We’re all reeling at the price of lettuce and the extra expense at the petrol bowser these days. The news tells us it’s due to inflation. So, what exactly does that mean? What is inflation? What are inflationary pressures? Why is inflation so high right now? Do interest rates rise with inflation? Why does inflation affect interest rates? And how do these affect the skyrocketing cost of living in Australia? Is it all as glum as it seems? In this post, the experts at Capital Properties will answer all these questions and more. 

It’s important to acknowledge that the relationship between inflation and interest rates is complex. In a nutshell, it means that when inflation increases faster than expected, interest rates will rise. Interest rate hikes are used as a response from banks to help curb rapid rises in inflation. 

But if the intricacies of inflation and interest were that straightforward, we wouldn’t need economists! In reality, there are many nuances to consider in order to understand how inflation and interest rates work.

If you’re in the Sydney area and want to know more about how inflation might affect your home loan, then why not book a free discovery session with Capital Properties today? 

We specialise in helping Australian Defence Force members learn about the property investment market. With blog posts like things you should know about buying a house while in the ADF we share tips to help you buy and sell property, and our buyers agent service takes care of all the hard work for you.

On the go? Here’s 30 seconds of take outs:

• We explore the questions everyone’s asking: 

• What is inflation? 

• What are inflationary pressures? 

• Why is inflation so high right now? 

• Do interest rates rise with inflation? 

• Why does inflation affect interest rates? 

• What does it mean for Australians? 

• Inflation can be defined as “the increase in the price of household goods and services which is measured as the rate of change of these items over time”. 
• The Australian Bureau of Statistics (ABS) calculates inflation quarterly based on the average household’s spend on goods & services known as the Consumer Price Index (CPI).
• There are 2 types of inflation, temporary & persistent. Persistent inflation is either ‘demand-pull’, ‘cost-push’ or ‘built-in’ inflation.
• Inflation is the highest it’s been for 20 years due to the war in Ukraine, low unemployment, increased energy prices & low pandemic interest rates.
• The government raises interest rates to curb inflation.
• Capital Properties can help you explore opportunities in the property investment market in these challenging economic times.

Keep reading >>

What is inflation?

We’ve all heard about inflation. We know it’s increasing.  But many people are unsure about what it actually is. So, let’s answer the question on everyone’s lips right now “What is inflation?”.

Given that people have written entire books on the subject, we’re not going to pretend that this is a comprehensive definition, but in essence we define inflation as “the increase in the price of household goods and services which is measured as the rate of change of these items over time”. Simple right? 

Here’s a quick formula to calculate inflation for individual items: 

(Price year 2 – price year 1)
Price year 1 x100

Let’s look at this brief example to help understand it further:

Item	2021 price	2022 price	Inflation %
Bottle of wine	20	22	10%
Phone case	10	15	50%

 

So, interpreting inflation for individual items is pretty straightforward. However, when we examine inflation on a national level it becomes a lot more complicated. 

In order to measure inflation across the whole Australian economy, every quarter the Australian Bureau of Statistics (ABS) collects prices for thousands of goods and services, and groups them into categories. Then the ABS calculates the price changes of these items over that quarter and works out the inflation rate.

Each item for which inflation is calculated is given a weight derived from the average household spend on each item. And every household’s overall spend is referred to as a ‘basket’. These metrics are known as Consumer Price Index (CPI) weights. 

It’s safe to say that governments worldwide track inflation obsessively. But the next question to tackle is why prices are changing all the time? And what actually causes inflation? 

Common inflationary pressures

We call the underlying causes of inflation “inflationary pressures”. Inflationary pressures trigger economic adjustment to changes in supply and demand. There are two primary types of inflation, each with its own causes:

Temporary inflation is caused by issues such as supply interruption. A great example is the increased price of petrol due to the war in Ukraine. Economists don’t usually include temporary inflation when performing their calculations.

Persistent inflation is what people usually refer to when speaking of inflation. It is most often precipitated by increased circulating money due to various factors. These causes are commonly broken down into three main categories: 

1. Demand-pull inflation – when demand for a good or service exceeds production capacity (people can afford things they couldn’t before).
2. Cost-push inflation – when production costs increase prices (people producing goods are getting paid more than they were).
3. Built-in inflation – a circular type of inflation; as wages increase, so too do prices (the steadiest type of inflation).

