How the rise in living costs is affecting the property market

Inflation is both impacting the housing market and itself being impacted by the housing market.

CoreLogic Head of Residential Research Eliza Owen said one way in which inflation impacts the housing market is that it erodes the value of debt, making it easier to repay a mortgage. That's because $1 today is worth less than $1 in the future, as inflation reduces the value of that $1.

On the other hand, inflation also erodes the real value of housing. 

Australia's median property price rose 11.2% in the year to June, according to CoreLogic, while the inflation rate during the same period was 6.1%, according to the Australian Bureau of Statistics (ABS). So the 'real' increase in property values during that time was only 5.1% (i.e. 11.2% minus 6.1%).

Ms Owen said there is an inverse relationship between the Reserve Bank cash rate – which influences home loan interest rates – and changes in home values.

"As interest rates rise, and economic activity slows, inflation may be reduced. A consequence of this is that borrowing money to buy housing becomes less desirable, which in turn slows purchases and prices in the housing market,” she said.

How housing impacts inflation

Ms Owen said the ABS ignores several housing-related costs when calculating inflation.

Changes in the price of buying land, buying established homes and serving a mortgage are not factored into inflation calculations.

However, the ABS does factor in other housing-related costs, such as prices for:

• Building new homes (minus the land value)
• Rents
• Renovations, repairs and maintenance
• Rates and charges
• Utilities

Unsure how rising prices and interest rates might affect your home loan? Feel free to get in touch and I’ll be happy to crunch the numbers for you.