Outlook #2
Many requested a written summary to accompany last week's charts
So further to last week’s post, here we go.
Real estate comes down to supply and demand.
Supply, as shown in last week’s charts, remains tight and it is increasingly expensive to increase.
Demand is influenced by population growth and, in part, by new jobs.
Yet one of the largest impacts on demand is interest rates and where they go this year is likely to be one of the key factors influences the local housing market.
So where are interest rates headed?
Where interest rates head in Australia this year and beyond depends not on inflation per se but what happens with new job creation. This impacts the unemployment rate and, in most situations, the level and direction of inflation.
So, looking forward it is all about jobs.
The most current data shows that the annual rate of job creation is currently above the long-term average. Good if you are looking for work but not so much if you have a big mortgage or outstanding loan.
Also there is a strong relationship between the job growth trend and when the RBA lifts and cuts official interest rates.
If we see job growth start to trend downwards – and especially below the long-term trend - then interest rates will start to fall.
And this is where geopolitics and this year’s Australian federal election comes into play.
On the geopolitical front Trump’s return to the White House is likely to see a much more divided world, with the likelihood that world trade will be divided into three or four major trading blocks.
Think Europe, China’s axis (China, Russia, Iran, North Korea etc), America and Asia.
With the likes of the USA and India with their fingers in several pies.
Australia falls into an Asian block and our trade with China could be more restricted than in the past.
Trade tariffs are being threatened and whilst the headline spruik might not eventuate, there is little doubt, that under the American Republication Party it will cost more to trade goods and services.
This could lift inflation and negatively affect employment creation. This will especially be the case for economies reliant of exports, such as Australia.
The lead articles in our press are already warning of our weakening economy and over reliance on public spending and employment. Our current energy policies and recent labour regulations – unless they are repealed - are also placing handcuffs on private business and consumers.
Of course, 2025 is local federal election year.
And given that two-thirds of the new jobs created over the past couple of years have been in the public sector or in government aligned work, expect more pump priming in the lead up to the May election.
So, this makes forecasting when interest rates fall more difficult than normal.
Although we do expect the first cut to be today.
If not, then we will have to wait until May - being after the March quarter CPI results which come out on the 30th April - and if May is the first interest rate cut, it might be seen by many to be more like ‘politics’ rather than ‘economics’.
And taking a stab at it, and based on our conversations with experienced economic pundits, we think that the cash rate is likely to fall between 1% and 1.5% over the next 18 to 24 months.
So, if you have a mortgage, fingers crossed.
The Matusik Missive is free. There is also a paid version, in which subs, get more and can engage in commentary.
Signed up today.
Next week we will cover population growth. I know you cannot wait. Only seven more sleeps. I don’t know about you but I can hardly contain my excitement!