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Inflation Outlook Improves as New Housing Costs Ease - September 2022

 

Inflation Outlook Improves As New Housing Costs Ease

 

Australia’s inflation rate has surged to the highest levels since the early 1990’s driven by record consumer spending, steeply rising oil prices and significantly higher housing costs.

The ABS reported that annual inflation increased by 6.1% over the June quarter with new dwelling purchases, fuel and furniture the most significant contributors to sharply rising prices. New dwelling prices as measured by the ABS (houses only) increased by a record 20.3% over the year ending the June 2022 quarter.

Surging house building costs reflect the impact of the previous governments HomeBuilder policy that provided a grant to eligible applicants to construct a new home, and designed as a stimulus initiative to offset the negative economic influences of covid. Demand generated by the HomeBuilder policy however far outstripped supply capacity and created severe shortages of labour and materials resulting in the unprecedented cost increases.

According to the My Housing Market National House Building Cost Index, quarterly costs increased sharply from June 2021, with the annual rate of growth peaking at 24.3% over the April quarter 2022. However, we are now seeing the rate of building cost growth slow for 3 consecutive months in a row, and more is likely to follow.

 

National House Building Costs Index Annual Growth Rate

 

Good news for the inflationary outlook (according to the Index), is with the rate of house building cost increases falling over the past two quarters, there are clear signs of possible longer-term easing of price pressures. As this unfolds in the coming months we should start to see further declines in Australia’s inflation rate, which will restore consumer confidence.

 

National House Building Costs Index

 

Although annual house building costs are still rising strongly, the recent decline in quarterly growth levels indicates that the construction boom driven by last year’s HomeBuilder is gradually being absorbed by the industry. Building approvals for houses have declined dramatically since the conclusion of HomeBuilder and have stagnated recently just above pre-covid levels, with supply now set to match demand over the medium-term.

 

ABS House Building Approvals

 

Although Australia’s inflation rate has surged over the past year, early signs are emerging that prices growth may start to ease sooner than expected. The price of oil has declined sharply over recent months and supply is gradually catching up with high levels of covid-generated demand – particularly in regard to moderating increases in house building costs.

A better than expected outcome for inflation can mean that interest rates may also peak lower and sooner than predicted – as indicated recently by the RBA Governor post the last interest rate rise announcement in September 2022.

 

Headline Inflation Rate

 

Interest rate levels are an important driver of home prices generally as they impact home loan affordability and also influence market confidence. Australia’s official interest rates, in line with other similar advanced economies, have increased sharply since May as the RBA and other central banks act to tackle surging inflation by stifling demand.

Although house prices were lower through winter in the face of sharply rising interest rates   - particularly in the previously booming markets of Sydney and Melbourne, recent signs are emerging that buyer and seller confidence may gradually be reviving into spring.

Regardless Australia remains the lucky country with inflation set to remain well below the levels reported in other similar economies.

Dr Andrew Wilson – Chief Economist My Housing Market 

 

If you'd like to discuss the current property market or better understand how we can assist you with purchasing a new or off-the-plan property, please contact us on 1300 123 463 or book a call back.

 

Published on 28th of September 2022 by Dr Andrew Wilson
Dr Andrew Wilson
Dr Andrew Wilson

Dr Andrew Wilson is Chief Economist for My Housing Market. He provides comprehensive property market intelligence and holds a PhD and Masters by Research each in Housing Market Economics together with graduate qualifications in Econometrics and Construction Economics. Formally Chief Economist of Domain, he is also one of Australia’s highest profile property market commentators.

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