growth in 2022, with overseas migration forecast to return to being the largest contributor to population growth again from 2023-24.

A dramatic increase in population growth (especially with boarders opening) coupled with heavily reduced volume of new development completions is set to create the perfect recipe for a thriving apartment market.

The complete

contemporary all-in-one lifestyle

Many new apartment developments such as Anthem Essendon by Blue Earth Group boast the complete contemporary lifestyle. With amenities such as fully equipped gyms, cinemas, golf simulators, children’s facilities, wellness centres, squash courts, community gardens, and co-working spaces, it’s resort-style living right on your doorstep.

Developments like these offer an all-in-one lifestyle - it’s next-level living that you just can’t get in housing estates. You might live in a 2 bedroom apartment that is 80m2, although downstairs you have all of the facilities you need to live a rich daily life.

Convenient inner-city living is the future. This is where we believe the world is going to be heading.

While new apartments are still expensive, if you are an investor wanting to get into the market, apartments are where you want to be looking at this point.
We believe that apartments are going to have a huge resurgence over the next 5 to 10 years, and that resurgence is beginning now.

With population growth, low supply of new products, and a trend towards convenient living, we believe apartments are on their way to being back in high demand.

If you would like to learn more about current investment opportunities available in apartment markets of Melbourne and South-East Queensland, get in touch with us today.

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