2022 was a year of turbulence. With the war in Ukraine sparking a global energy crisis, our Reserve Bank raising interest rates to their highest levels in decades, and lettuce somehow costing more than some street drugs, we were all watching our wallets and wondering where it was going to end up.
Now that we’re into the bright and shiny year of 2023, those factors are still very much with us. But just how far this cost of living crisis and economic unrest will go over the next 12 months is still a little hazy.
Inflation is still the driving factor in the cost of living crisis, with the price of virtually everything soaring. As the government and the RBA grapple to get it under control, there are policy interventions that may help people weather the storm. But how long it keeps raining for will again depend on global, environmental, and individual factors, which are all very hard to map economically.
So, here’s what the financial forecast looks like between now and next year, and precisely how much financial anxiety you should be feeling.
Will the Housing Market Collapse?
One of the key themes of last year was the RBA squeezing mortgage holders, which many warned could lead to serious knock-on effects in the housing market.
Even if you’re not a homeowner, a collapse in the housing market would have a devastating impact on the economy, as the value of property in Australia is three times that of collective superannuation and more than three times that of the Australian stock exchange.
We’ve already seen a sizeable slide in house prices, which have declined in most major cities at their fastest rate in nearly 15 years. Last year, Sydney saw a drop of 12.1% while Melbourne experienced an 8.1% decline, according to the latest figures from CoreLogic.
Understandably, people are worried, trapped between the rock of rising mortgage payments and the hard place of selling their house for less than they paid for it. This is, however, after the housing market surged 28.6% during the pandemic, meaning house prices are still above pre-pandemic levels in most areas. Melbourne is the only capital city that is expected to lose all of its pandemic gains in house price value during the current downturn, which CoreLogic reckons will happen in February.
Experts have also said that these steep price drops may not carry on for the remainder of the year. According to Bloomberg, house prices should begin to pick up again around June.
“The lagged effect of rate hikes — including the one we expect in February — should continue to weigh on the market. We expect house prices to trough in mid-2023, once the RBA pauses its tightening cycle,” Bloomberg economist James McIntyre has said.
As above, the RBA is expected to raise interest rates once again, possibly for the final time in this cycle, in February. Interest rates are then expected to remain at their historic highs for at least the next year after that. While this may ease up the continued spiral of house prices, it’s not going to have any inflationary effects, meaning house prices are likely to stagnate during this time.
AMP Capital chief economist Shane Oliver has said that rising interest rates take around three-to-four months to flow through to the housing market, as people on fixed-term mortgages have to renew for higher-cost repayments.
“As a result of these demand and supply side considerations flowing from higher interest rates, we continue to expect national home prices will have a top to bottom fall of 15-to-20% out to around the September quarter,” he told the ABC.
“With prices already down by about 8% from their high, this implies another 9% or so fall yet to come.”
The careful balancing act that the RBA has to perform is raising interest rates to stem inflation while at the same time not pushing them too high and triggering a recession. Doing so could see house prices drop by 30%, although experts believe this is unlikely to happen.
Will the Cost of Living Crisis Ease Up?
As above, the RBA is expected to stop raising interest rates after a final hike in February, and could begin to cut them by the end of this year or early next year. This will only happen if economic signals, like the rate of employment, remain stable. If joblessness started to spike, the RBA would respond by quickly cutting interest rates back down again.
Already, we’re seeing good signs, with last month’s inflation figures indicating that inflation may have peaked and could be heading downwards. Australia entered 2023 with an inflation rate of 7.3%, up 1.8% in the final quarter but slowing in the last months. This is a good sign that the economy could be beginning to stabilise and will give an incentive for the RBA to ease up on the interest rate button.
Interest rates, however, are not the only thing that sparked the cost of living crisis. The war in Ukraine, the energy crisis, and the rising cost of employment have all sent prices skyward. Not to mention the repeated natural disasters that wrecked our agricultural sector last year. Many of these things have not been corrected, although the government is stepping in to try and steady the ship.
In the October budget, the government introduced a range of cost-of-living measures which have now come into effect as of January 1. These include cheaper medicines under the PBS, which will see maximum co-payments drop from $42.50 to $30. Aged care providers have been barred from charging fees like ‘exit’ payments, subcontracting fees, and cannot charge more than 20% of their in-house fees for outpatient care.
In addition, Youth Allowance, Austudy, Abstudy, disability support pensions, and carer payments are set to rise, indexed to the cost of inflation. Income thresholds to apply for these programmes have also been update to reflect inflationary pressures.
Finally, the government passed a range of energy bill reforms that it says will save Australian households and businesses $1.5 billion over the next year.
Will Australia’s Energy Market Sort Itself Out?
While these measures will likely have some effect, the rising cost of energy bills is likely to make things harder and push inflation higher. Although economists are predicting that inflation will start to drop off soon, it all depends on how we spend over the next few months and some out-of-our-hands factors, like energy bills and food, could push that spending higher.
Canstar data shows that rising bills are one of the biggest concerns when it comes to cost of living pressures, and that most expect these to continue through 2023, with the RBA unable to keep a hold of inflation. Many are saving and cutting back in order to buffer themselves from these costs.
“Most Australians have come to realise that the days of ballooning wealth from rising property prices and rampant discretionary spending, both courtesy of low-interest rates and inflation, are behind them for now,” Canstar finance expert Steve Mickenbecker has said.
“We are living in an alien era of austerity that was owned by prior generations.”
Energy bills are expected to rise by 36%, according to Treasury modelling, over the next 12-18 months, due to faltering coal-fired infrastructure that’s too old to be running in 2023 and no viable alternatives for energy generation.
This is why the government passed their energy price cap Bill at the end of last year, which locks power sales in at $12 per gigajoule from producers. The Treasury estimates this will see energy bills rise by “only” 23%, saving each household $230 compared to doing nothing. This policy is only designed to remain in place for 12 months, by which point the government is hoping the war in Ukraine will have ended and global energy prices will have returned to normal.
Outside of the global factors, Australia is not likely to see cheap energy return for at least another few years until more renewable energy generators can be moved into the grid to fill the gaps of the failing coal-fired stations.
“A real decrease (which takes inflation into account) is pretty unlikely for a few more years yet,” Associate Professor Liam Wagner told 9News.
“I think that if all governments move quickly enough, we will see a tapering off in growth and prices, but I still think it’d be a growth in prices.
“You would see a significant drop in price on the wholesale market (by) injecting more renewables into the grid. It’s not happening quickly enough. It should have happened 15 years ago. I’ve been shouting at the top of my lungs, I’ve been blue in the face for the last 15 years.”
So, until we can generate cheaper energy via renewables, or there is serious government intervention beyond what we’ve already seen, we’re expecting that energy bills will continue to rise.
While the future looks fairly uncertain, 2023 could very well be as bumpy as 2022. However, the economic forecast does seem to be pointing towards a clearing up by the midpoint of this year. That’s if we don’t accidentally plunge ourselves into a recession first.