With the cash rate seemingly set to increase to land somewhere between 2.5 per cent to 3.0 per cent by the end of the calendar year, and inflation at 6.1 per cent and wages growth at 2.6 per cent, these increased rates, higher inflation, low wages growth are eroding balance sheets and creating a confluence of factors impacting the housing market — with the general sentiment being we will see a drop in housing market values of up to 20 per cent.
Interestingly, if values fall by 10 per cent, it takes us back to July 2021 values and if by 20 per cent, back to January 2021 — such was the rapidity of the growth.
Recent ABS figures shows the highest annual rate of inflation in almost 32 years, with Treasury and the Reserve Bank (RBA) thinking it will peak at over 7 per cent.
So, what is the relationship between inflation and the housing market?
Inflation influences the housing market through cost-of-living pressures, the subsequent rising rates and the impact on consumer confidence — meaning household budgets tighten, savings are lower and borrowing capacity is impacted — all point to lower housing demand, which we are seeing in the market.
Secondly, the housing market itself also influences inflation — and this is as relevant as ever.
Established dwellings are already within the household sector, so changes in established dwelling prices are not included in inflation, likewise land purchases are considered an asset and also not included, and in the early 1990s mortgage interest costs were excluded from inflation — mainly due to the RBA setting interest rates to directly target inflation.
So, what is included?
The costs to build a new dwelling less the land value is included in inflation, as is changes in rent values, and other property-related expenses such as property repairs, renovations, maintenance, as well as rates and charges, and utility costs.
As such, inflation is heavily influenced by change in rents, new dwelling prices and the costs to “operate” a dwelling. And with the recent surge in the cost of new dwelling construction (through supply chain constraints and costs of both material and labour) and the recent increase in the value of rents (1.6 per cent nationally) through the tightening rental market with demand outstripping supply in the June quarter 2022, the total housing component of the CPI was 9 per cent — second only to transport at 13 per cent.