How inflation Impacts housing prices and your Home loan Decision

Published 15 September 2021

What is inflation?

Inflation is the general increase in the level of prices of goods and services that households buy, it is used to understand the rate of change of the costs of something over a period of time. 

In Australia the inflation rate is calculated by the Australian Bureau of Statistics (ABS) using the Consumer Price Index (CPI) of thousands of items across a range of categories. The ABS uses the CPI to calculate the change in price across all these items and aggregates them to calculate the inflation rate. 

Australia’s target inflation rate is 2-3%, on average, over time. This target is considered a suitable rate as it does not materially distort economic decisions in the community and helps to allow Australia in achieving price stability in its economic growth. 

The inflation rate is calculated each quarter and as of Q2 2021 is at its highest reading since 2008 of 3.8%.¹

How can inflation impact housing prices?

Australia’s housing market plays a vital role in how the inflation rate is calculated, accounting for 22.3% of the total weight of the CPI. It’s important to understand this when looking at how both inflation and the housing market work together and impact each other. 

The inflation rate can impact housing prices through its relationship to interest rates. In Australia, the inflation rate and the cash rate are strongly correlated as the inflation rate has an influence on the RBA’s decision to adjust the cash rate. The RBA may increase or decrease the cash rate as a means of meeting the inflation target. The cash rate is then used as a major factor for lenders in determining the interest rate for home loans.

Some considerations when understanding how inflation impacts housing prices can be seen by looking at the intent of the cash rate decisions. For example, if the RBA lowers the cash rate, this can be a means to stimulate the economy. With a low cash rate, interest rates are likely to lower, making buying homes become more affordable and property prices tend to increase. This is similar to what we are currently experiencing in Australia as the cash rate and interest rates are at record lows and many of the country's major property markets are experiencing booms. 

Planning on buying a house?

If you’re planning to buy a property, whether it is your first home, next home or as an investment, having an understanding of inflation can help you with your decision. 

As Australia’s current inflation rate is at one of it’s highest points, it’s no surprise that we can see the property market growing with inflation as many markets in Australia have recorded high growth rates so far in 2021. 

The rising value in house prices can affect your home buying decision by adding another barrier to entering the housing market when it comes to saving up a deposit to purchase your home. However, if you’re currently looking to purchase a home and you don't quite have a 20% deposit saved up, there are other options available for you, such as a guarantor or using equity in a home you already own.

Already own a house?

For homeowners, inflation can have positive impacts on both your property’s value and your home loan’s interest rate. When measured in nominal terms, the increase in housing prices has been affected by the general level of inflation.²

Therefore high inflation can positively affect homeowners by reducing the real value of their mortgage, while also contributing to the increase in the value of their home. As we are seeing with the current inflation situation in Australia, home owners are experiencing an increase in property prices as well as record low interest rates available. 

To take the most out of the current inflation and low interest rates, you may benefit from looking at a fixed rate home loan. A fixed rate mortgage gives you the option to lock in your home loan’s interest rate at the current rates offered in the market, for a set period of time. While there are factors to consider with fixed rate loans, such as exit costs, it is best to speak with a Mortgage Choice broker to understand if a fixed rate mortgage is right for you. 

Additionally, if you currently own your home and have a mortgage, now may be a great time to review your home loan and understand if you’re taking advantage of the interest rates available at this time. You can review your home loan with our free quick quote tool here.