Politics – Page 2 – Digital Finance Analytics (DFA) Blog

“Transitory” Inflation Is Back, Baby…

Overnight we got the latest decision from the US Federal Open Market Committee keeping its benchmark federal funds rate steady for the second straight meeting, in a target range of 4.25%-4.5%.

But in the subsequent press conference, where Fed Chair Jerome Powell seemed to be tip-toeing through a potential minefield, he said the committee had down forecast growth, increased inflation expectations, and said the full impact of tariffs had yet to work though. And while the FOMC did slow the pace of balance-sheet runoff — their updated forecasts and dot plot betrayed little concern about the growth scare that has gripped markets. More rate cuts are expected, perhaps two though the year, despite the higher inflation and lower growth.

Significantly though he dusted off the old “transitory” moniker again, which you will recall was used through the early phase of the strong inflationary pulse we saw post COVID. It was then dispatched to the dustbin of stupid and unhelpful terms, that is until it was resurrected in the press conference. Seeing as they got it so wrong last time, was it wise to do that, as I am not sure it will help their credibility this time around.

Incidentally, because the Fed will also start shrinking its balance sheet at a slower pace starting in April, meaning it will reduce the amount of bond holdings it lets roll off every month that is a quasi rate cut, without being a rate cut. Again, this is engineering a watch and wait period, for the FED, and perhaps the possibility of the real rate cut will be clearer by the Northern Summer.

So this was a do not harm press conference, but I suspect despite wanting to calm the markets, and avoid tripping over Trump, the truth is the data-dependent FED is itself unsure of future trajectory. Which may not bode well for the rest of us!

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Are Investors The Reason Home Prices Are Rising Into Unaffordability?

The trends are clear, in many western countries around the world, home prices have been rising, and in recent years rising fast. The underlying drivers are the freeing up of mortgage markets, and lower interest rates, allowing more people to borrow more, which is why debt has been rising too. As you know I have long argued the rise in home prices to stupid levels is all due to the deregulation of the financial system, driven by neo-liberal thinking which leaves ordinary people in the dust. Greater debt driven demand lifts prices.

Of course, the Government is fixated on the supply side story. And we can expect they will peddle this hard into the election. The government’s housing policies include 1.2 million new homes built by mid-2029, a $9.3 billion agreement with states and territories to support social housing and homelessness services, a scheme to help 40,000 households purchase a new or existing home, and tax incentives to support investment in new build-to-rent developments. One of those latter tax incentives includes increasing the capital works tax discount depreciation rate from 2.5 per cent to four per cent.

The other factor in play is high migration, another demand driver, with another 2 million people expected to land in the country over the next few years. This was subject to interesting questioning from Senator Bragg in Estimates recently. Astonishingly, Treasury has not considered the impact of high migration on housing demand (and implicitly) price.

But what of the tax breaks for investors? Well according to a new report from Australian Council of Social Service (ACOSS), Two tax breaks are “disproportionately” benefiting Australia’s richest while simultaneously fuelling the housing affordability crisis. The report criticises the capital gains tax deduction for property, where only 50 per cent of capital gains made from an asset are taxed when it is sold, and negative gearing, which allows investment expenses to be deducted from income.

ACOSS says the wealthiest 10% of households own two-thirds of all investment properties and are receiving 82% of the $16 billion in tax relief the two breaks provide.

While I absolutely agree the investor tax breaks are part of the problem, unless we address too high migration, control unsustainable lending growth, and also work on building enough new homes to meet new demand, the affordability situation will continue to deteriorate.

As a result, many will choose to leverage up just to get into the market and out of the rental sector. Government policy is at fault here. And they appear to be avoiding the elephants in the room. Address too high migration, and control unsustainable lending growth.

I wonder if this is because many politicians are also property investors?

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Some Green Shoots Midst The Gloom?

The narrative has turned quite negative recently despite the first rate cut in years, thanks to cash flow pressures, the overhang of poor housing affordability, high migration and the tariff wars coming from the US. And yet, if you look closely, there might just be some signs of green shoots. But then you need to ask, is this signal, or noise?

For example, the latest Westpac-Melbourne Institute sentiment bulletin, released today reported a solid 4% rise in March, lifting to 95.9 from 92.2 in February which we note though is still in negative territory, as the survey detail shows the score is still 4% off the ‘neutral’ level of 100, where there are the same number of optimists as pessimists.

The latest ANZ-Roy Morgan Consumer Confidence data showed that Australian Consumer Confidence fell 2.9pts over the past fortnight but is still 1.8pts higher than before the RBA cut the cash rate.

Elsewhere, after last months SQM Research released data showing that the national vacancy rate fell to just 1.0% in January 2025, down 0.1% year-on-year SQM Research’s latest rental vacancy report shows that the national vacancy rate rose to 1.3% in February, to be 0.3% higher annually. Capital city asking rents also rose by 0.4% over the month. SQM Research managing director Louis Christopher was surprised by the result and expects the vacancy rate to tighten in March. He also believes the “country remains in a rental crisis”.

And according to CoreLogic, The rolling 12-month change in national rental values has continued to slow, with rents up 4.1% over the year to February, down from an 8.3% increase seen over the year to March 2024.

So is this signal or noise?

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