The last few years have been nothing short of unpredictable. Financial trends have become tough to predict, with a global pandemic throwing everything into chaos. As the world slowly begins to return to ‘normal’, there are some things you can expect to see.
Here are the financial trends our team of experts will be keeping their eye on in 2022.
What to watch
One of the significant financial trends consumers need to be aware of in 2022 is inflation. The increased price of goods and services will continue to rise due to issues surrounding the pandemic and other environmental factors such as supply chain issues, lack of staff and a higher cost of goods.
The December 2021 quarter saw automotive fuel costs rise 6.6 per cent; vehicle prices rose 1.9 per cent; food (dine-in or takeaway) rose by 1 per cent; and groceries rose by 1.7 per cent. In 2021, prices were up by around 3.5 per cent for the comfortable couple budget and 3.9 per cent for the comfortable single budget.
Inflation of the cost of consumer goods, while wages are struggling to keep up, means Australians can expect to tighten their purse strings and reassess their budgets this year.
Property prices saw record highs in 2021. The number of buyers far outweighed the number of houses available, leading to fierce competition and increased sale prices. While the property market won’t see a sharp decline, prices will begin to plateau in 2022 as more properties are listed for sale.
Inovayt Managing Director, Nick Reilly, says, “We should see property return to a normal market this year. In this instance, a normal market is where there may be two or three buyers on one property, rather than the six or seven we saw in 2021 which is what drives the high prices.”
An increased number of vendors are listing their properties for sale to try and catch the tail end of the growth phase. This means more properties are coming onto the market so buyers have a wider selection.
Three things that may help slow the market include: an increase in the number of properties for sale, an interest rate rise, and heavy restrictions on finance.
Increased interest rates
People have been asking when interest rates will rise for a while; it’s finally set to happen in 2022. With record low rates for the past few years, they’re set to rise once again following a sharp rise in inflation.
“The experts are predicting to see a rise in interest rates by the end of the year,” Nick says. “All the major banks have increased their fixed rates over the last few months, which indicates an interest rate increase.”
The risk-off approach is something likely to continue from 2021 into 2022. This refers to share markets or cryptocurrency and the success consumers experienced.
“People have made so much money post COVID,” Nick says. “From April 2021 onwards, after there was a crash in the share market, it’s just flown ahead. What we saw at the start of this year was significant pullbacks in the Australian share market, overseas markets, and Bitcoin.”
The risk-off approach occurs when something comes along that could affect the market – such as an interest rate rise. The riskier assets, such as shares and Bitcoin, are some of the quickest to drop in value. Many people have experienced financial gain through these assets that if something threatens the significant increases they’ve seen, they may partially or completely pull their investments out of it.
With the market fluctuating and being completely unpredictable, consumers are trying to reduce their risk and any implications they may face by leaving them invested.
What needs to come back
In Australia, wage growth will be crucial for consumers to combat rising interest rates and inflation. In the last year, wages grew by 2.3 per cent. Despite this increase, it’s not helping people with their cost of living. The Reserve Bank governor says that wages need to grow at 3 per cent or more to make meaningful improvements in people’s lives.
With inflation growing much faster than our wages, you won’t be able to buy the same basket of goods with the same amount of money. In fact, you’ll need more money to keep from falling behind.
Nick says, “My hope this year is that, due to an undersupply of skilled workers, wage growth can come back, which will offset the effects of rising interest rates.”
A stable share market
Rising interest rates can significantly affect retirees – especially if they have money tied up in shares. The market’s current volatility means their returns may decrease and become unpredictable, leaving them vulnerable. With no active income, besides their share portfolio and superannuation, it’s no wonder they’re feeling nervous. The return of a normal market will help relieve some of this stress.
What to be wary of
Rising interest rates
In 2022, rising interest rates are something people need to be wary of. Despite a large amount of savings recorded throughout the pandemic due to consumers staying home, inflation will force people to dip into their saved funds.
For people who have bought property in the past few years because of the low interest rates, it’s crucial to be wary about how this could impact them. Although the bank factors a higher interest rate into loan applications, consumers quickly get used to paying their current rate. When mortgage repayments rise with increased interest rates, many may find themselves unprepared if they haven’t budgeted for this extra expense.
“You get comfortable paying low interest rates,” says Nick. “Homeowners should take advantage of current low rates and, if their budget allows, make extra repayments on their loan. This means that when repayments do go up, they’ll be ahead in their mortgage.”
The finance industry has been thrown into chaos over the past few years, with unpredictable events happening all over the world. While 2022 will see the rise of interest rates alongside inflation, the property market will begin to slow after record highs. If you’re looking at how this years’ financial trends will affect you, get in touch with the financial advisors at Inovayt today.