Now that we’ve answered the question “what is inflation?” and “what causes inflation?”, let’s examine why inflation is so high in Australia right now. 

Why is inflation so high in Australia?

Inflation in Australia is currently at a 20-year high. The causes are numerous and diverse and include: 

• The war in Ukraine, which has led to increases in food and energy costs.
• Low unemployment rates – which means that on average, people have more disposable income.
• Increased energy prices on the east coast of Australia (the East Coast Energy Crisis).
• Record low interest rates during the pandemic, again meaning more disposable income for Australians

All of these factors are leading to a multi-factorial increase in inflation not just in Australia, but across the Organisation for Economic Co-operation and Development (OECD). 

Now, let’s refer to the last point above, interest rates. We’re often asked, “do interest rates rise with inflation”? Well, low interest rates seem to lead to higher inflation, so let’s explore this relationship a little further.

Relationship between inflation and interest rates

Fast rises in inflation are no good for anyone, and curbing inflation is something that governments take very seriously. A hike in interest rates is one of the government’s first lines of defence to slow inflation. 

We know this may sound counter-intuitive and even unfair. Many people will feel stressed that prices are already rising, and then banks raise the amount that must be repaid on top of that.  But this strategy is effective and necessary to keep the economy balanced. A rise in interest rates reduces disposable income meaning people can’t spend as much on goods and services. Ostensibly harsh, but efficient. 

Why is the cost of living so high in Australia?

When inflation is at a sustainable level, the cost of living generally increases in line with wages, but a rapid increase in inflation leads to an increased cost of living. And in Australia, we’ve seen drastic increases in the price of everyday goods and services such as:

• Groceries
• Coffee
• Petrol
• International travel

But it’s not all doom and gloom. Economies constantly go through cycles, with fluctuations in inflation and interest rates happening all the time. Whilst it may seem bad now, we know from experience that the system will balance out eventually.

If you need help understanding how inflation and interest rates might affect your home loan repayments or if you’re looking to get into the housing market but feel overwhelmed with all that’s happening in the world, contact Capital Properties today. We can help you get the best deal when buying a home. 

Book a free Discovery Session to find out more about how we work and what we can do to help you achieve future financial security.

We’re sure you’ll already be aware that the 2022 Australian Federal election brought a change of government in Australia with the Liberal/National coalition ousted, and a majority Labor government sworn in for the first time since 2007. 

This changing of the guard comes during an escalating war in Ukraine, China’s increasing presence in the South Pacific, an urgent need to tackle climate change and the tail end of a global pandemic. All of which will continue to challenge the Australian economy.

So, what does the change of government mean for the Australian property market? In this blog post, our Capital Properties investment experts explain what the change of government means for property investors with this property update.

To discuss how the change of government affects your property investment potential, book a discovery call with Capital Properties today. 

On the go? Here’s 30 seconds of take outs:

• The new Labor Government has promised to get more Australians into their own homes.
• The National Housing Finance & Investment Corporation (NHFIC), has been renamed ‘Housing Australia’ and now incorporates the ‘National Housing Supply & Affordability Council’ and the ‘National Housing & Homelessness Plan’.
• Housing Australia key programs include:

• – Housing Australia Future Fund
• – Help to Buy
• – First home guarantee/ 5% deposit scheme
• – Regional First Home Buyer Support Scheme
• – Restoring Funding for Homeland & Improving Remote Housing

• A “greenslide” of Greens & independent seats makes sustainability a major focus. The “Rewire the Nation” campaign aims to make Australia a “renewable energy superpower”.
• No changes to capital gains taxes and/or negative gearing, though earlier contribution to superannuation is allowed.

Keep reading >>

Property update – current outlook

Globally, it’s been a tough couple of years. In response to this, the Reserve Bank of Australia (RBA) is raising cash rates to help Australia’s recovery from the Covid-19 pandemic emergency borrowing settings. We’ve discussed this in more depth here: “Cash flow property – Counter interest rate raises.”

With inflation predicted to reach approx. 7% by December 2022, some homeowners and first home buyers are understandably nervous about their ability to attain a mortgage and their capacity to service the loan. However, with an unemployment rate at a 50-year low and steady economic growth, economists remain hopeful for a strong financial recovery. 

