Property Hub - Investment Insights & Inspiration - Realty Talk: The facts about interest rates

Episode Date: August 6, 2022

It was only a few months ago, as we were in the midst of a huge amount of media speculation about the possible impact and reports of on going rate increases, that Bushy Martin took the time to produce a Realty Talk show thoroughly investigating the impact of inflation and interest rates on you and I.   This week, with yet another increase in rates, we decided to repeat that entire episode in full.   Even if you watched the original show, I urge you to watch it again.    RealtyTalk is your trusted voice in property investment and Australia’s most popular online property show.  RealtyTalk is brought to you by Realty, Australia’s leading search and social property distribution platform that helps investors like you beat the crowd, giving you the earliest access to property opportunities, listings, and insights. Check out Realty. RealtyTalk is hosted by top property investment expert, author, and founder of KnowHow Property, Bushy Martin. Find out how Bushy’s KnowHow team helps investors unlock freedom with finance and property here, and check out Bushy’s podcast Get Invested.  RealtyTalk is supported by BMT, a company that helps property investors save thousands of dollars each year by maximizing tax deductions from investment properties. Find out more.See omnystudio.com/listener for privacy information.

Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by Realty.com.au, connecting buyers, sellers and agents differently. Hello and welcome to the show. Well, it was only a few months ago as we were in the midst of a huge amount of media speculation about the possible impact in reports of ongoing rate increases, that Bushy Martin took the time to produce a realty talk show thoroughly investigating the impact of inflation and interest rates on you and I.

I've got to say that in the 15 years that we've been producing this show, we've never experienced feedback like we received about that particular episode. And for me, it highlighted the deep concern about our future financial prospects. Those concerns certainly haven't waned, and this week, with yet another increase in rates, we decided to repeat that entire episode in full. Even if you've watched the original show, and it was several months ago, I urge you to watch it again. This week's episode with Bushy Martin could potentially save you from financial disaster.

We'll return in just a moment as Bushy talks about inflation, what it means, how it's tracking, where it is now and what we can do about it. Stay with us. We'll be back in just a moment. Welcome. Now, what's the story with inflation and interest rates? where's it all heading what does it mean to you and what do you need to be doing about it well today I'm going to focus on these questions that are likely to be plaguing you and a lot of

other hard-working Aussies because unfortunately as we become numb and indifferent to the rolling series of so-called news disasters that the mainstream media's latest 24-7 cry wolf catch cry talks about that is all about keeping us scared and fearful with our eyes and ears glued to our TV sets and the news that's resolved around scary headlines and dire predictions on inflation and interest rates and property market crashes. So as I've said before, the only thing that I really think is inflated are the media's egos and their overblown headlines. So in the absence of any other sensationalist disaster report on, now that COVID, the war in the Ukraine, local natural disasters and the federal election have all run their course, inflation and interest rates have

become a fear factory's latest target. So I'm going to bring some objective balance of discussion based on facts rather than the hysterical fiction that's being peddled by the boomsdayers. So today we're going to look at inflation, what it means, how it's tracking, where it is now, and what can we do about it. We'll also explore the links between inflation and interest rate movements, providing some context on where rates have been historically, where they're heading, and bringing all this together. How does this impact on you and property values? And what do you need to be doing about it both now and in the future? So let's dive into it. And I want to go back to basics to our high school economics to get a sense of where we are, why, and what's likely to

happen. Because the reality is that what we think and do as individuals rolls up from the local micro level to the macro global economic level and vice versa. And it all revolves around the seesawing swings of supply, demand and our sentiment perceptions that are tried to be guided and managed to some degree by variations of what I like to call the three C's, which are credit, cash and confidence. But more on this later. So let's start with the current media focused on inflation. In simple terms, inflation is the rate of increase in the price of goods and services over a period of time. And as a simple example, when I was in primary school, which unfortunately was a very long time ago, once a week as a special treat, we'd get about 20 cents

to buy lunch. And that princely sum would buy me a Kitchener cream bun for recess, a pie with sauce for lunch, and I still had enough left over to be able to get a frozen Sunny Boy ice cream and a small bag of lollies or potato chips with still a couple of cents left over to put into my savings tin. Roll forward to today and those same super healthy treats, and please note my sarcasm there, would cost me around about $16. And the cheapest thing that you can now buy from the school talk shop is a piece of fruit that'll cost you about a dollar. So on the space of over 50 years, the cost of my school lunch has multiplied up 80 times what I used to pay, which is the equivalent of about 7,900% increase over this time. That means that the average annual year on year

inflation rate of my tuck shop lunch during that period has been around 8.4%. Now, this is inflation at work, where the buying power of your money is less than what it was in the past. And this increase in the overall level of prices is called inflation. And with inflation, our currency gradually loses its purchasing power, so its value decreases in time. So you need more of it to buy the same amount of goods or services. Therefore, the expressions inflation and the decrease in the value of money are often used synonymously. But it's worth noting that inflation actually helps you if you're investing in growth assets, because as inflation rises, so does the value of the assets, whether it be houses, whether it be shares or other investments.

