Property Inflation

This week’s Consumer Price Index figures revealed what most of us already knew: the cost of living has been rising of late. The national CPI index is now at 5.1 percent, the biggest rise since the GST was introduced 21 years ago.

Inflation has jumped about over the past two years with the March quarter figure in 2020 down 1.9 percent from the previous quarter. Two years later, last quarter’s inflation rose 2.1 percent.

The year-to-date number of 5.1 percent is due to several factors. Much of the inflationary surge has come from a sharp increase in dwelling construction costs, up an extraordinary 13.7 percent in the past year. These price rises were driven by high levels of building construction activity combined with ongoing shortages of materials and labour; something anyone currently building a home will be very much aware of.

Other annual inflationary pressures are coming from fuel prices (up 35 percent), residential rents (nationally up 1 percent, Perth up 9.7 percent) and food up 4.3 percent. Importantly, inflationary pressures are impacting non-discretionary items (up 6.6 percent annually) that households typically buy and cannot really do without such as food, health care, fuel and housing far more than discretionary items (up 2.7 percent).

Now outside the 2 to 3 percent ‘inflation comfort zone’, the Reserve Bank is now more likely to raise official interest rates as early as next month, impacting home mortgage repayments. A moderate rise in home mortgage rates could be a problem for households already contributing more than 30 percent of their incomes on servicing their mortgage. It has been a long-held view that mortgage stress kicks in after householders move beyond this 30 percent threshold.

Average proportions of household incomes servicing mortgages in Sydney, Melbourne, Brisbane and Hobart are already above the 30 percent threshold. Coming from a low interest rate base, even a moderate rate rise could seriously impact property markets in these cities.

Thankfully, Perth remains the most affordable capital in Australia with average households contributing 26.4 percent of their income towards their mortgage; some wriggle room there when facing interest rate rises and other cost of living pressures.

So, what’s likely to happen to property markets under a cloud of rising inflation and pending interest rate rises? It seems logical that regions (Sydney, Hobart, Brisbane most notably) experiencing substantial rises in property values in recent times are likely to slow as the cost-of-living increases. However, capacity constraint means housing remains in short supply nationally with broad expectations that demand for housing will remain relatively strong, with property values holding up or even increasing as a result.

Local property values and rents are likely to hold up better than elsewhere in Australia due to our more subdued gains comparative to other regions; we are coming off a lower base. It is significantly more affordable to live in most places in WA than just about anywhere else in Australia. Upon learning this, it follows that migrant populations will move here, especially given our nation-leading unemployment rate.

Property markets for the remainder of 2022 will reveal a fascinating tension play out between solid demand, rising rates, short supply and inflationary pressures.