The year in review and my 2023 predictions

Financial Planning, First time buyers, Home buying & selling
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The end of the year is upon us and no one could argue it’s been uneventful. There was a palpable sense emerging from the post-pandemic funk as we transitioned from 2021 to 2022. The world was opening up, lives were being lived and work was being done. All expectations were that it was time to return to normalcy – even if some elements of how we exist had changed forever.

But 2022 ended up delivering a diversity of historic, world-shaking events that would influence a myriad of factors in everyday life, from finance to work to family.

Here’s my retrospective on the happenings that shaped 2022 and how 2023 looks set to play out.

2022 in review

January was an extraordinary start to the year 2022 for multiple reasons – and the tennis world probably best demonstrated the rollercoaster of emotions being felt across the country.

While we were grappling with what life would be like in the pandemic’s wake, the world’s number one ranked male player was being put in his place by the Australian government. Novak Djokovic’s anti-vaccination stance resulted in deportation before he ever got to serve a ball at the Australian Open.

In contrast, our most admired sportsperson for years – the one and only Ash Barty – took out the women’s title at the Open, capping off a stellar career. Her retirement a short time after was a lesson in leaving on a high. Good on you Ash!

February was a milestone in international relations with Australia reopening its borders to the rest of the world. Fully vaccinated travellers were welcomed back – a sight for the sore eyes of the tourism and hospitality industries.

Of course, February’s La Nina compounded the flood misery in Queensland and New South Wales. It hit many population centres that were still reeling from inundation in 2021.

On the finance front, the Reserve Bank of Australia (RBA) started making observations about inflation that had our industry sitting up and taking notice. Notes from the bank’s board meeting tell the story:

“While inflation had picked up, members agreed it was too early to conclude that it was sustainably within the target band. There were uncertainties about how persistent the pick-up in inflation would be as supply-side problems were resolved… The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

As a result, the cash rate stayed at its record low of 0.10 per cent.

In March, South Australians went to the polls and came away with a new government. A shocking slight to the Liberal party with Labor ousting them after just one term in power.

Footy season kicked off again in March too – and the nation wholeheartedly embraced the new season with full crowds able to attend AFL and NRL matches for the 1st time for the last seasons.

Meanwhile, the RBA maintained its wait-and-watch position on interest rates, holding the figure at 0.1 per cent for the time being.

April, and Prime Minister Scott Morrison finally announced that a federal election would be held on the 21st of May, which fired the starting gun on weeks of political reporting that would exhaust even the most stoic voter.

This is also the month when things got interesting on the interest rate front. After declaring in 2021 that rates wouldn’t increase until 2024, RBA governor Dr Phil Lowe started talking about imminent rises to the cash rate due to government stimulus, flood impacts, supply chain issues and rising fuel prices punching up inflation. The RBA’s meeting notes took a sudden and worrying u-turn for borrowers, declaring:

“Inflation had picked up and a further increase was expected, with measures of underlying inflation in the March quarter expected to be above three per cent… These developments have brought forward the likely timing of the first increase in interest rates.”

While rates would remain at 0.1 per cent this month, the RBA was softening us up for a blow.

In May, Anthony Albanese became Australia’s 31st Prime Minister after a resounding defeat of the Liberals. This is our first Labor government in almost a decade. Scott Morrison resigned as Liberal leader and Peter Dutton was elected to the party’s top job.

Then the RBA pulled the trigger, announcing a 0.25 per cent increase to the cash rate – the first rise in 11 years. The meeting notes also indicated a bit of concern about the near future:

“Members agreed that raising the cash rate by 15 basis points was not the preferred option given that policy was very stimulatory and that it was highly probable that further rate rises would be required. An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates.”

All banks were to follow suit and increase their interest rates by the full 0.25 per cent.

In June, the RBA really ramped up the rises by taking the increase to 0.50 per cent. Fear surrounding local and global inflation was palpable – some would speculate at the time that the RBA regretted not going harder, sooner.

July saw another tranche of floods ravage many parts of New South Wales. The state could barely catch a breather before it was hit with a wave of bad weather and damaging inundation.

Inflation was getting beyond control, so the RBA lifted the cash rate another 0.5 per cent and signalled more to come in the near term:

“In making their policy decision, members considered the possibility of raising interest rates by 25 basis points or 50 basis points. Members agreed that arguments for raising interest rates by 50 basis points were stronger.”