Now, getting back to our old school days when most of us were just nodding off or thinking about what we're going to do after school or on the weekend, the traditional economics of supply and demand, as described by CNBC, dictates that there are two main causes for inflation, which are referred to as cost push inflation and demand pull inflation. Cost push inflation happens when business expenses increase and these extra costs are then passed on to you and customers. So with cost push inflation what happens is that the price of your inputs or your raw materials goes up over time and that could be because of anticipated events or unanticipated supply-side shocks, like a natural disaster, pandemic, or a war. And a good example of this

is what has happened to many of the world's developed economies coming out of the COVID lockdown. On the back of this, we've seen a lot of supply chain bottlenecks, we've seen a rise in shipping costs, we've seen labour shortages in many areas, and because of this combination, where most of these cost inputs goes into the price of manufacturing, Inevitably, this has led to much higher costs. On the other side of the ledger, there's also demand-pull inflation, which is when the demand for goods and services outpaces supply, and this tends to happen when the economy is strong.

Demand-pull inflation is generally a better reflection of what happens when the economy is very close to full capacity and full employment, which is about where we're now. So in the case of a very well-functioning economy like Australia's has been, people feel confident that they have more disposable income to spend and therefore demand for goods and services tends to go up. And if companies are operating at full capacity, they won't be able to increase their production to keep up with the demand.

So this leads to cost-increase inflationary pressures. In addition, some economists also see increasing money supply as another major cause of inflation because if central banks are buying bonds, which is the equivalent of printing more money, which the US and Australia and most developed countries have done in massive quantities during the GFC, and more so following the pandemic to stimulate the economy, then eventually this becomes inflationary when governments and the general population have the confidence to start

spending it and increasing the volume and velocity of transactions, which is exactly what's been happening over the last 18 months or so. So how has inflation performed in the past, and what's a desirable rate of inflation. But to give some historical context on how inflation has performed in Australia, trading economics figures indicate that our inflation rate averaged about 4.86% from 1951 until 2022, reaching an all-time high of 23.9% in late 1951 and a record low of minus 0.13% in the middle of 1962. And in more recent times, since the global financial crisis in 2009, inflation has been relatively flat with minor oscillations and a fairly tight band between a low of about 1.2 percent and a high of 3.5 percent with the last 10 years of inflation averaging

around about two percent now economists and central banks over the years have come to the point of view that a little bit of inflation is a good thing it's a bit like goldilocks you don't want to be too hot or too cold you want it to be somewhere in the middle just right and in this fashion a little bit of inflation is usually a sign of a well-functioning productive and growing economy. So to ensure the economy is growing sustainably and steadily without getting out of control or slipping into deflationary downturns central banks around the world including our Reserve Bank aim to keep annual medium-term inflation within a two to three percent band so that marginal economic growth is both stable and manageable. So why all the current fuss and

to fuffle over inflation in recent months? Well, according to ABS figures, the annual inflation rate in Australia surged to 5.1% in the first quarter of this year, up sharply from 3.5% in the last quarter of 2021, surpassing market estimates of just 4.6%, and marking the highest inflation rating since the introduction of the GST in the early 2000s, reflecting soaring fuel prices and surging building costs. Now transport prices also rise the most in over 30 years since the 1990 Iraqi invasion of Kuwait while additional flow on upward pressures came from the cost of food and non-alcoholic beverages which grew quite substantially along with significant price increases in alcohol and tobacco, housing, furnishings and recreation. On a quarterly basis

consumer prices went up about 2.1% which multiplies out to over 8% on an annual basis which is the highest inflation rate in over two decades since the year 2000 which again is mainly due to the jump in cost of new dwellings and fuel. Now this has meant that the Reserve Bank's trimmed mean consumer price index rose by 3.7% year on year which is the adjusted rate of inflation when the cost of seasonal and abnormal prices are taken out. And this is the fastest pace in over 12 years, exceeding the midpoint of a central bank's 2% to 3% target almost overnight. So no wonder inflation has become a major talking point.

