Grocer-nomics
Michael Harvey shares his thoughts on interest rates, inflation, the housing market, household budgets and what Tyrrell’s chips have to do with it all.
Watch the video or read the article below.
“The RBA is actually quite limited in what it can do to influence inflation. Their biggest lever is to put up interest rates, squeezing household budgets, make people fearful, and get them to stop spending”
I love Tyrrell’s chips, but I haven’t been eating them much lately because even though I love them, I only buy them when they are on special. I am sure I am not alone noticing that nothing much has been on special lately…until last weekend when Tyrrell’s chips were half price! (plus Old Gold Chocolate was half price as well…what a shopping day that was!)
Maybe it is the optimistic side of me coming out, but I thought “is this the first sign that we have burst through the so called ‘inflationary curve’ and we’re coming out the other side?”
It may be a co-incidence that last night petrol prices were back to $2.00/litre. Is life returning to normal?
The Reserve Bank of Australia (RBA) is under the pump at the moment, and rightly so. Having told us interest rates would not be going up until 2023/2024, we are now in one of the more intense interest rate rises of the past 20-30 years. This dates back to the late 1980s, where our parents can retell the true stories of how they survived when their mortgage rates hit 18+%
Will we head there?
Will property prices crash?
What is the share-market going to do?
So many questions, with the media having a field day playing off our fears.
Our budgets will no-doubt be stretched over the next 18 months or so, and we may have to make some hard discretionary spend decisions. However, I hold out hope that I don’t think interest rates will go to extreme levels, and the housing market won’t collapse completely.
Let’s take a look at interest rates…
The RBA is actually quite limited in what it can do to influence inflation. Their biggest lever is to put up interest rates, squeezing household budgets, making people fearful, and getting them to stop spending.
We still need to eat and drive, so everyone who has been doing that recently knows the impact on the hip pocket in these two areas.
So, I don’t think the Reserve Bank will keep having to increase interest rates forever. ANZ and others forecast another 2% interest rate rise, which seems to be the consensus. (ING even announced an interest rate drop yesterday, so obviously they don’t agree). I think people in general will work through cutting back on their discretionary spend (like only buying Tyrrell’s chips when they are on special).
So for small business, if your customer spend is in the discretionary spend, it might be a tough period coming up.
What about the housing market and property prices?
Well the heat has come out of the market, which effectively means a price drop. For most people there is enough equity in their home from recent rises to weather the price drop. For new or recent home buyers, things will be a bit tougher. They tell me banks have had a 2% interest rate buffer (now 3%) factored into their serviceability calculations - so, in theory there’s no pressure for a little while - but with inflation hitting other expenses, it will become tight.
3 reasons why I think prices won’t collapse completely…
Strong employment market
Our strong employment market means the likelihood of someone losing his or her job and not picking one up elsewhere is very remote. Therefore banks will more than likely work through with their customers if they are under mortgage stress. If you have borrowed for other goods recently such as vehicles, caravans, boats as well as a fully drawn mortgage, then something might have to give and I am guessing it won’t be the house.
Even the RBA has said a 20% price drop for houses, would only mean 2.5% of mortgage holders would have negative equity. Not good if you are the 2.5%, but for the 97.5% things will be tight but not a calamity.
Our unemployment rate nationally is at 3.5%, the lowest rate for 48 years. There were 494,000 unemployed people in June, and 480,000 job vacancies in May. That’s nearly a job for everyone. Not necessarily the job you want, but a job to pay the bills at least.
Increase in migrant workforce
The second thought is that due to the tight labour market, I think that skilled and unskilled migration will have to start to flow again. There are 60,000 skilled migrant applications forms from overseas that are stuck on desks in Canberra, that hopefully will get resolved soon. All of these people will need to live somewhere, therefore providing greater demand for housing and therefore assisting in stabilising house prices at some point.
Older generation wealth remains
The third thought why house prices won’t drop dramatically over the long term, is that there is still a lot of wealth in older generations. At some price point those investors will reason, “at that price point with increasing rents, I will come back into the housing market as an investor.” Therefore it means that a pseudo floor will be in the market. Also, the '“bank of mum and dad” is around the fourth most used bank in Australia. With substantial equity in that generation, they will also ensure that mortgage default doesn’t happen.
What does that mean for small business?
As I said previously, if your sales comes from customers that are a discretionary spend, it might continue to be a difficult time for you. Access to staff will continue to be an issue for the short to medium term. Interest rates will have an effect on your profitability, so might be time to revisit your level of debt and either look to re-finance (our new MDH Lending division can help assess whether this is right for you) or consider reducing working capital such as inventory holdings.
Hopefully this has been helpful… now I will go back to my Tyrell Chips and savour the moment!
