Ominous sign for interest rates over housing-related inflation and rising oil prices

Once, when conversing with an American hedge fund manager, I noted that Aussie mortgages are mainly of the variable rate variety. He guffawed, “Everybody must pray for a recession!”

There is a pointedness to this anecdote today. Global interest rates have been marching higher again even as a worldwide recession appears more threatening.

Heavily indebted Aussie households will be praying that the latter comes first.

The rise of housing-related inflation

Locally, inflation has come down, but house prices have been rising simultaneously. In due course, this could lead to more robust consumption. And it may be before the economy is deflated enough to accommodate it.

Inflation is expected to fall further but less swiftly than thought a few months ago. The culprits are the oil price and housing inflation: rents, prices and construction.

The primary reason for rising housing-related inflation despite the highest mortgage rate in a decade is record levels of mass immigration.

I call this ‘Alboflation’ since the government is deliberately driving breakneck population growth via generous people-to-people terms with India.

Worse, state governments are desperately investing in infrastructure to catch up to population growth. This will add roughly 2 per cent to GDP over the next year. This makes building houses more expensive as people pay through the nose to find a tradie. That’s even before the planned expansion of public housing.

It is no wonder that markets have already shifted to price two more rate hikes by year-end.

Praying for a global shock

The primary rationale against further interest rate hikes is a shock coming from offshore. The same backed-up bond yields driving local interest rate repricing will soon hit global growth.

In the US, mortgage rates are approaching 8 per cent. Business and floating rate borrowing is seeing steep rises too. This will hit the small business sector hard before long.

In Europe, there is already a recession, and spiking bond yields are blowing out peripheral spreads in places like Italy. The Eurozone is scheduled to cut fiscal spending steeply in 2024, and that could get much more severe if the bond market does not let up.

In China, the most tremendous housing crash in the history of the world is still in full roar and taking its toll on the broader economy.

These three factors will damage global growth and commodity prices over 2024, if not produce a financial crisis of some sort.

No end to housing-related inflation

Will the global shock arrive to stop the RBA from chasing inflation with higher interest rates?

My guess is yes, but you never know.

What we can say for sure is that Alboflation is likely to get stronger still.

A recent scandal involving the assassination of a Sikh leader in Canada has led to India recommending that its citizens avoid that country,

Those workers and students seeking to get offshore will now look to Australia all the more:

If you want to pay less on your mortgage, start praying.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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