The Australian share market had a fast start to 2023, with the All-Ordinaries index gaining 6.4% for the month of January (closing at 7,686.1 points). The Australian Dollar was also strengthened by 4.3%, with 1 Australian Dollar buying 70.59 United States cents.
The Reserve Bank of Australia (RBA) Board did not meet in January, however with Australian inflation tracking at 7.8% for the year to December 2022, market expectations are that the official Cash Rate will be increased from 3.10% per annum when the RBA Board meet next week.
Global share markets returns were stronger in January, with the United States Dow Jones Index gaining 2.8%, the London FTSE gaining 4.3%, the Japan Nikkei 225 gaining 4.7%, and the Hong Kong Hang Seng Index gaining 10.4%.
With interest rates rising dramatically last year, and as I wrote last month with the property market experiencing declines, many are questioning what will be the outcome for property values this year.
The chart below shows the relationship between average house prices across the country and mortgage rates over the past decade.
Source: Tradingeconomics.com
As can be seen in the chart above, historically there has been a strong “inverse relationship” between house prices and mortgage rates. In other words, as mortgage rates came down, house prices increased sharply.
Now that mortgage rates have increased sharply, we are seeing early evidence of sharp falls in house prices. Added to the fact that we have never seen mortgage interest rates as low as they were this time last year, and mortgage rates are now back to the level not seen for a decade, it certainly will be interesting to see how this plays out.
I wrote last month that I expect the RBA will need to “pivot” and cut interest rates at some stage. While it will not be this month (as the December inflation figure was higher than forecast), I hope that the RBA don’t wait too long before making a move – otherwise inflation largely due to “global supply constraints” could be the least of our concerns.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation, and investment objectives.