High inflation, rising interest rates, less bang for your grocery buck: it seems to be all bad news lately but how will inflation, in particular, affect the property market?

What is inflation?

In the words of the Reserve Bank of Australia (RBA), inflation is "an increase in the level of prices of the goods and services that households buy" and "is measured as the rate of change of those prices".

In Australia, the main economic indicator of inflation is the Consumer Price Index (CPI): a percentage measure of change in the price of a basket of goods and services.

Hence the popular basket picture when people talk about inflation.

The Australian Bureau of Statistics (ABS) calculates CPI and publishes the figure every quarter and it does this by collecting prices for thousands of different items.

"Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket," RBA explains.

NB: the opposite of inflation ie when prices drop is known as deflation.

What is Australia's current rate of inflation?

The annual inflation rate in Australia climbed to 6.1% in the second quarter of 2022 and is now at its highest point in 32 years.

According to ABS, the most significant price rises were:

• Furniture (up 7%)
• Owner-occupier property purchases (up 5.6%) and
• Automotive fuel (up 4.2%)

Yet the eye-watering 6.1% figure is still below the RBA's most recent forecast of 7.75% in 2022, before a predicted drop to "a little above 4% over 2023 and around 3% over 2024."

Why is inflation so high?

For starters, inflation isn't as high as it may seem - but inflationary shock is feeling sharper because deflation has been the name of the economic game for three decades.

Indeed, in June 2020, the inflation rate dropped to a negative 0.3% figure while between 2012-2020, rates stayed well below 3% - if not 1% - according to ABS.

Saul Eslake, an economist, key number cruncher and Vice-Chancellor’s Fellow at the University of Tasmania, described the reasons behind Australia's deflation situation.

"Manufacturing of ‘big ticket items’ (known as consumer durable goods) were moved from the West to the developing world, where overheads are lower," Mr Eslake explained.

"Most people didn’t notice until prices shot up, because these big-ticket items are generally bought infrequently. 

"When COVID lockdowns were imposed, there was a dramatic surge in demand for products such as computers and home fitness equipment."

Mr Eslake goes on to explain that lockdowns resulted in people wanting bigger homes with fancier entertainment as well as nice cars.

"There was all this demand-shock and governments threw a lot of money at people, which meant that they could afford to buy these things," Mr Eslake explained.

At the same time, factories closed down and shipping costs skyrocketed from basically expensive to a “stratospheric” 400% while the Russian invasion of Ukraine has also seen oil and gas prices surge.

How will inflation affect the property market?

Firstly, inflation affects the property market in good and bad ways and has direct and indirect impacts, said CoreLogic in a recent inflation report.

CoreLogic believes it's also crucial to understand just why and how high inflation is occurring, as well as what else is going on in the economy at the time.

Dark side to current inflation:

1. Cash rate increases
2. Stalling wage growth
3. Steep price rises in "non-discretionary" but crucial items (fuel, housing and food)

Silver lining to current inflation:

1. Erode the value of debt 
   For example: Warming economy means wages may rise yet mortgage principals remain fixed, meaning repayments decrease
2. Discretionary spending likely to shrink more quickly in coming months
3. Interest rate rise + slower economic activity slows = potentially reduced inflation
4. Less desirable borrowing for home purchases could equal lower house prices

To panic (about high inflation) or not to panic? 

However, high inflation doesn't necessarily mean property prices will drop or the property market will crash.

Prices are certainly easing slightly, especially in Melbourne and Sydney but particular areas - such as Adelaide, Perth and Brisbane - are still enjoying almost unnaturally high growth.

This goes for rising interest rates too with economist Stephen Koukoulos recently saying it was actually rare for interest rate-hiking cycles to coincide with falling house prices.

While inflation has become the bogeyman of the year, says PropertyUpdate's Michael Yardney, he concurs with Mr Eslake in that much of the current property panic is occurring because we haven’t seen inflation in the developed world for decades.

As such, property owners - and potential buyers and sellers - don't need to run from high inflation in a pessimistic panic.

"I’ve invested through inflationary times before and inflation is a property owner’s friend – as long as you own the right type of property," Mr Yardney said.

"I know how good it can be for those who are in the right assets, particularly property."

As well, while property prices are high, the market is already starting to correct itself, says Mr Yardney.

"When you invest for the long term, the market fluctuations don’t harm you, especially if you own quality assets," he explained.

"Things only become problematic when you make bad investment decisions."

Mr Yardney admitted that new property buyers who haven’t experienced market cycles could find current market conditions concerning.

"But they should take comfort in the fact that property corrections tend to be short-lived, and the Reserve Bank doesn’t want the housing market to crash," he said.

"The decline in property values will be temporary while the long-term increase in property values is permanent."

In short, Mr Yardney believes the current trend of high inflation and rising interest rates will be short-lived.

CoreLogic also believes there is a light at the end of the tunnel.

"There are early signs of relief in supply and demand pressures in the economy," its recent inflation report stated.

"Money markets are also indicating a lower peak in the cash rate than originally anticipated a few months ago.

"If these trends in easing inflation begin to manifest more widely, it could signal a floor for the housing market decline as early as 2023."

Where does this leave you?

Expect your home buying - or selling - journey to be an exciting one!

And you're not alone on the road with the Listing Loop team here to help buy and sell off-market properties.

We can also help you refinance, and invest through our sister company, Lending Loop.

So, if in doubt about any of your home-buying plans, sign up at Listing Loop or download our app.

Our off-market and pre-market marketplace give you VIP access to properties so you can get in first.