Home loans in the age of inflation: How might you beat high property prices?

Houses in Sydney
Image: Getty

Key points of this article:

  • Inflation remains high, general cost of goods still pricey.
  • Housing costs contribute to Australia's inflation figure.
  • Official interest rate is holding for now, so home loan rates are mostly steady.
  • Popular suburbs and property types contribute to housing demand and therefore price.
  • Comparing home loan rates remains crucial even if property prices climb.

We live in a high price world in 2024. Everything seems to be more expensive the past couple of years - be it milk, bread, meat, furniture, clothing, shoes, household energy, and yes, housing.

While the current inflation rate in Australia has decreased, it still remains, well, inflated – you probably feel as though you’re still being asked to pay a lot more than before. In many cases, you are.

There’s been some brief positivity around inflation, however: the Consumer Price Index (CPI) - which measures inflation on a household basis - recorded a modest 0.6 per cent increase during the December 2023 quarter, marking the slowest growth since March 2021, as per the Australian Bureau of Statistics (ABS). 

What is Australia’s inflation rate in February?

While inflation hit a whopping 7 per cent last year, the rate of price increases has certainly slowed. It started trending downward halfway through last year and by year’s end, CPI rose by just 4.1 per cent in December. That’s the figure we have for now. 

Keep in mind that the Reserve Bank of Australia (RBA) has a target inflation range of 2 to 3 per cent per year. And while this doesn’t seem out of reach, there’s a balancing act to perform to get there. 

“If inflation continues its downward trajectory, the RBA will likely respond by lowering the cash rate,” says economist and senior lecturer at UNSW Business School, Dr Gonzalo Castex. “However, new geopolitical developments in the Middle East could potentially impact prices, adding an element of uncertainty to this scenario. “

What contributes to inflation?

Different spending categories impact inflation. For example, clothing, footwear, holiday travel and furnishings, have contributed to the decline in the CPI, says Dr Castex. 

Conversely, he says that insurance, financial services, gas, electricity, rent, tobacco, bread and cereal products have played a role in increasing it. Housing also plays its part, but we’ll get to that in a moment. 

All of this typically leads to deliberation over the official cash rate, which is set by the RBA. The cash rate is a crucial tool in the RBA’s monetary policy toolkit, influencing economic borrowing costs. For one, the RBA aims to stimulate economic activity by reducing the cash rate and making borrowing more affordable. (Last year, it sought to do the opposite, tightening the reins on spending by increasing the cash rate numerous times).  

How does this impact housing and home loans?

A lower cash rate often leads to lower home loan interest rates, which can help to attract more home buyers and potentially see a spike in home prices. 

However, Dr Castex says it’s important to acknowledge that the relationship between interest rates, inflation, and the housing market is multifaceted. 

“While a lower cash rate may contribute to increased housing demand, other factors such as economic conditions, employment levels, and global events also shape market dynamics,” he says. “The RBA carefully considers these variables in its decision-making process, aiming to strike a balance that supports overall economic stability.”

This is where it can all get a bit complicated. The steady rise in the price of housing is one of the factors actually pushing inflation higher in recent years. And this doesn’t seem likely to slow down because there’s already a low supply of homes in major cities and a constant stream of new immigrants needing housing in the mix each year. So in short, demand remains high and prices keep climbing, generally. 

Corelogic reports that housing makes up around 22% of the CPI basket that is used to calculate inflation over time. In fact, this gives housing the largest weighting of all components within the CPI calculation. 

New properties and renovations cost a lot

Yet, there’s a further clarification to be made here: the biggest sub-components of the housing measure are the change in the cost of newly constructed dwellings and major renovations by owner-occupiers, as well as the change in rents paid to landlords.

That said, rising property prices in a given market can be like a rising tide – all boats (or houses) are lifted. So it’s difficult to say why some aspects of housing can cost more than others. At the ground level, the popularity of certain areas at weekend home inspections and auctions can at least offer a window into how popular or competitive a suburb is among buyers. 

It’s also easy to lose sight of other factors that contribute to home prices, be it the property type, street location or aspect, or seasonal market changes (the early part of the year tends to be quiet, while Easter tends to be very busy). As you can see, there’s a push and pull with all these economic trends. And amid a mix of news headlines about unending inflation, interest rate speculation and supposedly impossible property prices, being optimistic about affording a home can be very challenging.

At least easing cost of living pressures should help to support an improvement in consumer sentiment, which has been poor for a while. We have certainly been impacted by all this high inflation talk, even if we choose to ignore it. But Corelogic says that it's likely the lower than forecast inflation outcome for the December quarter, alongside a growing expectation of rate cuts later this year will help to lift consumer attitudes. 

And, it reports if that is the case, we should expect housing activity to follow suit later this year. So, as interest rates hold, and presumably most home loans rates hold, now might just be the time to step more positively toward buying a home.

If you’re ready to take this step, the most crucial aspect of your journey will be securing a good home loan. Among the many features available in home loans, none is perhaps more important than the interest rate you pay each year. At Mozo, our experts crunch the numbers to reveal some of the best available home loans on the market, which you can start comparing right away!

Compare the top home loans - last updated 23 February 2024

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