October 2024
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Do Housing Investors Pass-through Changes in their Interest Costs to Rents?
Interest rates and rents often move together. Some have argued that this positive relationship is evidence that higher interest rates have been a key driver of increases in rents over the past few years, due to leveraged housing investors passing through increases in their interest costs to their tenants. This article uses anonymised tax return data covering 2006/07–2018/19 to estimate the direct pass-through of interest cost changes to housing investors’ rental income. It finds small pass-through on average, even when interest rates are rising. The largest estimate suggests that direct pass-through results in rents increasing by $25 per month when interest payments increase by $850 per month (the median monthly increase in interest payments for leveraged investors between April 2022 and January 2024). Overall, the results are consistent with the view that the level of housing demand relative to the housing stock is the key driver of rents.
Developments in Wages Growth Across Pay-setting Methods
The dynamics of wages growth can differ across pay-setting methods. Understanding these differences is relevant for forecasting wages growth, and for assessing labour market conditions and inflationary pressures. Across each pay-setting method, wages growth picked up following the COVID-19 pandemic, but appears to have peaked. Wages growth is expected to continue to slow as the labour market eases, but the rate of easing is expected to vary across each method. This article explains recent developments in wages growth across pay-setting methods and the RBA’s disaggregated approach to forecasting wages growth, which includes considering the Fair Work Commission’s annual reviews of the minimum wages in modern awards.
Small Business Economic and Financial Conditions
The economic environment has been challenging for many small businesses over the past year. Growth in demand has slowed while input costs remain elevated, putting pressure on profitability – particularly for businesses reliant on discretionary consumer spending. Even so, profit margins remain around pre-pandemic averages for most small businesses. While access to credit remains a challenge for small businesses, many accumulated sizeable cash buffers during the pandemic, contributing to their resilience over the past few years. The unevenness in small business conditions has been reflected in some continuing to perform well, while others have had to draw down on cash buffers and an increasing share have entered insolvency. However, the number of insolvencies remains below its pre-pandemic trend on a cumulative basis. This article discusses small business conditions in Australia by drawing on information from the Reserve Bank’s 32nd Small Business Finance Advisory Panel, firm-level administrative data and other economic surveys.
The Reliability of Retail Payment Services
Australians are increasingly dependent on the continuous availability of electronic payment systems. As such, every incident or outage can potentially cause inconvenience or economic harm for end-users of those systems. This article presents insights into the reliability of payment systems using information from the RBA’s retail payment incidents dataset. The article notes that retail payment services have an average availability of at least 99.8 per cent each quarter. Online banking and fast payments services are most likely to be affected from outages, with root causes relating to issues with third parties, software and change management. Given the wide-reaching impact of outages, the effective management of operational risk in the payments system has never been more important.
Inflation-linked Financial Markets
Financial instruments with returns that are indexed to inflation allow market participants to hedge against or take positions on future inflation. Inflation-linked bond and swap markets in Australia are small and not very liquid relative to some other advanced economies. Nevertheless, pricing in these markets can provide valuable information about participants’ inflation expectations. Market measures of long-term inflation expectations have increased in many advanced economies since the COVID-19 pandemic. In Australia, this has brought expectations into closer alignment with the RBA’s inflation target.
Growth in Global Private Credit
Global private credit has grown rapidly over the past two decades, providing an alternative source of financing for businesses. This article introduces a new estimate of the size of private credit outstanding in Australia, based on data collected by the Australian Prudential Regulation Authority and London Stock Exchange Group. It is estimated that there is around $40 billion in private credit outstanding in Australia, which is around 2½ per cent of total business debt. Globally, the growth in private credit has raised concerns related to a lack of visibility over leverage and interlinkages, with regulators taking steps to strengthen oversight of the market. For Australia, the risks to financial stability appear contained for now, though regulators continue to monitor the sector closely.
Interpreting Chinese Statistics: Extracting Expenditure-side Quarter-on-quarter Growth Contributions
Components for GDP on the expenditure side of the national accounts – expenditure on consumption, investment (including inventories) and exports less imports – can provide an important read on the composition of demand. For China, these components are available in contributions to year-ended GDP growth, which provides insight into trends but makes it difficult to interpret how the economy is operating quarter to quarter. This article discusses a method for deriving contributions to quarter-on-quarter GDP growth using official data that allows for a better understanding of expenditure side drivers of quarter to quarter. The decomposition shows that strong growth in the March quarter of 2024 was driven by a large increase in net exports, but growth in the June quarter was mainly supported by investment, which likely reflected a large contribution from the change in inventories. This suggests that Chinese domestic demand remained sluggish in the first half of the year, despite the strong outcome for GDP growth in the March quarter.
The ABCs of LGFVs: China’s Local Government Financing Vehicles
China’s local government financing vehicles (LGFVs) are a key feature – and risk – of China’s infrastructure investment and financing environment. The scale of their debt has consequences for local governments’ fiscal sustainability and for capacity to continue financing infrastructure development. This article reviews progress and challenges in the transformation of LGFVs from local government off-balance sheet financing vehicles into market-driven entities, and estimates the scale and sustainability of their debt burdens at a regional level. Developments in the debt sustainability and investment outlook at China’s LGFVs potentially has implications outside of China due to the importance of LGFVs to financial stability and long-run growth in China.
Some graphs in this publication were generated using Mathematica.
ISSN 1837-7211