How long will it take to lower inflation


We all are suffering



We all want to know how long it will take to lower inflation. We are all affected by interest rate hikes and they are always at the centre of real estate. When interest rates are low people borrow and properties increase, conversely, when rates are high there is less borrowing and properties generally stay on the market longer. Below is a snapshot of what is happening and the outcomes





What the Reserve Bank and the Australian Government want through these rate hikes is to lower inflation.



It helps to understand



You may have noticed the Reserve Bank rate is different from the bank’s lending rates. The nominal interest rate is the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest. The real interest rate is nominal interest rates minus inflation. Therefore, if interest rates rose from 5% to 6% but inflation increased from 2% to 5.5 %. This actually represents a cut in real interest rates from 3% (5-2) to 0.5% (6-5.5).



Who and where is most affected?



The effect of higher interest rates does not affect each consumer equally. Consumers with large mortgages – often first-time buyers in their 20s and 30s and suburbs far from CBDs – will be disproportionately affected by rising interest rates. The aim of reducing inflation has led to interest rate rises and will unfortunately cause real hardship to those with large mortgages. However, those with savings are choosing not to sell or withdraw from the market rather than sell at a loss.





The time it will take to lower inflation



Everyone now is aware that everything is more expensive. However, that has taken a while for it to sink in. We have all been warned that interest rates would go up but we just put the thought out of our collective minds. Also, governments have taken months or even years before they acknowledged there has been an economic change. The policymakers then have needed to debate the appropriate policy response and that needs to be followed by implementation. All this lag before any fiscal or monetary policy action is taken.



All this delay is identified as a lag in economics. You may have heard the expression ‘turning the Titanic” – meaning it is very slow and hard that’s where we are now -slowly turning. All the response lag takes time. Businesses, consumers and investors along the chain of transactions may wait for some time before completing the next transaction. Eventually, once all the necessary transactions take place, the outcome of the lower inflation policy will be achieved.



Are we there yet?



Unfortunately, no and the best predictions are mid to end of 2023. Some forecasters say longer but at least another year of pain for the entire world. As for real estate aspirations, it is important to remember every threat offers an opportunity and every opportunity offers a threat. Some properties will be exchanged at more favourable pricing and some sales will be forced. Remember in the sellers’ group there are investors too so the reporting of the market being favourable for buyers is a bit opaque.



Clearly, some people will be more affected than others in real estate transacting going forward and that is the real outlook for buyers and sellers. Some will be threatened and others will have opportunities.