But what can the Reserve Bank or anyone else do about it to calm inflation and to get it back under control? Well, before I answer that, I want to paint a picture of a relevant analogy. Imagine you're the pilot of a jumbo jet on a long-haul trip around the world and you carry the burden of responsibility for all of the passengers and crew by keeping the plane flying at a safe and steady speed and altitude in any and all extremes of weather conditions to arrive and land safely at the other end.

You feeling any pressure? And to make things even more challenging, the plane has started gathering speed and rising sharply and you're flying at night in heavy constantly changing storm conditions that are continuously battering the plane up down and sideways so you can't see anything but unrelenting pitch black ahead and your autopilot and complete instrument panel has failed so that the only things you can do to control the plane's trajectory and get your bearings is to look out of a side mirror to catch infrequent glimpses of occasional distant lights receding very fast behind you and the only thing

you have left to control the lurching jumbo speed, elevation and direction are the ailerons, which are the up and down adjustable panels on the tips of the wings, which are the flying equivalent of the handbrake on your car. Now, does this sound scary to you? Is this a situation you'd be happy to take responsibility for? Now, I can hear you thinking, yeah, this is all good, but what's this all got to do with the economy, inflation and interest rates, Bushy? Well, the answer? Everything. Because this is exactly the equivalent that the Reserve Bank Governor and the Reserve Bank Board currently find themselves in as they try to precariously navigate the current and future flight path of our economy in constantly changing tubular times that are affected by a

plethora of dynamic global variables that are totally beyond their control. The only thing that they can use to manage our economic jumbos trajectory and to keep us flying safely without spiralling out of control or crash landing, is to base their decisions on rear view mirror pass data using only the delayed handbrake lever or ailerons of interest rates to adjust our speed, our height and our direction. If the RBA drops rates and lets the handbrake off too much, then our economic jumbo starts flying too fast and rises to dangerous heights, while if they increase rates and pull the handbrake on too hard and too fast, then the economic plane is likely to stall and start

falling out of the sky. Does this sound easy and effective to you? How would you perform and handle this enormous pressure with such limited tools at your disposal? Using another quite similar and crude analogy, it's the equivalent of being a blindfolded one-legged bomb detector in a minefield. One wrong step and it's all over. So let's apply this approach back to our current situation. Interest rates are suddenly and unexpectedly on the rapid rise. Why? Where's it all heading? What impact will it have on you? And what can you do about it? We'll answer all this after a short break. So stay with us for more. Successful property investment is a game of finance. Do you have the right team and the right game plan? Realty Talk is brought to you by

KnowHow Property. More than mortgage brokers, Bushy Martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs, tax, risk and stress while increasing your capacity for growth. KnowHow has helped over 1,900 homeowners and investors secure more than 800 million dollars in property wealth so get set to live more work less and live your legacy want to know how to invest in your freedom visit knowhowproperty.com.au welcome back well interest rates are suddenly and unexpectedly on the rapid rise so why is this where's it all heading what impacts it going to have on you and what if anything can you do about To answer these questions, let's get back to the basics so you can start to see how the entire

economic jigsaw fits together in a dynamic, interdependent fashion. Let's begin with the obvious question. Why are rates suddenly and aggressively rising? Because it's fair to say that even though I was expecting rates to rise this year from the historic lowest levels ever, I was caught by surprise at how quickly and early rates started to rise, given that I focus so closely on what the RBA Governor, Dr. Philip Lowe, actually says, rather than the fear-mongering, sensationalist scare tactics of the mainstream media. And the reason I and many others were caught by surprise is that the Reserve Bank was also caught by surprise by the sudden, unanticipated increase in the speed and altitude of the price increases and inflation that I

outlined earlier. So using the analogy that the Reserve Bank Governor is the pilot of our economic juggernaut. He and the RBA board are trying to keep the Australian jumbo flying at a steady speed with slow incremental growth in altitude by keeping inflation within what's considered to be the sustainable two to three percent range. Now remember that the RBA pilot is essentially flying blind in the dark without a current live instrument panel and is trying to forecast unseeable and uncontrollable future events while relying on looking through the review side mirror of limited historical data on inflation, employment, the economic growth rate of both the Australian economy and global financial conditions. And all of this information

is anywhere between one to six months old. And as we've all experienced in recent years, a hell of a lot can change over that time. So in simple terms, the RBA is forced to make decisions today on the second Tuesday of every month that won't really take effect for months Based on information, that's already out of date. So no wonder it's an inexact science that's difficult to get right consistently. Now, the Independent Reserve Bank is our appointed central bank whose stated and legislated primary role is to use monetary policy to set interest rates in order to achieve three main objectives.