The rhetoric continued through August when an additional 0.5 per cent rise was announced. Australian borrowers had now been dealt three 0.5 per cent increases in a row and a total to date of 1.75% in increases, so much for rates not rising until 2024 hey Dr Lowe?

September was a month of historic proportions. The significance of the 8th of September 2022 will never be forgotten with the passing of Her Majesty Queen Elizabeth II at age 96. Her 70-year reign was the longest of any British monarch. She was hugely admired and is fondly remembered for her grace, duty, dignity and service. On her passing, King Charles III became ruler of the United Kingdom and Commonwealth.

September was also the month for Optus’s great data breach. The telco released a statement confirming that the personal details of at least ten million current and former customers had been hacked.

To add to the pain of September, a fourth 0.50 per cent interest rate increase was announced, bringing cash rate rises for the year to 2.25 per cent with concerns around inflation persisting.

In October, the NRL saw the Penrith Panthers thump the Parramatta Eels in the grand final to take back-to-back premierships for the club. A chorus of both cheers and groans rang out across western Sydney.

Of more concern was torrential downpours bringing major flooding to areas throughout central and northern Victoria.

In a move that surprised stakeholders, the RBA increased the cash rate by 0.25 per cent this month. Yes, it was still a rise, but a more tempered one, signalling the RBA might be approaching the peak of the interest rate rise cycle. This brought some tentative confidence back to a few property markets as well.

Then to November when the Victorian state election saw Daniel Andrews and the Labor party returned to power for a third time. The result prompted Matthew Guy to resign his position as leader of the Liberal party.

The RBA kept up the rate rises but stuck fast with its 0.25 per cent moves. The cash rate was now at 2.85 per cent.

Finally, in December it’s (so far) been the interest rate story. There was much speculation about the move given some signals that inflation may be starting to slow globally. In the end, bets were hedged and the interest rate rose by 0.25 per cent once more, bringing the year-end cash rate to 3.1 per cent and 8 months of consecutive rate increases. The RBA doesn’t meet again until February 2023, so mortgage holders can have a small breather over Christmas.

The RBA board’s final meeting notes telegraphed its intentions:

“A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around eight per cent over the year to the December quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.”

My 2023 predictions

So, there’s an extensive snapshot of significant events and influences throughout 2022.

With this knowledge as a foundation, what are my expectations and predictions for the year ahead?

Firstly, let’s tackle the question of interest rates given how significant an influence they’ve been this year. While rates are likely to increase further, I believe the RBA would do well to actually back down for a bit. This would give some clear air so they can observe how influential the 2022 increases have been. Traditionally, interest rate increases have a three-to-six-month lag effect on the economy. There are signs that consumer spending is slowing and global inflation is attenuating. The RBA doesn’t want to overshoot with the rate rises, or they risk damaging the economy. Business and Consumer confidence are record lows, so people are listening and actions will follow.

Whilst some things, such as the floods and the war in Ukraine, are well beyond our control, I believe the lag effect of rate rises are now starting to take effect and spending is definitely moderating. This is why I’d wait and see what the numbers do until March or April before needing to signal or take further actions.

Also, the big interest rate story for 2023 and into 2024 will be the 60 per cent of mortgage holders whose fixed rates are set to expire. They will find a sudden increase in their loan interest rate of 2.5 to 3.0 per cent. That’s going to be a monumental impost on household budgets and those who don’t prepare could find themselves in financial strife. This fixed-interest-expiry wave could be the biggest financial shock of 2023, so everyone should hang tight.

Interest only loans expiries will also be something consumers need to deal with, and many people may find they aren’t eligible for interest only extensions based on the rising interest rate environment, putting further financial pressure on family households.

As far as official interest rates go, we should expect to see the increases stop soon, especially if inflation recedes. In fact, I wouldn’t be surprised to see a rate decrease by the end of 2023. A startling prediction, I know, but the metrics are pointing in that direction.

Another significant shift in the economy will be a return to more normalised employment numbers. As the pendulum swings back towards the employer’s favour, don’t be surprised if more workers will be required to return to the office.

In terms of property values, my big tip is to avoid the current bad-news headlines and simply enjoy your Christmas break. There have been doomsday reports by the media screaming that markets are in for a 20 per cent price plunge. Let’s be clear – this is clickbait “reporting” by journos seeking their five minutes of fame. Take a long-term view and speak to your advisors if you have any concerns.

There it is – my Christmas letter for 2022. I hope everyone has a happy and safe festive season full of good cheer. Thank you to everyone for your support this year and we look forward to helping with your mortgage needs in 2023.

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Andrew Mirams