How is inflation impacting investor cash flow?
One economic topic that has been in the headlines more than most over recent months has been inflation or the Consumer Price Index as it’s called officially.
Since the start of the pandemic, inflation has been all over the place. This is primarily because of the various inflationary and deflationary pressures that have been impacting our economy over the past two and a half years.
You can see this in action in the graph below, with each quarterly inflation reading causing the line graph to bounce down and then up – and up again.
What I find most interesting about the current inflation headlines is the limited coverage inflation has had over the last few years! Inflation has struggled to reach the bottom of the two to three per cent target band for years but has been a passing thought by the media. This is despite the fac that it was actually a sign of less than impressive economic conditions.
However, inflation has now hit 5.1 per cent – the highest in decades – primarily because of the intense supply side pressures around the world. This has not been helped by a number of other factors such as the economic stimulus measures brought in during the pandemic, and the war in Ukraine.
According to the Head of Prices Statistics at the Australian Bureau of Statistics, Michelle Marquardt, the CPI recorded its largest quarterly and annual rises since the introduction of GST in the March quarter this year.
However, the most significant contributors to the rise were new dwellings (+5.7 per cent), automotive fuel (+11 per cent) and tertiary education (+6.3 per cent).
“Continued shortages of building supplies and labour, heightened freight costs and ongoing strong demand contributed to price rises for newly built dwellings. Fewer grant payments made this quarter from the Federal Government’s HomeBuilder program and similar state-based housing construction programs also contributed to the rise.” Ms Marquardt is reported as saying.
“The CPI’s automotive fuel series reached a record level for the third consecutive quarter, with fuel price rises seen across all three months of the March quarter.”
Impact on cash flow
Increasing inflation is starting to be a topic of note amongst investors, even with rents rising over the past year in particular.
Some investors are concerned that rising inflation will cancel out any positive cash flow they have recorded from higher rents.
It’s important to understand that the reason for increasing weekly rents is not because of inflation – rather it is predominantly due to the record low vacancy rates that are being recorded.
There is far more demand from tenants than supply of rental properties available, which is naturally having an impact on weekly rents.
It must be said, though, that rents mainly flat-lined for years before the pandemic, because of underwhelming inflation but also increased rental supply, especially in our two biggest capital cities.
Rents to keep rising
According to SQM Research, asking rents for capital city units and houses combined has risen by 15.7 per cent over the year ending July.
Some capital cities have recorded even stronger results with Brisbane posting asking rent growth of 20 per cent over the same period – the best result for any capital city in the country.
What this means is that current and prospective investors are achieving higher rents than they were just a year ago, with rents expected to keep rising while inflationary pressures moderate.
Just consider that even with inflation recording 5.1 per cent for the year ending March, asking rents nationally have risen by 15.7 per cent over the past year, which means they are well above the CPI measure.
Another factor to keep in mind is the fact that vacancy rates have hit record lows and are unlikely to increase significantly in the near future. This is being driven by the national rental property crisis and is likely to be further exacerbated by the return of overseas migrants.
Whether high inflation is a short- or medium-term problem remains to be seen, but investors can take comfort in the fact that strong demand from tenants is a situation unlikely to change anytime soon.
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