Property market to flourish in spring selling season | Close of Business

Key Concepts:

• RBA's decision to hold interest rates
• Inflation and unemployment data
• Property market trends and affordability constraints
• Global minimum tax deal and its implications for Australia
• Illicit tobacco trade and government revenue
• Quarterly CPI and market expectations
• Macquarie's first strike against its pay report
• Event risks in the financial market
• Superannuation access for First Nations people

1. RBA's Interest Rate Decision and Economic Outlook

• The Reserve Bank of Australia (RBA) surprised markets by not cutting interest rates in July.
• RBA Governor Michelle Bullock indicated that future rate cuts are contingent on further declines in inflation.
• Bullock defended the RBA's decision despite unemployment reaching a 4-year high, stating that monthly unemployment numbers fluctuate and forward-looking indicators don't suggest a significant downturn in the job market.
• She expressed optimism about improved monthly CPI data to be released later in the year.
• Economists are largely forecasting a rate cut in the following month if inflation continues to ease.
• The big four banks are expecting further cuts in November and February, potentially bringing the cash rate down to 3.10%.
• The RBA is closely monitoring global shocks and the independence of the US Federal Reserve.

2. Property Market Dynamics

• Sydney's median house price reached a new record of $1.7 million, with strong growth in most capital cities except CRA and Darwin.
• Eliza Owen from Totality attributes the property market's strength to the two rate cuts already implemented and the expectation of more to come.
• Constrained supply, including lower dwelling approvals and new listings, is also driving prices higher. Total stock levels are almost 20% lower than usual for this time of year.
• Sellers may be waiting for the spring selling season, further rate cuts, and more price growth before listing their properties.
• Increased stock and potential rate cuts are expected to push prices higher due to increased borrowing capacity.
• Affordability constraints remain a significant issue, with a large gap between typical incomes and median dwelling values.
  • The median household income is $100,000 per year.
  • An affordable purchase price is around $560,000.
  • The median dwelling value is closer to $860,000.
• Houses are performing slightly better than units due to higher incomes among house buyers and supply constraints.
• The construction space faces challenges with labor and material constraints, leading to lower dwelling approvals.

3. Global Minimum Tax Deal

• A global minimum tax deal aimed at stopping a "race to the bottom" on corporate tax rates has faced setbacks.
• The G7 agreed to exempt US companies from the rules, potentially giving them a competitive advantage.
• Australia will no longer be able to apply a top-up tax on US-based multinationals operating locally if they pay less than 15%.
• The global minimum tax was expected to increase Australia's tax receipts by $370 million over 5 years.
• Australian startups are questioning the value of staying local due to these changes.
• Experts suggest Australia should work within the new UN tax convention to address tax avoidance and evasion.
• The UN tax convention will require a two-thirds majority for substantive matters, preventing individual countries from blocking it.
• The convention will initially focus on taxes on cross-border services, potentially capturing tech companies.

4. Illicit Tobacco Trade

• The illegal tobacco trade is growing in Australia, fueled by high tobacco excise rates.
• In 2023, illicit cigarettes made up an estimated 28% of the total tobacco trade, leading to a decline in government revenue from $16.3 billion in 2019 to $7.4 billion.
• Some argue for lowering the tobacco excise, while others advocate for better compliance and enforcement.
• Professor Becky Freeman argues that lowering the excise would reward retailers who flout the law and undermine public health gains.
• She suggests reducing the number of outlets selling tobacco and increasing fines for businesses and landlords involved in the illicit trade.
• The government has allocated $350 million to tackle the black market and appointed an illicit tobacco and e-cigarette commissioner.
• New tobacco laws in New South Wales and Victoria require retailers and wholesalers to hold a license to sell tobacco.
• There is a call for making nicotine replacement therapies more accessible to help smokers quit.

5. Market Analysis and Economic Indicators

• Kyle Roder from capital.com discussed the upcoming quarterly CPI release and its importance for the RBA's decision on interest rates.
• The RBA is projecting a 2.6% inflation rate for the June quarter, while market expectations are around 2.7%.
• Markets are pricing in a rate cut based on the expectation that inflation is close to the middle of the target band.
• Macquarie received a first strike against its pay report, putting the board on notice regarding risk management and shareholder value.
• The financial market faces significant event risks, including the August 1 trade deadline, quarterly results from major tech companies, a Fed decision, the Bank of Japan's meeting, and non-farm payrolls.
• Donald Trump's attacks on Federal Reserve Chair Jerome Powell continue, but the Fed is sticking to its data-dependent approach.

6. Superannuation Access for First Nations People

• A new report highlights that First Nations people are still facing barriers to accessing their superannuation.
• Rigid systems and discriminatory policies disproportionately affect people in rural and remote areas.
• Only 69% of First Nations people have superannuation, compared to 87% of other Australians, with a median balance of $22,000, which is just over a third of what other Australians hold.
• Many First Nations people lack access to email accounts or the internet, hindering their ability to manage their superannuation.
• The superannuation industry acknowledges that it has not adequately met the needs of First Nations Australians.
• There is a call for mandatory customer service standards for superannuation funds to ensure they help customers access their money.
• The government is considering further reforms to improve services for First Nations people.

Synthesis/Conclusion:

The Australian economy faces a complex interplay of factors, including the RBA's monetary policy decisions, property market dynamics, global tax agreements, and challenges in curbing the illicit tobacco trade. While the RBA is cautiously optimistic about inflation, the property market continues to rise despite affordability constraints. The global minimum tax deal has been undermined by US actions, potentially disadvantaging Australian businesses. The illicit tobacco trade remains a significant issue, requiring a multi-faceted approach to address. Furthermore, systemic barriers continue to prevent First Nations people from accessing their superannuation, highlighting the need for urgent reforms. The financial market is bracing for a week of significant event risks, which could lead to volatility.