Firstly, the stability of the Australian currency. Secondly, the maintenance of full employment. And thirdly, the economic prosperity and welfare of you and I and all the people of Australia. Now, since the early 1990s, as I've mentioned a couple of times, these objectives have found practical expression in the target for consumer price inflation of 2% to 3% per year. And the RBA's monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy. And controlling inflation also preserves the value of our money and our purchasing power. So in the long run, this is

the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy. So how do RBA adjustments in the official base cash rate influence the economy? Borrowing from some great explanations offered by The Economist, in simple terms, when central banks like our RBA raise interest rates, the impact is felt far and wide. Mortgages become more expensive, house prices may fall, and unemployment can rise. And of course, the converse is true. When the RBA drops rates, where mortgages become less expensive, house prices may increase, and unemployment can fall, as we've recently experienced in the massive response to COVID. And as we've seen splashed far and wide across the mainstream media in recent times,

when central banks like the RBA raise interest rates, it's big news. In recent weeks, we've been deluge with headlines and nightly news bulletins suggesting that rates are going to go through the roof, but the costs of borrowings and repayments skyrocketing and adding to a runaway inflation that's sending sensationalist negative ripples across the entire economy, resulting in consumer confidence falling, mortgage stress spiralling apparently, fewer jobs, lower wages, stock and property prices falling, and if they go too far too fast, tipping our economy back into the big bad, our word, a recession. It never ceases to amaze me just how much hype and rubbish keeps pumping through that system. But despite these doomsday predictions, the reality is that interest

rates only rise when our economy is actually travelling well and growing too strongly. So in a strange sort of way, a rise in interest rates is actually a very good sign that collectively we're doing very well. But I bet you won't hear that report of the news because good news just doesn't sell any advertising. So let's now drill down into why central banks lower or raise interest rates. And let's go back to the basics and spell out the bleeding obvious so that you can see how this whole economic jigsaw puzzle fits together and how it's all interlinked, intertwined and interdependent. Now, there's no surprise that there's no single interest rate in the economy. We've got multitudes of banks setting their own commercial rates, but they're all influenced

though by the interest rate that our central reserve bank sets. Now our central reserve bank is like a bank for banks so just like you and your savings account banks earn interest when they leave money with a central reserve bank and commercial banks also have these things called reserves which are a bit like their cash in hand where commercial banks lend their excess reserves to each other at an interest rate and they can also deposit their excess reserves at the central Reserve Bank. And when they do that, they can earn an interest rate on that money. So when the Central Reserve Bank raises interest rates, they're trying to control inflation, which again, is how fast prices are rising for everyone within that sustainable 2% to 3% range, preferably.

Because interest rate variations are pretty much like the only tool or lever that they have at their control to manage our economic performance, just like the handbrake or ailerons on that jumbo jet. So when inflation is seen as rising too fast and too high for too long, like the recent inflation rating of 5.1%, that's projected to increase to anywhere between 6% to 7% in the foreseeable future, then the Reserve Bank has no option but to raise interest rates. And this change spreads through the financial system and eventually slows down the rate of inflation. Here's how. A rise in interest rates from the Central Reserve Bank means that a commercial bank will earn more on their reserves.

They might make more from keeping their money in a central bank than lending it out. So if they do lend it out, they'll raise their interest rates to make it worth their while. And this can have a significant flow-on effect to individual consumers and the economy at large. So looking at home loan mortgages here in Australia,

where there are currently over 10 million homes with around about 6 million having home loans attached to them, and the majority of these are on variable interest rates, where the interest rate that you pay is actually linked indirectly to the central bank's interest rate. Now, in this situation, then, higher interest rates mean that essentially and immediately, the higher rates will translate into less cash to spend on other things.

And less spare cash means households will spend less. And less spending means businesses will be warier of raising prices, which should lower inflation. Now, currently, the average variable mortgage rate in Australia following the recent rate rise is around about 3.23% according to Finder. So as an example, an extra 1% rate rise on the national average $600,000 home loan means a bit over 4,000 a year more

in principal and interest repayments, which equates to around $340 a month or about $78 a week. Now on this basis, for every 0.1% increase in interest rates, repayments on the average home loan increase by just under $8 a week or $34 per calendar month,

which equates to just over $405 a year. Now, these are post-tax dollars. So if you earn $100,000 and hence pay an average tax rate of about 25%, a 1% increase in interest rates is like taking a $5,500 pay cut. So how high are interest rates likely to increase? Before we dive into this, let's have a look at what interest rates have looked like historically. Because according to trading economics figures, The RBA's official base cash rate in Australia averaged about 3.88% from 1990 until 2022,

