The Urban Developer
AdvertiseEventsWebinarsUrbanity
Industry Excellence
Urban Leader
Sign In
Membership
Latest
Menu
Location
Sector
Category
Content
Type
Newsletters
Urban Leader Awards Logos RGB White
NOMINATIONS CLOSE SEPTEMBER 12 RECOGNISING THE INDIVIDUALS BEHIND THE PROJECTS
NOMINATIONS CLOSING SEPTEMBER 12 URBAN LEADER AWARDS
LEARN MOREDETAILS
TheUrbanDeveloper
Follow
About
About Us
Membership
Awards
Events
Webinars
Listings
Resources
Terms & Conditions
Commenting Policy
Privacy Policy
Republishing Guidelines
Editorial Charter
Complaints Handling Policy
Contact
General Enquiries
Advertise
Contribution Enquiry
Project Submission
Membership Enquiry
Newsletter
Stay up to date and with the latest news, projects, deals and features.
Subscribe
ADVERTISEMENT
SHARE
3
print
Print
ResidentialEliza OwenThu 29 Oct 20

Deflation, Interest Rates Support House Prices

79611080-71ec-49b9-af11-9907f268aced

Adjusting for a strong rise in inflation takes some shine off the recent value increases seen across smaller capital city housing markets in the September quarter.

This is because factoring inflation into the rate of capital gains of dwelling values provides an important perspective that is often overlooked.

Housing is an integral part of Australian household wealth, and has been identified as a key source of equity for funding aged care and health care later in life.

Therefore, inflation can affect the real value that be accessed through property over time.

The latest Consumer Price Index results from the Australian Bureau of Statistics showed a 1.6 per cent increase over the September quarter—the highest quarterly result since 2006.

When taking headline inflation numbers into account for the September quarter, real (inflation adjusted) changes in house prices showed declines across seven of the eight capital city markets, and the combined regional markets.

Darwin was the only capital city market to exhibit real dwelling value growth, at 0.7 per cent.

Real v nominal change in dwelling market values

^Source: Corelogic

However, the 1.9 per cent decline in headline inflation through the June quarter, which was not fully recovered by the September result, has reduced the real decline in property values through the pandemic compared with the nominal result.

Nominal declines in national dwelling values were 1.9 per cent between the end of March (when stage 2 lockdowns were rolled out across Australia), and September.

However, adjusting for the deflationary period in June, real dwelling values fell only 1.5 per cent.

While annual inflation has been weighed down to 0.7 per cent, real growth in national dwelling values was 4.1 per cent in the year to September.

Cash rate reductions, which are anticipated through November, are prompted by a low inflationary environment, but simultaneously increase demand for property, and typically push prices higher.

Despite the initial correction in home values that came with high uncertainty and a slowdown in economic activity, residential real estate values show signs of stabilising, or even increasing.

A particular challenge through the current period may be for those trying to save for a deposit to buy property, particularly for first home buyers who do not have existing property to draw on for sale or equity.

On the one hand, low inflation erodes the value of savings at a more gradual pace. But with the cash rate potentially hitting new record lows in November in an attempt to lift inflation, deposit rates for savings accounts are likely to be further compressed.

This could see first home buyers trying to enter the market with increasingly low deposits, meaning more debt, which in a low inflationary environment, is harder to pay off over time.

What does inflation tell us about real returns in different areas over time?

Growth in housing across Australia at the macro level has broadly outpaced inflation, creating real returns for property owners across Australia.

In the June 2020 Pain and Gain report, it was noted the median return for resales on property held for 30 or more years had a nominal profit of $569,000.

On the median resale through the June quarter, this amounted to a real return of $230,000.

The table below summarises the nominal versus real returns on capital city dwelling values over a 10 and 20 year period.

The 10 year real return highlights the weakness in long term returns from mining-related markets like Perth and Darwin.

It also highlights that the growth in the Brisbane market over the past 10 years can be largely attributed to inflation.

