Rate Hikes Weigh on Housing and Households as Share Markets Hold Firm

Inflation is still elevated, house prices are falling, and consumer confidence has slumped. Bond yields, meanwhile, are near multi-year highs. Yet share markets have held up. Here is the wrap.

Key Takeaways

• Inflation stayed high. August CPI rose to 4.0%, driven by housing and fuel, while underlying inflation held at 3.6%, still above the RBA’s target.

• House prices kept falling. National values fell 1.1% in September according to Cotality’s Home Value Index, the sixth straight monthly decline, leaving them about 5.2% below their March peak.

• Consumer confidence slumped. Westpac’s Consumer Sentiment Index fell 4.7% to 80.4 after last week’s rate hike, with sentiment now at its lowest since the early-1990s recession.

• Bond yields are near multi-year highs. Australia’s 10-year yield is around 5.4% and the US equivalent, near 5.3%, is at its highest since 2007.

• But share markets held firm. The ASX and Wall Street have stayed near recent highs despite the gloom, a notable divergence between bonds and shares.

Inflation Held at 4.0% in August

Australian inflation continues to run hot and remains among the highest in large developed economies. August’s figures, released just after the RBA’s rate hike, showed annual inflation at 4.0%, up from 3.5% the month before. Housing input costs and fuel did most of the work: housing costs rose 5.7% over the year on higher new-build and electricity prices, while petrol jumped as global oil prices climbed. Underlying inflation, the RBA’s preferred measure, held steady at 3.6%, still above the 2–3% target band. In short, the data did little to suggest the inflation problem is behind us, which is why the RBA has kept lifting rates.

House Prices Fell for a Sixth Straight Month

The higher rates are increasingly visible in the housing market. National home values fell 1.1% in September, according to Cotality, the sixth straight monthly decline, leaving values about 5.2% below their March peak. Every capital city except Darwin fell, with Brisbane (down 1.5%) and Sydney (down 1.4%) the weakest. The drivers are familiar: rising interest rates, stretched affordability and softer buyer demand as confidence weakens.

Consumer Confidence Slumps to Recession-Era Lows

Households, unsurprisingly, are feeling the strain. This week’s Westpac–Melbourne Institute consumer sentiment survey fell 4.7% to 80.4 in October, firmly in pessimistic territory. Confidence dropped to levels last seen in the early-1990s recession. With the cash rate at its highest since 2011 and petrol back above $2.30 a litre, more than 80% of consumers now expect mortgage rates to rise further. It is a reminder that the tightening cycle, while aimed at inflation, may soon start showing up in the consumer spending data.

Bond Yields Climb, Yet Share Markets Hold Firm

In markets, the standout has been the gap between bonds and shares. Government bond yields have pushed to multi-year highs. Australia’s 10-year is around 5.4%, and the US equivalent, near 5.25%, is at its highest since 2007.

Why Shares Are Shrugging Off Higher Yields

Normally, yields that high would weigh on share prices, especially in rate-sensitive sectors. Yet equities have been resilient: the ASX 200 has strung together several gains, Wall Street is near record highs, and even listed property has bounced this week. For income-focused investors, at least, there is a silver lining: cash and bonds are offering their highest yields in years.

Looking Ahead

Attention now turns to whether the RBA has more work to do later this year as it digests the incoming data over the next month. Globally, elevated bond yields and how long share markets can keep shrugging them off remain the key things to watch, with oil and the Middle East still in the background.

Key Dates to Watch

• NAB business survey — next week: A read on how firms are faring, after business conditions recently turned negative for the first time in six years.

• RBA minutes — next week: Will be watched closely for any indication of the RBA’s thinking and potential catalysts for further hikes.

• Australian unemployment rate — next week: If unemployment remains low, it gives the RBA further scope to continue hiking rates.

• Bond yields & global markets — ongoing: Whether equities can keep shrugging off multi-year-high yields remains the key tension.

• Oil & the Middle East — ongoing: Still feeding into fuel prices and the inflation outlook.