reaching an all-time high of about 17.5% in January of 1990 and a record low of 0.1% that we've been enjoying that came into play in November 2020. And with the RBA's official cash rate generally being around about 2% lower than the discounted variable home loan rates that are being offered by the major banks, this means that the average discounted variable rate over the last 30 years has been around about 5.88%. So against this long-term average backdrop, and assuming that the banks will continue to pass on the full RBA rate increases, then the 0.75% increase in the RBA cash rate over the last two months up to the current level of about 0.85% is resulting in an average 2.85% discounted variable loan. And these rates increases are really just a blip on

horizon when you look at it in the context of long-term history. And while this has been the first back-to-back rate hike in over 12 years, the RBA now rightly considers that the huge monetary support offered during the pandemic is no longer needed amid the strength of the economy and the current inflation pressures. In addition, the labour market's strong as employment has grown and the jobless rate is at its lowest level in nearly 50 years. And the RBA has warned that further tightening is in the pipeline with its size and timing being guided by incoming data

and the board's view of the outlook for inflation and the labour market. The RBA has reiterated that it's now committed to doing what's necessary to ensure that inflation returns to target while paying attention to the global outlook, which stays clouded by the war in Ukraine and its effect on prices of energy and commodities. In this respect, the RBA Governor Philip Lowe has recently said that the central bank expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead, as inflation in Australia has increased significantly. And while inflation is lower than in most other advanced economies, it's higher

than earlier expected. So depending on who you're listening to, inflation is likely to peak somewhere between six and seven percent in the foreseeable future before it starts to track back down. So how high are interest rates likely to go in order to curb inflation back to that target range? Well, how good's your crystal ball? The truth is that no one knows because there are way too many dynamic variables at play and too many unknown and uncontrollable conditions, both positive and negative that are likely to impact on inflation in the months ahead and the Reserve Bank will be reviewing these things very closely on a month-by-month basis. It's worth stressing here that the RBA has repeatedly made it clear that it will only do

the minimum that it has to do in order to keep inflation at bay and to return the cash rate to a more normal setting now that the artificial and abnormal COVID threat has largely passed. and Dr Lowe's actual language is important here as he's alluded to no further need for the extraordinary economic support that was introduced in 2020 suggesting that the RBA board wanted to shift the cash rate closer to neutral as soon as possible intimating that at this stage a two and a half percent official cash rate is close to neutral but remember that given the multitude of disparate economic variables at play, everyone, including the RBA governor, are just making calculated guesstimates based on lagging historic data. Now, as a benchmark, the average existing

under-occupied variable home loan rate in April 2022, prior to the first recent cash rate hike, was about 2.89% according to the RBA figures. And depending on which bank economist guesstimate you rely on, the RBA's base cash rate is likely to rise from its lowest ever level of 0.1% during COVID up to around 2% by the end of the year and peaking around the 2.35% to 2.6% level in mid-2023 before potentially dropping the cash rate again as an anti-recessionary measure as the economy slows down and cools. But how long is a piece of string? Because we need to remember that history tells us that once the inflation genie's out of the bottle, it's hard to put back and it's challenging to stabilise as the momentum starts to oscillate with the delayed waves of supply,

demand and perception created through swings in credit, cash and confidence as the RBA attempts to use the blunt handbrake instrument of interest rates to stabilise and steady the flight of our economic jumbo via a series of over and under rate corrections. This means that in the short term, discounted variable rates are likely to increase by a total of about 1.9% from April's pre-rise discounted variable average of the 2.89% up to about 4.79% by the end of the year and increase a total of 2.25% to 2.5% from the onset of rate rises to the peak by the middle of next year when the cash rate may well start dropping again. So on the average $600,000 owner-occupied principal interest variable home loan, a 1.9% total rate increase by the end of the year

will increase repayments by about $646 a month or $150 a week, with additional monthly repayments increasing between $765 and $850 to the peak rate increase of between 2.25% and 2.5%, which is equivalent to weekly increases of somewhere between $175 and $196. dollars. So it's obvious that higher interest rates mean that mortgages are going to become more expensive. And if this is affecting all new buyers, then house prices may begin to fall as repayment affordability drops alongside the corresponding drop in buying capacity, where on an average loan, a 1% increase in rates also drops buying capacity or the amount that you're able to borrow by roughly $100,000. And the overall softening in average property values, which