The government building stimulus packages and the Great Interstate Migrate were both partly responsible for phenomenal increases in house prices across most markets in the last year. As we predicted, these markets have started to calm down, so we’re seeing a more gradual and sustainable growth. 

Although property prices are stabilising, construction costs continue to increase, and demand for housing is still at an all time high. Now, with the re-opening of international borders, both students and skilled migrant workers are once again returning to our shores, thus driving up rental demand in urban areas. 

Change of government – Labor property update

Australia’s new Prime Minister Anthony Albanese won over many voters with his promise to get more Australians into their own homes. And to do so, the Labor Government has committed to expanding the role of the National Housing Finance and Investment Corporation (NHFIC), renaming it ‘Housing Australia’. This incorporates the National Housing Supply and Affordability Council and the National Housing and Homelessness Plan.

Under the National Housing Supply and Affordability Council, the Federal Government will work with state governments to set targets for land supply and collect national data on housing affordability as well as supply and demand.

The National Housing and Homelessness Plan

Developed with key stakeholders including States, Territories, local governments, not for profit and civil society organisations, Real Estate Institute of Australia, Master Builders Australia, and many, many more key organisations, the National Housing and Homelessness Plan will set out key reforms to make it easier for Australians to buy a home, rent, and house homeless Australians.

Housing Australia key programs include:

• Housing Australia Future Fund
• Help to Buy 
• First home guarantee/ 5% deposit scheme
• Regional First Home Buyer Support Scheme
• Restoring Funding for Homeland & Improving Remote Housing

– Housing Australia Future Fund

With the establishment of a National Housing Supply & Affordability Council, the new government aims to increase housing supply and improve housing affordability. A $10 billion fund will help to build 30,000 new social and affordable housing properties in its first five years, creating thousands of jobs for tradespeople.

The annual investment returns will be transferred to the National Housing Finance and Investment Corporation (NHFIC) to further fund:

• 20,000 social housing properties, with an allocation of 4,000 ($100 million) for women & children fleeing domestic & family violence and older women on low incomes who are at risk of homelessness. 
• $200 million for repair, maintenance & improvements of housing in remote Indigenous communities.
• $30 million to build more housing & fund specialist services for veterans who are experiencing homelessness or at-risk homelessness.
• Creating 10,000 affordable homes for frontline workers.
• Resulting in 21,500 full-time jobs across the construction industry with incentives for training new apprentices.

While this additional funding is necessary and long overdue, a report published in November 2021 from Brendan Coates at the Grattan Institute suggests it’s still falling well behind what’s needed. More than two thirds of low-income Australians are still struggling in a private rental market with rents rising at around 9% per year nationally.

– Help to Buy Scheme

The change of government fulfils Labor’s “Help to Buy Scheme” and a promise to cut the cost of buying a home by up to 40% for some lucky Aussies. This means that each year up to 10,000 eligible candidates will require a smaller deposit, a smaller mortgage and will have smaller mortgage repayments. The scheme is restricted to owner-occupiers who don’t currently own a property, providing an affordable entry point to the Australian housing market and allowing better access for key workers to live in more central areas.

Buyers will only need a minimum deposit of 2%, with the Federal Government providing an equity contribution up to 40% of the purchase price of a new home and up 30% of the price of an existing home. For example, a homebuyer in Sydney, buying at the area price cap of $950,000 with 40% equity, would save over $1,600 on their monthly mortgage repayments. In regional Queensland, home buyers purchasing at the price cap of $500,000 with 40% equity, can save $850 on their monthly mortgage repayments. 

Under the scheme, homebuyers can also avoid paying Lenders Mortgage Insurance, potentially saving more than $30,000. It’s also possible to top up with an additional 5% stake in the home, however if their income exceeds the annual income cap ($90k for individuals / $120k for couples) for 2 consecutive years, they’ll have to repay the government’s financial contribution. Also, buyers will still need to pay transactional costs, including bank fees, stamp duty and legal costs. Visit the ALP website for eligibility and further details.

– First Home Guarantee/ 5% Deposit Scheme

Labor has expanded the Coalition’s ‘First Home Loan Deposit Scheme’, renaming it the ‘First Home Guarantee’ and generously adding another 10,000 places annually to allow for 60,000 guarantees per year. We’ve covered this 5% deposit scheme before here.

