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Low CPI's effect on rents, interest rates

Low CPI's effect on rents, interest rates

While the pace of Australian inflation remained steady over the December 2017 quarter, rental inflation dipped to a 25-year low over the same period. While some industry commentators forecast interest rates remaining on hold in the immediate future, others feel that these inflation figures could be a sign of rate hikes on the horizon. 

The December 2017 Consumer Price Index (CPI) from the Australian Bureau of Statistics (ABS) rose 0.6% in the December 2017 quarter, following a similar rise of 0.6% in the September 2017 quarter.

Quarterly price rises
  • Fuel +10.4%
  • Tobacco +8.5%
  • Domestic holiday travel and accomodation +6.3%
  • Fruit +9.3%
Quarterly price falls
  • International holiday travel and accomodation -1.7%
  • Audio visual and computing equipment -3.5%
  • Telecommunication equipment and services -1.4%

On an annual basis, the ABS found that the nation’s CPI rose by 1.9%, while annual inflation in most East Coast cities rose above 2%, due in part to strong house prices. Softer economic conditions in Darwin and Perth were found to have resulted in annual inflation of 1% and 0.8% respectively.

Looking at rents

According to the Housing Industry Association (HIA), the ABS figures also reveal that rental price growth dipped to just 0.6% in 2017, the slowest pace of growth since 1993.

HIA senior economist, Shane Garrett, described the deceleration in rents as “welcome news” for families reliant on the rental market.

“The slowdown in rental price pressures has been helped by the completion of large volumes of newly built dwellings over the last couple of years. Investors, both domestic and foreign, have been instrumental in delivering this additional supply.”

Real Estate Institute of Australia (REIA) president, Malcolm Gunning, said regarding the CPI figures that increased investment in housing has kept growth in rents lower than they have been historically, adding that the current taxation arrangements benefit renters and that any change would see an increase in rents.

What about interest rates?

Mr Garrett of the HIA added that the recent inflation data, combined with a tightening labour market, indicates that the Reserve Bank of Australia (RBA) could follow the central banks of several other countries, and that the next move for the nation’s interest rates would be upwards.

Mr Gunning of the REIA described the relatively low CPI as good news for both home buyers and renters, and forecast that the RBA would continue to maintain historically low interest rates:

“With the RBA meeting next week for the first time in 2018 and the CPI figures always a central component of the RBA’s consideration, the latest inflation data would suggest that home buyers can be comfortable in the knowledge that interest rates will remain stable for a while yet.”

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This article was reviewed by Property & Personal Finance Writer Nick Bendel before it was published as part of RateCity's Fact Check process.

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