will get blown out of all proportion by the media to keep us fearful, will make everyone who owns a home feel poorer. And therefore, we're likely to spend less. And lower spending will translate into lower inflation. And it's not just consumers like you and I who will tighten their purse strings. Because when interest rates rise, then businesses will find it more expensive to borrow and invest. This generally means less economic activity, which might mean fewer jobs are created and wages start to flatline or decline and fewer jobs and lower wages could mean less money for households which means the consumer confidence might suffer which also means less spending and if people are grappling with a decline in real wages meaning their money buys less

when interest rates rise that will tend to slow down spending and investment and generally depress economic activity. Overall that will make businesses more reluctant to raise their prices and that will tend to pull back inflation this is the credit cash and confidence connection in action increased interest rates mean higher credit costs which means less cash to spend which lowers our confidence and of course the reverse is also true so the RBA is understandably expecting that their policy of running hard and fast early to raise rates will curb inflation quickly given that the average Australian is now more highly leveraged and indebted than ever before. So the RBA will be hoping that pulling on the interest rate handbrake in a short and sharp burst will calm

the inflation jets. But will it? Well, I'm going to dive into that question after a short break. So stay with us for more. Property depreciation is the natural wear and tear of a building and its assets. Property investors can claim depreciation as a tax deduction each financial year. Depreciation is a non-cash deduction. This means you don't need to spend any money in order to claim it. On average, BMT tax depreciation find residential investors almost $9,000 in first full financial year deductions. Call BMT on 1300 728 726 today for an obligation free quote. Welcome back to our deep dive on inflation, interest rates and their impacts. Now, the RBA is understandably expecting that their policy

of running hard and fast early to raise rates in the short to medium term will curb inflation quickly, given that the average Australian is now more highly leveraged and indebted than ever before. So the RBA will be hoping that pulling on the interest rate handbrake in a short and sharp burst is going to calm the inflation jets. But will it? Because according to the mortgage professional Australia, the proportion of fixed mortgages skyrocketed beginning in June 2020, with more than a third of new mortgages locked in for two to three years at historically low rates, as reported in The Australian. Fixed rate mortgages jumped from a historical average of around about 15% of home loans to nearly half of all mortgages at the peak of the fixing boom in

the 12 months from mid-2020, according to industry analysis. So it's worth noting here that whereas the majority of home loans were variable prior to COVID, rapid interest rate reductions and special offerings of low rate loans by the RBA to the banks meant that many Australian home loan borrowers have taken advantage of very cheap and low rate two to three year fixed loans that were substantially and unusually cheaper than variable rates. That will in turn insulate them from the impacts of rate rises in the short to medium term until the fixed rates start to expire en masse in one to two years' time. So in the interim, the Reserve Bank's move to increase rates may not have the reduced and curb level of spending and confidence impacts that they're expecting.

And the other interesting thing about our current situation is that interest rates generally only have an effect on the demand side of the supply and demand equation, but it's currently external extraordinary supply side shocks that are actually outside of the RBAs or anyone else's control that are the main contributors to the sharp growth in inflation currently. For example, the unforeseen situations that have arisen in the Ukraine and now China. Now, I can hear you thinking, what do either of these remote situations have to do with inflation in Australia? The answer again, everything. Russia's or should we say Putin's inexcusable attack on the Ukraine has led to the most of the world imposing significant

trade sanctions on Russia. Now, Russia actually contributes roughly 36% of the European Union's total gas demand, and the EU has depended on Russian gas for about 45% of its imports and about 40% of its consumption. The sanctions mean that this supply has been turned off. And to replace all Russian pipeline gas with liquid natural gas or LNG, Europe needs to acquire more than 53% of the global NNG trade according to the Columbia Climate School. Now Europe's energy reliance on Russia particularly for gas, coal, oil and petroleum has created major supply squeezes and a corresponding jump in energy costs and as energy and fuel are the lifeblood of both manufacturing as well as transport

significant shortages have limited the production and export of goods and cost for just about everything have jumped up substantially as a result. Now, this has created a global energy crisis of unprecedented levels alongside a rapid increase in transport costs and commodity prices. Now, similarly in China, which has become the world's major manufacturing and supply hub, recent zero-tolerance COVID lockdown measures have seen manufacturing and production grind to a halt alongside massive drops in Chinese consumption, resulting in supply shortages in just about everything and the cost of goods increasing substantially right across the world.

