Inflation and the housing market

May 2022 represented an inflexion point of sorts in the housing market, with the RBA triggering the first of the month on month interest rate rises – these higher rates in combination with rising inflation and low wages growth are eroding balance sheets – creating a confluence of factors impacting the housing market.

In the following opinion piece written for the Investor Daily published on 13th September 2022, Anthony Landahl looks at the relationship between inflation and the housing market and market headwinds and tailwinds.

For the first time since 2010, we are now observing the impact of higher interest rate rises on the housing market. And while it is worth noting that the rate of growth in the housing market was slowing prior to the RBA raising the cash rate – May represents an inflexion point of sorts for the housing market with the national dwelling value index falling each month since May, coinciding with month-on-month interest rates rises – nationally, values are down by 2 per cent since their April peak.

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.

How Australia’s rising inflation is impacting the housing market 

  • For households, wages growth has so far been elusive. As such, households have to deal directly with higher debt levels through rate rises and a rising cost of living — outrunning wages growth. This means more pressure on households, and impacting decisions such as increasing debt. This in turn may put some downward pressure on property prices.

  • Inflation has been impacting ‘non-discretionary’ items like fuel, housing and food — meaning, households have less ability to cut back on “non-discretionary” household expenditure. And with rising rates adding significantly to mortgage costs, mortgage holders are likely to feel more of a pinch in their household budgets.

  • Erosion of the real value of housing and costs rise, and growth slows.

  • And notably, rising inflation has been directly targeted by the RBA through subsequent and rapid increases in the cash rate — the fastest pace since the 1990s — impacting the cost of borrowing, serviceability and consumer confidence, all flowing through to housing demand.

  • The raising of interest rates, triggered by the RBA cash rate decisions is designed to hold back the rate of inflation. Whilst this will have an impact on many households, it may not have the desired effect on inflation, given that a significant impact on the increasing costs/prices we are seeing are driven by global factors (supply shortages, fuel costs, etc).

  • People who plan to sell and buy will still do that, they just may delay for a while. This will impact property turnover over the next few months.

Market headwinds and tailwinds

  • Rates – how high and how fast

  • Uncertainty – forecast of the cash rate between 2.6 per cent and 3 per cent – with financial markets now factoring in a cut middle of next year

  • Cost-of-living pressures and higher cost of debt – pulling back household spending

  • Housing prices are falling; servicing is more difficult meaning people borrowing less

  • Regulatory intervention and targeted credit tightening is less likely with overall credit growth slowing

  • Tightening labour market

  • With the borders opening up migration is again on the move, impacting rentals and housing demand

What’s next?

While domestic and international factors are keeping inflationary expectations high — and the RBA targeting inflation being contained between 2 to 3 per cent before they adjust cash rate settings accordingly, money markets are in fact building in a lower peak in the cash rate than originally anticipated — with some of the majors suggesting RBA cash rate cuts could be as early as next year.

This could indicate a short sharp downturn with a floor for the housing market decline as early as 2023.

Anthony Landahl | Managing Director Equilibria Finance

This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.

Equilibria Finance is a mortgage broking practice specialising in delivering residential and commercial mortgage and business and asset finance solutions to the clients of financial advice and accounting practices.

Our Awards