Way back in 1990, Treasurer at the time – Paul Keating – infamously described Australian economic conditions as struggling through “the recession we had to have”. And after a lull of more than thirty years, news headlines are starting to mention the “r” word again, in varying degrees of speculation:
“Economists fear ‘recession we don’t have to have’”, The Australian“Is Australia headed for a recession?”, ABC“A global recession looks increasingly likely – but here’s how Australia could escape it”, The Guardian“Australia forecast to avoid recession”, Sky News Australia
So who do you believe? And by the time your retirement rolls around, how much will it really matter?
What is a recession?
The reality is that the business cycle can sometimes experience more extreme phases than is usual:
A boom is technically a period of strong economic expansion leading to rapid growth in prices, measured by a rise in inflation. We’ve just seen something like this happen throughout Covid with booming property prices. Check out how this fits in with the property cycle here. A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in economic activity in two successive quarters.
The recession we experienced in Australia in the early 1990s was driven in part to curb inflation. Sound familiar?
Well, that’s why leading economists are becoming nervous about The Reserve Bank of Australia (RBA) plunging Australia into recession if it continues to raise the cash rate to curb inflation.
Now is this good news? No.
But is it really as bad as some media commentators say it is? Also, probably, no.
Smoothing the business cycle and the impact on property prices
“Inflation targeting” was introduced in Australia in the early 1990s, and it’s one of the RBA’s roles to keep inflation sitting at between two and three per cent, on average, over time. They do this by increasing the cash rate, which influences the interest rates offered by banks, making it more expensive to borrow money, dampening economic activity and thereby lowering inflation.
In August 2022 inflation was sitting at an annual rate of 6.8%, down from 7% the month prior in July, so raising the cash rate is having an impact. We can also see the affect it's having on property prices.According to PropTrack, the annual rate of home price growth started declining in May 2022 (the first decline since the start of the pandemic), slowing from a rapid 24% to (a still healthy) 14%. It feels a lot worse than it is simply because it’s the most rapid slowdown since 1989…the last time the RBA had to really hike the cash rate up.
And this is why Philip Lowe, Governor of the RBA, has just announced another increase to the cash rate, to the tune of 25 basis points, raising the official cash rate to 2.6 per cent. Along with the warning that “…a further increase in inflation is expected over the months ahead…[and] The Board expects to increase interest rates further over the period ahead.”
What does this have to do with your long term plans?
While the official line from the RBA is that it’s increasing cash rates to bring inflation down, there is growing consensus that they are using them build a buffer, so that rates can be reduced again in the future. Either way, Australia is well placed to either avoid a recession entirely, or – if we do experience a recession – it’s likely to be short lived.
At the end of the day, no matter where we are in the business or property cycle, there are always challenges when it comes to investing. If you’re not waiting for prices to come down so you can buy, then you’re waiting for interest rates to come down...so you can buy.
The real question is, should you be waiting at all?
With an increase in stock levels as we head further into spring, and fear of rising interest rates driving market hesitation, now could present a very small window of opportunity for savvy investors. Set in context, interest rates are still sitting at historical lows, so stop panicking, review your plan, and keep your eye on the end game!Because here’s one thing you can count on…
Once inflation is under control and interest rates stabilise, confidence will return to the property market.
And that’s why long term property investors don’t allow themselves to be held back by short term recessions. They continue to invest because they’re taking a long term approach.
If you’d like to continue making progress with your property portfolio too, then book in a free one on one mentoring call with one of our property strategists today!