And on the local front, the recent spate of major damaging floods that have been experienced along the eastern seaboard has damaged, limited and reduced production, particularly for energy and foodstuffs. So these unexpected and unforeseen abnormal events have seriously spiked prices and sharply increased inflation. This combination of local and global abnormal events or supply-side economic shocks

have combined to create the perfect storm for inflation, unusual occurrences that no one could have foreseen. So it's going to be interesting to see what impact the RBA's move to increase rates and dampen demand will have on curbing inflation when it's actually external supply-side shocks that are creating most of the issues but one thing's for sure the media's relentless fear factor sensationalism around the Ukraine China inflation and interest rates will do a lot of the dampening work for the ABA as collective confidence falters and the masses start sitting

tight on the sidelines and doing nothing due to doubt but the good news is that the Ukraine war and the Chinese COVID lockdowns are likely to be temporary and relatively short-lived hopefully providing that they can be resolved in the short to medium term and average property values have already started softening in Sydney and Melbourne due to affordability constraints where 40% of our population and the majority of the press and our decision makers reside and growth has been slowing across the country prior to May's first interest rate rise. Now recent trade GDP figures and wages data also point to slow levels of growth at pre-pandemic levels. So this combination of temporary and underlying factors suggests that the RBA's current move to pull on the interest

rate handbrake hard and fast early, allowing for the three to six month delay in effects that it causes, will only have to be relatively short-lived. And to prevent our economic jumbo jet from stalling too quickly and falling into potential recessionary conditions, the RBA is just as likely to start dropping interest rates again in 12 to 18 months time as the momentum of alternating speed wobbles and seesaws takes time and a series of over-corrections and under-corrections to dissipate. So what does all this mean to you, your finances and property and what and should you be doing about it? Well let's start with the subject of rising rates. What if anything do you need to do as rates rise by anywhere between 1.9% up to about 2.5% over the next 12 months?

Well, the answer is always, it depends. It depends on your situation and your risk appetite. Because as I've said many times before, I'm always a believer in planning for the worst and then expecting the best. The first thing that I ask that you all do is to stop reading the newspaper and stop listening to the TV or online news so that you turn off the deluge of ill-founded and over-inflated negative noise. Now, I did this personally about 25 years ago and I've never felt better. Now, if you're a current homeowner, start by finding out exactly what increased rates will do to your repayments to ensure that you can afford them. And make sure you're ahead in your repayments or have a healthy three to six month rainy day savings buffer in

your offset account to cover any tight periods, which most Australians have actually done over the last couple of years. And a big mass of Australians are actually well ahead on their home loan repayments. Now, if you're looking to minimise your home loan repayments, I'd suggest sticking with discounted variable rates. So either ring your current bank and ask for a rate reduction by quoting a lower rate from another lender, or make sure you talk to a savvy mortgage broker as soon as possible to ensure that you've got the lowest cost loan

as our finance broking team is now saving many borrowers anywhere between about $400 to $1,200 a month simply by refinancing and restructuring. If you're a home borrower who can't deal with uncertainty and wants certainty repayments, then I suggest not fixing your whole home loan because fixed rates are now much higher than variable rates but consider splitting your loan by fixing part of your loan but leave an amount variable so that your offset account still operates

and you're still able to make extra repayments as most offset accounts cease to work when you fix the rate. And if you're one of the few who has been able to take advantage of the recent government loan assistance scheme to secure a property with a very low deposit, tread very carefully and make sure you don't lose your job, as the softening property values may mean that you end up in a negative equity position for a period where the value of your property may be worth less than your loan. So you may like to consider taking out income protection insurance or mortgage insurance that actually protects you. If you're a renter who's looking to become a potential home buyer, start paying notional rent at the level of a higher mortgage with the extra going into savings

to ensure that you'll be comfortable affording the increased repayments when you actually buy a home, and at the same time, you're increasing your deposit. And if you're a property seller, you either need to move quickly or leave it for a period before property values climb again. But if you bought your property some years ago, you're still likely to realise considerably more equity than the price that you originally paid for the property. And finally, if you're a property investor, make sure you reach out to a savvy mortgage broker to ensure that your loan structure on loan costs to minimise while preserving your maximum tax deductibility and your maximum borrower capacity with minimum risk. Because as a contrarian, times of change like these

create the best property opportunities. And a small window is opening up now that smart property buyers can actually take advantage of. Property price growth is softening, plateauing and starting to fall in some areas around the country, which is normal after the recent period of the sharp growth of anywhere between 20% to 30% in recent times, against the long-term national average of about 6.8% annual capital growth that's been experienced over about the last 30 years. And given the property values in an area generally follow an S-curve growth cycle over 15 years or more, with two to five years of strong growth followed by a 5% to 10% price reduction before plateauing, it's expected that A-grade properties will hold their value, but property prices for

