Melbourne's Recent Housing Market & Inflation

All you need to know about the recent housing market & inflation

Current financial climate

It is important to understand the current financial climate. It’s no secret that inflation is becoming a major issue in the property market with the RBA lifting the cash rate at the fastest pace since the 1990s, adding more money to homeowner’s mortgage repayments.

Interest rates

As the interest rates rise, economic activity slows and inflation may be reduced. As a consequence of this, borrowing money to invest in housing becomes less desirable which in turn slows purchases and prices in the housing market.

Inflation & housing market

To best understand the correlation between inflation and the housing market we need to look at the changes in the Consumer Price Index (CPI), which tracks the cost of goods and services consumed by households specifically bought from other sectors; governments and businesses.

New & existing dwellings

Because established dwellings are traded within the household sector, the change in established dwelling prices over time is not factored into inflation. Land purchases are also not included, as land is considered an asset, not a consumption good.

Mortgage interest costs were excluded from inflation from 1998, in part, because the RBA started setting interest rates in the early 90’s to target inflation. The cost of new dwellings purchased by owner-occupier households (minus land value) is included in inflation calculations, as well as changes in rent values.

How is housing factored into inflation?

Not factored into inflation

• The cost of purchasing land
  
• The cost of purchasing an established dwelling
  
• The cost of servicing a mortgage

Factored into inflation

• The change in rents
  
• The cost to build a new dwelling, minus the land value
  
• The cost of renovations, repairs or maintenance
  
• Rates and charges
  
• Utility costs

The housing component of the CPI is given the biggest weight of goods and services in the CPI around 23% (8.7% for new dwellings, and 6.2% for rents). This reflects the relatively large expenditure households put toward housing costs. As a result, inflation is heavily influenced by changes in rents, new dwelling prices and utility costs. The annual change in the total housing component of the CPI was 9.0% in June 2022. This was the second-largest increase of the CPI components, behind a 13% surge in transport costs.

The building sector has been bombarded with supply chain disruptions during the pandemic causing product and material shortages nation-wide. While this was happening, schemes such as HomeBuilder were introduced, creating a surge in demand for the construction of new dwellings. Though construction pipelines costs are still inflated, the expiry of these government grants has further added to the inflation figures in this category as grants and subsidies are being forced into the CPI.

Now, while inflation is set to remain high in 2022 with a mix of domestic and international factors putting pressure on prices there are early signs of relief in supply and demand pressure within the economy. The flooding in NSW and crop losses and Russia’s invasion of Ukraine in conjunction with the COVID resurgence in China have contributed to the rising cost of living for all households.

Money markets are indicating a lower peak cash rate than anticipated just a few months ago, the CBA has suggested RBA cash rate cuts could be coming as early as next year. If these trends in easing inflation begin to manifest more widely, it could signal a floor for the housing market decline as early as 2023.

Want to find out more?

Barry Plant are here to help, so don’t hesitate to get in touch for a chat with Dean if you have any questions or concerns. Give Dean a call on 0400 446 186  or contact via email.