The global pandemic was enough to create uncertainty in the market, without needing to precede inflation levels not seen in 40 years, hikes in interest rates and the whispers of our economy falling into recession. Not to mention a war with Ukraine, sky-high oil prices and supply chain problems that are wreaking havoc all over the world. There are countless more economic factors that might be cause of concern to those who don’t really know the bigger picture. While the world may seem to be losing its marbles, the team at Your Australian Property have good reason to be unworried, and confident that even with the rising inflation caused by economic uncertainty, the flow-on effect to the property market will not hinder you finding your dream property.
What is inflation?
To truly understand how inflation might impact your personal circumstance, you must firstly understand what inflation is. There are many definitions, however the Forbes definition puts it well: Inflation describes the gradual rise in prices and slow decline in purchasing power of your money over time. The RBA states that, “most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.” When you look at Australia’s CPI over the past 70 years, you’ll find that we have experienced long periods of high inflation, disinflation, and more recently, low and stable inflation. It’s a timely reminder that inflation is normal; it’s not there to be feared nor is it there to be avoided. Inflation is only a problem when the amount of inflation is inappropriate. In other words, hyperinflation. In this instance, the cost of living rises considerably more than salaries and our standard of living goes down.
The Role of the Media and Government
Inflation is still rising, stocks are crashing, property values are going to fall. Sound familiar? These are the headlines we’re seeing flood the media every day. You must remember that these ‘sources’ were the same sources that provided dire warnings in 2020, that bankruptcies, double-digit unemployment and 20% house price falls were on the cards. With good government and central bank policies we were able to mostly avoid these economic outlooks and we predict that this year might play out the same. While we’re not saying inflation won’t rise further, we’re just saying be careful where you read your news!
With the avoidance of economic turmoil in Australia did come various economic outcomes. In 2020 a number of stimulus measures were put in place to prevent us from falling deep into recession and prevent high levels of unemployment. Quantitative Easing was entered into, where interest rates were reduced, the supply of money increased which both drove more lending to consumers and businesses. At the same time, with nowhere to go and nothing to do, Australians saved an unprecedented amount of money. Now that life is relatively normal, we are spending more money at a time where there is a lack of supply of goods around the world. Hence, inflation.
How Long Will We Be Experiencing Inflation?
The RBA expects inflation to reach 7% in the fourth quarter of this year. According to the RBA Governor Philip Lowe, “It’s going to be some years, I think, before inflation’s back in the 2-3% range. But over the next couple of years, it will gradually come down. We don’t see a recession on the horizon.” There are many things on our side, being Australia’s strong economy, good job growth, strong exports and a positive balance of trade. With rising inflation all over the world, Australia is the best place to be.
The Impact on Property
The property market and the economy move in cycles. We are in a period where the market is cooling, and prices are adjusting. In some locations you’ll find property prices correcting while in others you’ll find prices remain stable. Unlike the media has presented, we do not predict the property market to crash. For this to happen, we need to be in the position where homeowners are forced to sell and property prices free fall due to little demand; a scenario more likely when unemployment is high.
The biggest impact inflation will have homeowners, is on recent buyers who might be financially challenged by higher mortgage costs. However, it’s also important to remember that 50% of homeowners have no mortgage at all on their homes, joining those homeowners who are ahead in their mortgage repayments, have money in offset accounts or whose properties already have substantial equity. Furthermore, data from APRA shows approximately 38% of home loans are currently fixed, meaning they won’t be impacted by higher interest rates for some time.
Good News for Long-Term Property Investors So, what does this all really mean? While inflation may seem daunting and concerning to some, to others with a long-term focus it is an excellent opportunity to invest in the property market. Typically, in times like this, inflation has been property’s best friend especially when unemployment is stable. Any decline we see in property values are likely to be short-lived while the world rides out temporary fluxes in the economy. This ‘short term pain’ will be outweighed by the long-term increase in property values, underpinned by an ever-increasing population, increased migration following the pandemic and the general wealth of Australians. Your Australian Property Managing Director and Founder Zac Newbold predicts that when interest rates start to stabilise the real estate market will be quick to bounce back. With inflation sitting around 6.1% and the RBA cash at only 1.35%, it effectively means we have negative interest rates. Ultimately this means the time to buy is now.
Contact Your Australian Property With over 30 years of expert knowledge in the Australian property market, we can help guide you through the sometimes tough and hard to navigate realm of purchasing. If you’re ready to start your journey to home ownership or looking to invest in a new piece of property to add to a growing portfolio, please get in touch.
