As we all know, something really big are happening these days…
Inflation reaching a 40-year high, increasing interest rates, rumor of our housing markets collapsing, and our economy entering a slump. Then there is Russia’s conflict with Ukraine. A surge in energy prices, a rising increase in the price of oil, and supply chain issues. Government spending is beyond the plan, and the national debt is growing. A significant growth in the country’s money supply.
We believe that 2022 will be remembered as the year of inflation. Admittedly, it began in 2021 as a result of the tremendous disruption generated by Covid across the planet. However, inflation is now on everyone’s mind and affecting everyone’s daily life. It is time to have a better understanding of ‘what, why and how’.
Inflation is defined as a sustained significant rise in the general level of prices caused by an increase in the amount of money, resulting in the loss of currency value. And there are many reasons that impact the pricing of specific commodities in the near term, as well as those ones that affect the prices of a large number of items in the long run, such as supply chain concerns brought by the Ukraine war or the Chinese lockdown.
But to put it simply, the volume of money is the thing that indeed impacts the price.
There is little question that factors connected to the coronavirus epidemic contributed to today’s high inflation rate. During the tough days of 2020 and 2021, when huge portions of Australia were shut down, the government devised a number of stimulus measures to keep us from falling into recession, avoiding the high levels of unemployment and the real estate crash predicted by some.
It accomplished this in part by implementing Quantitative Easing, which essentially decreased interest rates, increased the quantity of money, and expanded lending to households and companies. Most Australians stored their cash in local bank or offshore accounts.
Before the Quantitative Easing, Aussies were unable or holding more cautious attitude about spending as much money as before, because they were unsure of what was gonna occur in the future. Now that people are finally getting back to regular life, so they are tend to go out and spend more, which is happening at a time when many items are in short supply, driving up prices and hence inflation. As a result, we have both a demand-pull and a cost-push.
It’s conceivable that we’ll continue to see high levels of inflation until the novelty wears off or prices increase to the point where they start to have an impact on demand or consumption. So, in effect, the government produced inflation, and now they’re asking the RBA why they can’t get it under control.
And because of the ongoing challenges with the Russian and Ukrainian wars, as well as supply chain concerns due to the Chinese shutdown, we’re expected to see considerably higher inflation for most of that time. In reality, the Reserve Bank now anticipates headline inflation to hit 7% this year, peaking in the fourth quarter of this year – 2022, in part because increasing oil and electricity prices will not reach families until then.
After then, the yearly rate of inflation is projected to begin to fall. The Reserve Bank will strive to keep inflation under control by boosting interest rates and limiting demand.
The concern is that raising rates too quickly or too high may restrict demand excessively, perhaps leading to a recession. However, if a recession happens, it is probably to be a short phenomenon since the Reserve Bank would decrease interest rates again to push the economy growth. Remarkably, Australia’s economy is now doing all right, with high job growth, low level of unemployment, substantial exports, and a favorable trade balance.
So, what should you do now that inflation and interest rates are rising?
You’ve undoubtedly heard media and professionals mention before that planning for the worse and hope for the best, so knowing that interest rates will be higher, you are suggested to determine what to do next by taking your own situation into consideration.
If you are a home owner/property investor and on a variable mortgage, you’d better find out that how the increased interest rates will influence your mortgage payments so that you can have a better budget plan for it. Make sure you are ahead in your mortgage payments or have a sufficient cushion in an offset account. Time to speak with your broker about refinancing to a reduced variable rate loan. If you’re looking for certainty of loan repayments, unfortunately, you’ve missed the opportunity of low fixed-rate mortgage loans. Fixed rates are now substantially higher than variable rates, so get advice on how much of your loan should be fixed.
If you want to sell a property, don’t let the present market conditions force you to rethink your long-term plans and sell because of all the negative publicity. If you must sell, you should do it swiftly, or if you can wait a few years until the market recovers. If you’re planning to upgrade or downgrade your house, keep in mind that you’re purchasing in the same market that you’re selling in, so if you get less for your home than you expected for, your new home will likely cost less than it would have a few months ago.
If you are about to invest, acknowledge that at present a real opportunity is now starting to open for astute property purchasers. In other words, now is the moment to invest in quality assets, and keep in mind that “A grade” properties are likely to retain their worth. Ready to go limitless in your search for exceptional houses, and don’t go it alone. Prepare to invest in strategic real estate by paying for advice and guidance from consultants who are independent, unbiased, and paid only by you. Most importantly, make all decisions based on economics and facts, as well as a long-term strategic property plan, instead of emotion.
Reference: ”Why I’m not worried about inflation — and why you shouldn’t be either” by Michael Yardney