– Regional First Home Buyer Support Scheme

To address the regional housing crisis, Labor has extended the ‘First Home Guarantee’ to include some rural areas, calling it the ‘Regional Home Guarantee’. This allows buyers to purchase a new home in an eligible regional area with a 5% deposit without the need for lenders mortgage insurance. 

The aim is to enable 10,000 first home buyers a year to buy a home in regional Australia, thus tripling the number of people in these areas that can access a government guarantee scheme. You can read more about the scheme and see full eligibility criteria in our blog post ‘Regional Home Guarantee – 5% Deposit Scheme’. 

– Restoring Funding for Homeland and Improving Remote Housing

In an effort to Close the Gap, Labor intends to deliver an immediate boost of $100 million for housing and essential infrastructure on Northern Territory homelands. This includes improvements to water, power and community facilities, housing upgrades, extensions, as well as new builds. This is in addition to the 30,000 social and affordable homes available through the Housing Australia Future Fund.

Change of government = a new focus on sustainability

As the Greens party and independents won more seats than ever before in the recent election, this “green slide” means that sustainability will also be a major focus of the new government. With its “Rewire the Nation” campaign, the Australian Labor party has made a commitment to developing Australia as a “renewable energy superpower”.

And their initial policies reflect this goal with plans to reduce emission targets, review environmental legislation, implement new sustainable guidelines for businesses as well as establishing a national Environmental Protection Authority (EPA).

Each of these policies will have a knock-on effect on the property market. It’s likely that we’ll see additional sustainable recommendations for new builds and existing properties. We expect to see further incentives for solar and battery power use to allow for electric vehicles and new ways of managing water recycling and use of sustainable materials in new builds.

What the change of government means for property investors

Labor has not indicated any change to laws regarding capital gains taxes and/or negative gearing. With vacancy rates below 1% in some markets in Adelaide, Brisbane, and Perth, and rental yields steadily increasing, it’s a win-win for many investors.

For investors looking to downsize their portfolio, it’s now possible to contribute up to $300,000 from a property sale into superannuation at the age of 55years, a decade earlier than was previously allowed.

It’s important to remember that although these Federal laws will have a national impact, each state and territory may have individual implementation guidelines. And the property market is quite different in each of these regions. 

That’s why we recommend working with Property Investment experts at Capital Properties to evaluate what this change of government means for you. Our expertly researched Australian property updates will help you develop a strategy for successful property investment.

Book your free Discovery Session today to kick off your future financial security.

In its first back-to-back hike in 12 years, the Reserve Bank of Australia (RBA) has raised the cash rate by a total of 85 basis points. Its aim is to ease the country off the emergency borrowing settings that were required to maintain the economy through the Covid-19 pandemic. 

Philip Lowe, RBA Governor said that the Reserve Bank board is committed to making sure that inflation returns to the 2 – 3% target and that households should be prepared for further interest rate raises. In a statement, he negated the possibility of a recession saying “It doesn’t feel like the precursor to a recession and interest rates, while they have gone up, they are still low. The cash rate is still less than 1% at a time when unemployment rate is at a 50-year low.”

Capital Property investment specialists have lived experience dealing with interest rate fluctuations. We can help you counter interest rate raises with cash flow properties. To learn how, book a discovery call with Capital Properties today.

On the go? Here’s 30 seconds of take outs:

• The RBA has predicted further interest rate raises in order to achieve an eventual target of 2 – 3% inflation.
• Inflation is predicted to reach approx. 7% by December 2022.
• Although a concern to some already financially stretched homeowners & new home buyers, this may offer an opportunity for investors.
• Rising interest rates means less competition in the property market & higher rental demand.
• It also allows for substantial depreciation & tax breaks to circumvent inflation.
• To counter interest rate raises, we recommend that you:

– Work out your cash flow position

– Make additional mortgage payments

– Top up your offset account

– Consider refinancing your loan

Keep reading >>

How high will interest rates rise?

The RBA has warned to expect further interest rate increases. This is due to shortages in the labour market, rising petrol prices along with rising retail electricity and gas prices and of course global factors including supply chain disruptions due to Covid-19 and the war in Ukraine. Economists are predicting another 50-basis point rise in July 2022, taking the cash rate to 1.35%, although the forecast is for a cash rate peak of 2.5%, with inflation predicted to surge to almost 7% in the December quarter.

“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings,” Lowe told the American Chamber of Commerce on 21st June 2022.