City dwelling markets nominal vs real returns

CityNominal 10yrsNominal 20yrsReal 10yrsReal 20yrs
Sydney60.2%181.%33.0%76.3%
Melbourne38.1%228.6%14.7%106.2%
Brisbane11.7% 172.3%-7.2%70.8%
Adelaide 14.8%169.2%-4.7%68.9%
Perth-16.2%109.7%-30.4%31.5%
Hobart 41.7%240.4%17.7%113.5%
Darwin-25.6%61.5%-38.2%1.3%
Canberra23.0%199.6%2.1%88.0%
Combined Capitals34.2%186.0%11.4%79.4%
Combined Regionals15.1%145.8%-4.4%54.2%
Australia29.7%176.2%7.7%73.3%

^Source: Corelogic

Over a 20 year period however, each capital city dwelling market has returned growth higher than inflation.

Real returns for housing in Australia increased from the late 1980s, driven by deregulation in the financial system, increased globalisation and relatively low levels of supply to strong population growth.

Stubbornly low inflation against a low interest rate environment may continue to boost real returns for home owners, but could exacerbate the challenge for non-home owners to get on the property ladder.

ResidentialAustraliado not usePerthMelbourneHobartDarwinCanberraBrisbaneAdelaideOpinion
AUTHOR
Eliza Owen
More articles by this author
ADVERTISEMENT
TOP STORIES
Stockland bumps up its apartment pipeline in melbourne and sydney
Exclusive

Stockland Re-Enters Density in $5bn Apartment Play

Renee McKeown
4 Min
Woolloongabba Precinct Vulture St
Exclusive

Brisbane Developer in Cross River Rail Compensation Tussle

Clare Burnett
4 Min
The Mondrian Gold Coast hotel's food and beverage is driving profits
Exclusive

Touch, Taste, Theatre: What’s Driving Mondrian’s Success

Renee McKeown
6 Min
Fortis’ display suites are designed as brand environments first, with tactile details and curated design to build buyer confidence before project specifics.
Exclusive

Relevant or Redundant: Will Tech Kill Display Suites?

Vanessa Croll
7 Min
Exclusive

Missing Heart: Why The Gold Coast Needs a CBD

Phil Bartsch
7 Min
View All >
Aerial view of Caboolture and Bruce highway to Brisbane with Bribie Island Road crossing, Queensland, Australia
Policy

Queensland’s $2bn Push Opens New Housing Front

Vanessa Croll
JQZ Parramatta EDM
Residential

JQZ Plots 10-Storey Addition to Parramatta ‘Auto Alley’ Plans

Clare Burnett
The Adelaide purpose built student accommodation market is about to increase by 1058 beds with the State Commission Assessment Panel supporting two towers in the making.
Student Housing

Highrise Approvals Add 1000-Plus PBSA Beds in Adelaide

Renee McKeown
The two towers, of 35 and 34 storeys, help cement the SA capital’s growing status as the best place in Australia for the…
LATEST
Aerial view of Caboolture and Bruce highway to Brisbane with Bribie Island Road crossing, Queensland, Australia
Policy

Queensland’s $2bn Push Opens New Housing Front

Vanessa Croll
2 Min
JQZ Parramatta EDM
Residential

JQZ Plots 10-Storey Addition to Parramatta ‘Auto Alley’ Plans

Clare Burnett
3 Min
The Adelaide purpose built student accommodation market is about to increase by 1058 beds with the State Commission Assessment Panel supporting two towers in the making.
Student Housing

Highrise Approvals Add 1000-Plus PBSA Beds in Adelaide

Renee McKeown
3 Min
Stockland bumps up its apartment pipeline in melbourne and sydney
Exclusive

Stockland Re-Enters Density in $5bn Apartment Play

Renee McKeown
4 Min
View All >
ADVERTISEMENT
Article originally posted at: https://www.theurbandeveloper.com/articles/deflation-interest-rates-support-house-prices-