- Australia’s inflation rate hit a 20-year high of 6.1% in the June quarter
- Inflation rate will skyrocket construction costs, tighten rental market and set the stage for further rate hikes, says Pete Wargent
- The news spells trouble for construction companies, and more are expected to enter administration
Headlines revealed last week that inflation had hit a staggering 6.1%, the highest in more than 20 years.
While this may seem symbolic to those who have experienced the sharp rises and falls since the Korean War boom 70 years ago, it is more than 3% above the RBA’s official inflation target. 2 to 3%, introduced in 1993.
These high levels of inflation have already caused problems for Australia’s property sector, forcing several construction companies into administration.
It looks like the inflation-induced tension in the market isn’t over yet, with top buyers’ agent Pete Wargent warning of three critical impacts on the housing market.
Mr Wargent, co-founder of BuyersBuyers, says rising construction costs, a tight rental market and future interest rate hikes are all major concerns for the industry.
1. Skyrocketing construction costs
Construction costs are up 10% in the past 12 months to June 2022, according to Corelogic’s Cordell Construction Cost Index (CCI).
“First, we can see that the costs of renovations and building a new home have skyrocketed due to the relaunch of HomeBuilder, very high demand for trades and materials, and shortages of supply,” Wargent said.
“The latest inflation figures have confirmed that the producer price indices for the housing construction sector are going to be very ugly.”
Pete Wargent, BuyersBuyers
In addition to the impact rising construction costs will have on new home builds, Wargent believes the problem could drive more businesses into insolvency.
“The cost of building a new home has increased by 20-30% in many cases, and we expect an increase in insolvencies in the construction sector, with many projects now shelved or abandoned.
“This has implications for an insufficient supply of housing as immigration increases over the next 12 months,” Wargent added.
2. Tight rental market
The second big area of concern for the sector is the rental market, with rental price inflation starting to show up in the numbers.
“Official inflation figures measure actual market rents, rather than
asking rents – which have skyrocketed over the past year – and so there is a lag in the official data,” Wargent explained.
Mr Wargent expects inflation to rise further as electricity and energy costs currently rise, and said Australia’s headline inflation rate is unlikely to peak until the last quarter of this year.
“The ABS numbers still have Sydney and Melbourne in negative territory over the year, so there is some catching up to do for this index to reflect what is happening in real time with rental demand for newly signed leases.
“To some extent, the ABS figures reflect the low Central Business District rents, with many tenants choosing to move to the suburbs or the region during the pandemic,” Wargent said.
He added that high immigration rates as visas are processed over the coming year will see rental rates continue on a solid trajectory through 2023.
3. The next rate hikes
According to BuyersBuyers CEO Doron Peleg, the latest note of concern is the inevitability of further rate hikes threatening borrowers in the final half of 2022.
Peleg said with inflation still high, financial markets are bracing for further interest rate tightening.
“The good news for borrowers is that markets weren’t spooked by the June inflation numbers, and in fact bond yields are back to their lowest levels since May, suggesting that the numbers maybe weren’t as hot as expected.”
Australia – Bond Yields
“Indeed, markets are pricing in lower interest rates next year, which reflects our view that home buyers have a 6-9 month buying window with less competition to close. a bargain before the market picks up again next year.
“In our view, there is a tremendous opportunity to bargain hard in the second half of 2022 and buy a well-located property at a discount,” Mr. Peleg concluded.