How do rising Interest rates affect the property market?

Rising interest rates have an obvious effect on buyers and sellers. If the economy shows strong growth, rising mortgage rates won’t affect property value and housing prices hugely. That’s because job and wage growth should compensate for the higher costs.

However, for people who’ve struggled to get on the property market or those whose finances are already stressed by record-high home prices, this may prove detrimental to their home-owning dreams. Property investors must therefore ensure they take proactive steps to counter interest rate raises before they find themselves in a pickle.

Rising interest rates and property investing 

Increasing interest rates/mortgage rates is often an opportunity for real estate investors. Rising interest rates leads to a reduction of buyer demand in the market, leading to reduced property prices and less competition. As less people qualify for mortgages, the rental market swells to meet demand for additional rental properties.  In some Australian capital cities, rents are rising by more than 20%.

The potential for higher rental yields has already driven investor mortgage demand, with the Australian Bureau of Statistics (ABS) reporting 9 consecutive months of investor mortgage growth since June 2021.

Realestate.com.au also reported a steady increase in investor enquiries over the past 3 years, currently sitting at the highest level in years. And as international borders re-open, allowing students and skilled migrant workers to return, demand for urban rentals will continue to build.

Many investors will already have seen phenomenal levels of capital growth and will be prepared to run negatively geared property and cover a cash flow shortfall.

How to counter interest rate rises in a cash flow property

Investing in a cash flow property means you’re investing in a property with a high rental yield, i.e., with a rental income that’s greater than the expenses associated with owning that property.  Those expenses include maintenance, property management fees, insurance, mortgage interest and more. To increase equity and counter-interest rate raises, investors ideally want to pay down the loan on the property with any additional income, so budgeting is vital. Capital Properties Budget Planner can help with this. 

Increasing interest rates could affect cash flow for property investors, however, the effect should be diminished by increasing rental demand and higher rental rates. For example, the growth of populations in regional cities, such as Ballarat, in north-west Melbourne, Victoria and Newcastle in NSW shows no sign of slowing down with strong investor activity in these areas.

Many property investors embrace substantial depreciation and tax breaks to circumvent inflation. With vacancy rates below 1% in some markets in Adelaide, Brisbane, and Perth, investing for cash flow also allows for the excellent potential for capital gains.

How to counter interest rate raises

It’s worth remembering that banks and lenders have allowed buffers when lending to ensure that people won’t find themselves in an untenable situation. However, after enjoying historic low interest rates for years, some people may feel unprepared for the expected increases. 

If you’re wondering what you can do to improve cash flow and counter interest rate raises, here are our top tips:

– Work out your cash flow position

We’ve written about the importance of knowing your cash flow before in ‘Getting to know your cash flow: it’s power to you!’.  At Capital Properties, we’ve developed tools to help you work out how different interest rates, rental income changes and/or paying down some of your borrowings will affect your bottom line. 

These free Capital Properties investment tools and calculators, include a downloadable ‘Property and personal spending budget’ spreadsheet, a rental property calculator and so much more to help you accurately predict the cashflow position for your investment property or complete property portfolio. 

– Make additional mortgage repayments now

To counter interest rate raises, it’s a good idea to make extra repayments into your mortgage before the interest rates escalate further. If you don’t have a fixed loan, you can deposit a lump sum or make more frequent repayments. Or, you can add extra into your ongoing monthly repayments starting as soon as possible.

– Top up your offset account

Making extra payments into your mortgage offset account allows you to build a buffer. Ideally, you’ll only have to pay interest on the difference between the loan amount and the amount in your offset sub-account. This means you can pay the loan off faster and with less interest in the long run.

– Consider refinancing your loan

If you think your current lender’s interest rates are higher than they ought to be, it’s worth looking around and getting comparable quotes. Once you’re armed with that information, you can pick up the phone and ask your lender for a better deal. If you’ve been a good customer, making repayments on time and have built equity in your property, you’ll have a strong position to argue from.

If your current lender refuses to negotiate, then it’s worth considering switching to another lender who’s offering better rate. Some lenders have investor incentives allowing you to package investment loans with home loans.  

The Capital Properties team are property investment experts who are passionate about helping you develop a wealth building strategy. We’ll help you navigate the challenges of property investment so that you’ll always feel empowered to make the right decisions for your financial future.

Book a free Discovery Session today and let’s get started.