March 2024 direct property market update
Economy
The disinflation cycle is in the ‘last mile’, where monetary policy is being finely calibrated and market expectations can move month-to-month with each new data release. This was reflected in the RBA’s stance at the March Board meeting, where Australia’s central bank arguably kept a foot in both the tightening and neutral camps. However, much of the market’s speculation is focused on when rate cuts will occur, rather than the genuine possibility of further hikes. As at the end of March, financial markets and the major banks were forecasting the first cut to occur in the final quarter of 2024.
Annual inflation was stable at 3.4% in February (data released March), with rent and insurance inflation remaining stubbornly high, and goods inflation continuing to be moderate. However it is the tightness of the labour market (services inflation) which will likely be the key determinant of the CPI path moving forward. On this front, the unemployment rate fell from 4.1% in January to 3.7% in February1. The magnitude of the decrease is surprising at first glance, but less unexpected when you look at the detailed data which shows a shift in the seasonality of the labour market. It is now becoming the ‘new norm’ for workers to end a job in December and not start a new one until February. Labour data has also shown more volatility month-to-month since the pandemic. Looking at the recent trend rather than the latest monthly print in isolation shows the labour market is gradually softening, with underemployment (people wanting more hours) at its highest level since December 2021 and leading indicators such as job vacancies falling (albeit from high levels).
Retail sales provide another indication of a slowing economy. While Taylor Swift’s recent tour boosted February spending on clothing, department stores and dining in New South Wales and Victoria (the locations of the concerts), annual nominal growth of only 1.6% was recorded2. Considering inflation is running above 3% and population growth of circa 2.5%, underlying consumption is very weak, showing that the cost of living is clearly biting. However, consensus expectations are that there should be some relief towards the end of the year as stage 3 tax cuts flow through, inflation continues to moderate, and interest rates potentially ease.
A part of the economy bucking the slowdown trend is housing; reflecting robust demand and constrained supply. CoreLogic’s national Home Value Index recorded its 14th consecutive month of growth in March, rising to new record highs each month since November 20233. There is a risk sustained house price growth may influence the RBA’s view of the appropriate rate path, however as previously stated, the health of the labour market will likely be a much greater focus.