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Inflation Hits 5.1% – What Does This Mean for Property?

By Rachel Wallace

No doubt you have noticed when buying petrol or your groceries that things are getting expensive. It has now been confirmed. Inflation hit 5.1 per cent for the year to March 2022, the highest annual figure since the Global Financial Crisis.

The increase has been driven by a range of factors but the biggest growth components were fuel (up 11 per cent) and construction of new homes (up 5.7 per cent). This strong inflation figure has a wide range of impacts on property.

1. Interest rates set to rise sooner than later

The Reserve Bank of Australia use interest rates to keep inflation between two and three per cent. Now that inflation is at an annual rate of 5.1 per cent there is a lot of pressure to start to increase rates which are currently at record lows.

As we came out of the worst of the pandemic, it was always expected that inflation would be high however it was expected to be transitory. Now there are other external factors which are keeping prices higher for longer – in particular, the war in the Ukraine, blocked supply chains and continued shut downs in China.

Higher interest rates won’t fix any of these but it will slow down the economy and prevent it overheating.

2. House price growth will continue to slow

House prices have increased by an eye watering 30 per cent since the start of the pandemic however they are beginning to slow.

In the first quarter of 2022, prices have fallen slightly in Sydney and Melbourne. In other capital cities, price growth has slowed.

For the rest of the year we can expect to see much slower market conditions – prices won’t fall everywhere but we will not see the same market conditions in 2022 as we saw in 2021.

3. It will keep getting more expensive to build or renovate

Construction costs are continuing to rise. It is in part being driven by blocked supply chains but also a flow on from the 2020 bushfires (timber shortage) and a problem accessing labour. This has two major implications for property:

  • Fewer renovations – Australians want to renovate their homes and there were record planning approvals given last year however many renovations won’t get off the ground because it is getting very expensive to renovate. It is also getting hard to find builders to do renovations.
  • Fewer new homes – rising construction costs will impact the viability of many new developments – both houses and units. Even though house prices are softening in many places, longer term, this will mean house prices will rise.

4. Rents will continue to rise

Rents are rising at a rapid rate, up 17 per cent since the start of the pandemic. Unlike house prices, rents are going to keep increasing through 2022 as international borders re-open. Longer term, rising construction costs are a further challenge.

On average, renters are younger and have lower incomes and this will be a further challenge for them with costs rising more broadly.

Positively, investors are still very active which will go some way to ensure an increasing supply of rental properties, as will a growing number of “build to rent” construction projects underway.

5. Fewer homes for sale

While it is good news for buyers that prices aren’t moving so quickly, the biggest challenge will be finding homes to buy.

Compared to last year, there are 11,000 fewer homes for sale (March quarter 2022 compared to March quarter 2021). Leading up to the election it is unlikely to get much better. Our own data has shown a 33 per cent reduction in listing authorities in April (homes listed but not yet advertised) which points to a lean May.

Fewer homes for sale is good news overall – it does mean that there are low levels of distress and it will prevent a large fall in house prices. But for buyers, it does mean it will be harder to take advantage of lower prices.

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