Professionals Burleigh 
Australia is in the midst of inflation which imposes significant stress on household budgets. It’s no secret that inflation heavily influences the property market, but to what extent? A press release from the Australian Bureau of Statistics reported that in the year to October 2022, the consumer price index (CPI) rose 6.9%. One of the significant contributors to increased CPI were new dwellings (+20.4 per cent). If you’re looking to purchase a property soon, it’s a good idea to be aware of the current real estate market and how inflation might effect your purchase. This article will explain what inflation is, what factors impact property prices and what it means for you.
What is inflation?
You may have noticed certain groceries you always buy have one up a dollar or two- this is inflation! Inflation is the process of prices in an economy increasing over a certain period of time, or a decrease in the purchasing power of a dollar. In real estate, the concept remains the same. A property might have been sold for $900,000 a year ago, however might be valued at $980,000 this year. There are typically three factors that influence inflation: fiscal policy, demand and production costs.
How does inflation affect real estate?
As the whole concept of inflation is increasing prices, it makes sense that it also increases house prices and mortgage repayment costs. The main factor of increased house prices are interest rate hikes. Homes naturally become more expensive as interest rates increase.
Here’s a graph showing real median house prices since 1970.
So yes, inflation definitely impacts real estate prices! The property market is everchanging. If homes are in demand due to the economy expanding, prices will rise. This demand also impacts services that support the housing industry- such as hardware and other construction products. As aforementioned, one of the significant contributors to increased CPI were new dwellings (+20.4 per cent).
The ABS press release states: “High levels of building construction activity and ongoing shortages of labour and materials contributed to the rise in new dwellings.” This means the cost of buying a house is increasing. This is great for people wanting to sell their properties, but not so great if you want to buy.
Most people know investing in real estate is usually a reliable investment and may result in great returns. Real estate investments habitually perform well in a rising rate environment. As rental prices increase, so do returns on investment properties (especially if that house is already paid off). If you already have a mortgage though, fear not. When property prices increase, it decreases the loan-to-value of mortgage debt. Put simply, as rental property equity goes up, your mortgage payments remain the same, thus resulting in good returns. If you own an investment property, it’s quite likely you are currently renting it out.
As you can see, it seems pretty favourable to own an investment property during seasons of inflation.
Obviously, none of this sounds too great unless you own an investment property. Fear not, economists believe inflation will reduce by the end of 2023 and even further in 2024.
What to consider moving forward
If you are in the market to buy, think realistically about what you can afford- analyse your budget and take into consideration the current interest rate and possible mortgage repayments. It’s not impossible to find a great, affordable property! Research the market in the area where you want to buy, and most importantly, don’t feel pressured to do anything without considering it first!
Professionals Collective are experts in helping buyers find their dream property for a price that suits them. Visit our website www.professionalscollective.com.au to get into contact with a local agent who can help you. If you own an investment property, we offer professional property management services for rates as little as 4.5%!
Disclaimer: The information provided in this publication is intended for general information purposes only, and should not replace the advice of a financial advisor or any other qualified relevant party. Information may not constitute the most up-to-date or accurate information, and should not be taken as sworn advice. Opinions reflect those of the author and not Professionals Collective as a whole.