B-grade properties in B-grade locations will be flat and potentially declining. And it's important to remember that while the COVID catalyst of big stimulus, money printing and low rates has thrown petrol on the fire for property where the tide has floated all property ships nationally, this artificial honeymoon is now well and truly over and we're now returning to more normal conditions, with every region and area's growth cycle acting independently and out of sync with each other. So a flight to quality properties and a borderless approach to identify growth areas will now be more important than ever for long-term buy and hold investors. And if you're serious about this, don't go it alone. Engage a data-rich buyers agent who's got boots on the ground

in identified locations. It'll be the best investment that you'll ever make. it's also important to emphasize that if you're investing for the long term and you're holding properties for 15 years or more which I strongly suggest that you do then you don't need to worry about picking property tops and bottoms because this time horizon will mean that a property in a tightly held area will go through a complete growth cycle over this time but if your time horizon is 10 years or less and you need to actively grow your nest egg significantly then you may have to adopt a much more active investing approach through things like renovation, subdivision or property development strategies to actually manufacture equity

but make sure you are fully aware of the considerable risks and surround yourself with proven independent professionals who can guide you through with this. Now let me return to the emerging small window of opportunity for smart buyers. As rates rise, borrowing capacity and purchase price power reduces and property values generally soften further. So for a short period of time, smart property buyers will be able to secure properties on better terms as rates rise before the consequent reduced buying capacity prevents them from doing so. So the key here is not to leave it too long, because the best time to invest in property is actually every time you can, while the majority sit on the fear fence and do nothing.

And with the current rental squeeze putting significant pressure on rising rents, then the cash flow affordability of holding property is actually improving. Because if the experts are right and the current spate of interest rate rises is only a short-term inflation curbing phenomenon and the RBA then ends up reducing rates again in the latter part of next year or early the following,

on top of the growing impact of reduced housing supply from construction downturns, together with the positive upward property price and rental pressure caused by opening up borders to potentially hundreds of thousands of migrants moving forward, then the next few months will be a great time to secure a property in advance of the next growth period in some areas. So in summary, to curb short-term inflationary price rise pressures and to return to more normal and neutral interest rate settings so that our economic

jumbo jet corrects back to a stable speed and altitude, interest rates are likely to rise from the lowest level in our history by between 1.9% to 2.5% over the next 12 months or so before potentially going down again without restricting most of our lifestyle significantly. Now, this may further soften and flatten property price growth in some locations with many higher priced areas potentially coming back in value somewhere between 5% to 10%, 10%, but rents are likely to continue to increase. So stop listening to the mainstream media, ensure you have a rainy day reserve, renegotiate or refinance your property loans to reduce cost, risk, and to optimize your capacity. Stick to low cost discounted variable lines if possible,

and take advantage of the current small window to secure quality properties using a long-term term borderless approach on better terms now before reducing buying capacities prevent you from doing so. And then you'll be ready for the next growth cycle in a couple of years time as the floodgates of overseas migration creates further housing supply and pricing pressures and potentially rates start reducing again. That's more food for thought. I'm Bushy Martin from Know How Property Finance. Stay tuned for more. Property deductions can save you thousands of dollars each year. To make sure you maximise deductions, you need to work with the most experienced quantity surveyor in the country. BMT Tax Depreciation is the leading specialist

in the industry. They've completed over 700,000 tax deduction schedules for residential investment and commercial properties Australia-wide. BMT guarantee to find double your fee in the first full financial year deductions. Call BMT on 1300 728 726 today for an obligation free quote. Well, that brings to a close our special repeat performance by Bushy of his deep dive into inflation, interest rates and their impact on you and I. You can make sure that you don't miss a single episode of Realty Talk by subscribing now at our subscribe page, which is on the website. or you can do it on Apple Podcasts, Google Podcasts, Spotify, YouTube or wherever you listen. And when you do subscribe, you're going to receive a free copy of Bushy's book. It's great. It's called Get Invested. Realty Talk is produced exclusively for Realty.com.au and Realty Media

Group. You can find your next property at Realty.com.au. In fact, they feature listings from over 60,000 agents all over Australia. We'd also like to take the opportunity to thank BMT Tax Depreciation for their ongoing support. So join Bushy Martin from Know How Property Finance right here again next week and make sure you look out for his podcast as well. I'm Kevin Turner.

Thanks for being with us. Miss something in this week's show or want to catch up on past shows? Do it anytime at realty.com.au where we connect buyers, sellers and agents differently.