Inflation housing market impacts
Leading buyers agent, Pete Wargent, warns rising inflation levels will impact the Australian housing market in three critical ways. Image – Canva
  • Australia's inflation rate hit a 20-year high of 6.1% during the June quarter
  • Inflation rate will send construction costs soaring, tighten rental market and set the stage for further rate increases, says Pete Wargent
  • News spells trouble for construction companies, with more expected to enter administration

The headlines revealed last week that inflation had reached an eye-watering 6.1%, the highest figure in over 20 years.

While this may seem nominal to those who have lived through the sharp rises and falls since the Korean War Boom 70 years ago, it’s over 3% higher than the RBA‘s official inflation target of 2-3%, introduced in 1993.

These high inflation levels have already spelled trouble for Australia’s property industry, causing several construction businesses to enter administration.

It seems the inflation-induced strain on the market is not over yet, with leading buyers agent Pete Wargent warning of three critical impacts on the housing market.

Mr Wargent, co-founder of BuyersBuyers, says rising construction costs, a tight rental market and future interest rate hikes are all major concerns for the industry.

1. Construction costs soaring

Construction costs have risen by 10% over the past 12 months to June 2022, according to Corelogic‘s Cordell Construction Costs Index (CCI).

“Firstly we can see that the costs of renovations and building a new home have soared off the back of the HomeBuilder stimulus, very high demand for trades and materials, and supply shortages,” said Mr Wargent.

“The latest inflation figures confirmed that the producer price indexes for the housing construction sector are going to be very ugly.”

Pete Wargent, BuyersBuyers

pete wargent
Pete Wargent, BuyersBuyers. Image – LinkedIn.

In addition to the impact rising construction costs will have on new home builds, Mr Wargent believes the issue could drive more companies towards insolvency.

“The cost of building a new home has increased by 20 to 30% in many cases, and we are expecting a lift in construction insolvencies, with many projects now being mothballed or scrapped.

“This has implications for a potential undersupply of dwellings as immigration increases over the next 12 months” Mr Wargent added.

2. Tight rental market

The second major point of concern for the industry is for the rental market, with rental price inflation beginning to be reflected in the figures.

“The official inflation figures measure actual rents across the market, rather than
asking rents – which have soared over the past year – and as such there is a lag in the official data,” explained Mr Wargent.

Mr Wargent expects further inflation increases as power and energy costs are now rising, and says Australia’s headline rate of inflation is unlikely to peak until the final quarter of this year.

Rents CPI

Rents CPI
Source: ABS, collated by BuyersBuyers

“The ABS figures still have Sydney and Melbourne in negative territory over the year, so there is come catching up for this index to do to reflect what is happening in real time with asking rents for newly signed leases.

“To some degree the ABS figures reflect weakness in Central Business District rents, with many tenants electing to move to the suburbs or regionally through the pandemic” Mr Wargent said.

He added that high immigration rates as visas are processed in the coming year will see rental rates continue on a strong trajectory into 2023.

3. Future rate hikes

According to BuyersBuyers CEO Doron Peleg, the final note of concern is the inevitability of further rate hikes looming over borrowers in the final half of 2022.

Mr Peleg says that with inflation running hot still, financial markets are bracing for further tightening of interest rates.

“The good news for borrowers is that markets weren’t spooked by the June inflation figures, and in fact bond yields have dropped back to their lowest levels since May, suggesting that perhaps the figures weren’t quite as hot as feared.”

Australia – Bond Yields 

Bond yields
Source: BuyersBuyers

“Indeed, markets are pricing for interest rates to be on the way back down next year, which mirrors our view that property buyers have a 6-to-9-month window to buy with less competition to snare a bargain before the market picks up again next year.

“In our view there is a terrific opportunity to negotiate hard in the second half of 2022 and buy well located property at a discount,” concluded Mr Peleg.

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