Recent economic indicators that suggest inflation may have peaked in the US and UK have clearly influenced the Organisation for Economic Co-operation and Development’s (OECD) decision to call time on inflation here in Australia.

But the Paris-based economic outfit took great pains to remind the market that continuing cost pressures, renewed rises in energy and food prices, or signs of an upward drift in inflation expectations could compel central banks to keep policy rates higher for longer.

What did the OECD predict?

For starters, the OECD expects Australia’s GDP growth to slow to 1.4% in 2024 from 1.9% in 2023 on the back of cost of living pressures which are curbing household spending.

The OECD also expects:

  • The cash rate to stay where it is at 4.35% until the third quarter of 2024.
  • A gradual easing of the interest rate cycle is expected to see the cash rate fall to 3.6% by December 2025.
  • The unemployment rate to edge up to 4.4% mid-2025.

Overall, the OECD was encouraged by Australia’s lower-than-expected inflation, having fallen to 4.9% in October from 5.6% in September – better than financial market expectations.

Underscoring lower inflation was a major fall in petrol price inflation, down 0.3 percentage points from headline CPI, while inflation also pulled back across most food items.

Despite electricity prices rising 10.1% in the year to October, inflation eased across:

  • Lamb prices fell by 9.3% over the past 12 months.
  • Beef prices were down 4.1%.
  • Annual rate of inflation of automotive fuel eased to 8.6% in October from 19.7% in September.
  • Inflation for constructing a new home is down to 4.7% from 22%.
  • Rent prices fell by 0.4% in monthly terms.

However, rents and the cost of insurance (and financial services) were up 6.6% and 8.6% respectively over the last 12 months.

Next RBA decision will be a cut

As a result, the OECD has concluded that the Reserve Bank (RBA) will not lift rates again and expects inflation to fall below 3% by 2025, which is in line with the RBA’s expectations.

While that’s clearly good news, there’s no guarantee that rate cuts per se – whenever they happen – will necessarily result in house prices falling.

In theory, housing affordability issues and rising unemployment, coupled with inflation –  still at historically high levels – should start to undermine house prices early next year.

However, there’s growing concern that a rate cut may result in house prices kicking up again: No wonder the RBA may feel it’s ‘damned-if-it-does, and damned-if-it-doesn’t’ cut rates in the eyes of the property market.

Interestingly, former RBA governor Philip Lowe expects central banks the world over to suffer a credibility hit if they continue to dither on getting inflation back within their respective bands.

“…if central banks allow that timeline to be pushed out even further into 2026, the community will rightly say, ‘Are they serious?’”

Meanwhile, what’s lending support to the RBA’s inflation-busting efforts is a higher Australian dollar (A$), up 2.2% since the beginning of November.

Shane Oliver chief economist at AMP expects the $A to continue rising into next year due to it being relatively undervalued.

Source; CoreLogic

What’s in store for house prices?

CoreLogic’s national Home Value Index (HVI) rose 0.6% in November, which denotes the smallest monthly gain since the growth cycle commenced in February.

While the heat appears to have come out of the housing market, CoreLogic data points to multi-speed conditions across the capitals, with three cities recording a decline in values over the month.

Melbourne, Hobart and Darwin were down -0.1%, -0.1% and -0.3% respectively, while growth in Sydney home values also slowed sharply, reducing to 0.3% – the smallest monthly gain through the recovery cycle to date.

By comparison, Perth housing values jumped again in November, posting the largest monthly gain since March 2021 at 1.9%, while Brisbane and Adelaide were up 1.3% and 1.2% respectively.

CoreLogic research director, Tim Lawless notes slower growth conditions across the upper quartile of Sydney and Melbourne have become increasingly prominent.

“As borrowing capacity reduces, we may be seeing more demand deflected towards lower housing price points, with the broad middle of the market now recording the strongest rate of growth in Sydney and Melbourne.”

Source; CoreLogic

Could rate cuts backfire?

At face value, worsening housing affordability, rising unemployment and persistently high inflation suggest house prices should be on a downward trajectory.

However, Nicola Powell, Domain chief of research and economics suspects a potential rate cut later next year could reignite upward price pressure on the housing market.

Given the crucial factors still at play – notably the shortfall of housing amid rampant population growth – Powell says the outlook for the housing market is uncertain at best.

“I think what we’re going to see is that housing undersupply is going to trump the impact of higher interest rates, so we’re expecting prices to continue to rise, but at a more modest pace,” she said.

In light of that prognostication, Domain expects Sydney house prices to rise by up to 9% (and nationwide by 7%) next year.

Based on Domain’s outlook, other capital cities can expect price rises of:

  • Melbourne 4%.
  • Brisbane and Adelaide 8%.
  • Perth 7%.
  • Hobart 4%.
  • Canberra 5%.