The Australian Bureau of Statistics (ABS) has shared the fresh CPI figures for the quarter ending in September 2023. It’s stirring quite the conversation among financial enthusiasts.
What does this chart tell us and what can we do about it?
First, it is important to understand what this number means. The Consumer Price Index (CPI) measures the average change over time in the prices paid by consumers for goods and services. Essentially, what prices you pay for the things you consume and how they change over a period of time. A positive change indicates an increase in prices (inflation), while a negative change suggests a decrease (deflation).
As you can see the “All groups CPI” indicates a positive change. This suggests that, on average, the prices of goods and services across all categories have increased over the past year.
Diving into the Details
Numbers can tell compelling stories:
Front-runners: The sectors making notable strides include Housing (with a 7% growth), Insurance and Financial Services at 8.6%, and then Transport at 5.6%.
The Subdued Climbers: On the other end, Communication has nudged up by 1.3%, Furnishings and related services by 2.5%, and Clothing & Footwear by a modest 0.9%.
Why does this matter? A Glimpse Back in Time
The hotly debated topic across Australia right now is the housing market. A 7.0% increase in housing costs over a year is substantial, but it has happened before. In the 2000’s certain regions in the U.S., especially areas in Florida, California, and Nevada, saw home prices increase well over 7% annually. Between 1996 and 2007, Ireland witnessed one of the fastest property price surges in the world, with multiple years seeing increases over 7% and finally Spain experienced significant annual increases in house prices, especially between 2001 and 2007.
So, what’s the big deal?
In the US, this was a precursor to the 2007-2008 housing crash and the subsequent global financial crisis. In Spain the country faced a severe property market crash after 2008, resulting in numerous unfinished housing projects, a banking crisis, and severe economic recession. In Ireland the market corrected sharply after 2007, with prices plummeting and leading to a banking crisis that required an international bailout.
OMG, Jordon does this mean the housing market is going to crash?
No, well, maybe. I’m not sure.
Housing and Financial Services: An Intertwined Narrative?
Getting back to the Australian CPI numbers, It’s worth pondering: do surges in the housing sector invariably lead to rises in insurance and financial services? When house prices go up, a chain reaction happens in the financial world. People borrow more to buy the pricier homes, which means banks and lenders profit from bigger loans. At the same time, many homeowners might need mortgage insurance due to larger borrowings. To add to that, rising house prices can create a “wealth effect” where homeowners feel wealthier and might take out loans against the increased value of their homes (home equity loans) for other expenditures or investments. Financial institutions benefit from offering these products.
Venturing Some Educated Guesses
For those with an appetite for strategic foresight, let’s explore some avenues and play the “if” game. IF these correlations are correct and IF this is a signal for a shrinking housing market, a speculative trader might think it’s a good idea to:
Short Australian Real Estate Stocks: The 7.0% rise this year in housing costs suggests potential overheating. If you believe that there’s a housing bubble forming in Australia and it might burst, shorting real estate stocks or ETFs that focus on Australian real estate could be a play.
Invest in Gold or Safe-Haven Assets: Historically, during times of economic uncertainty or downturns, gold and other safe-haven assets see increased demand. If the Australian economy faces a potential recession or crisis, these assets could appreciate (this would carry greater weight if the recession is felt worldwide).
Short Australian Banks: An 8.6% rise in “Insurance and financial services” indicates that Australian banks are heavily exposed to real estate. If there’s a downturn in the housing market, banks with significant mortgage portfolios could be hit hard.
Long Consumer Staples and Healthcare Stocks: Regardless of economic downturns, people need essentials and healthcare. These sectors, historically, are more resistant to economic downturns. If you believe that the Australian economy might face headwinds, these sectors could outperform others.
Short Consumer Discretionary Stocks or Luxury Brands in Australia: In economic downturns, consumers tend to cut back on discretionary spending first. If the Australian economy slows down due to any speculated bubbles bursting, companies in these sectors might face headwinds. You can see in the statistics printed for us, clothing and footwear has only grown 0.9% over the past year, indicating consumers have already slowed buying.
A Parting Thought: As we wade into speculative waters, always remember the value of comprehensive research and expert consultation before making pivotal financial moves. No, seriously, these are speculative and drastic calls based on the data provided and historical events. Investing in financial markets carries risks, and it’s crucial to conduct thorough research and consult with financial advisors before making any decisions.
Stay informed, stay ahead.
