Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 466

How will rising inflation affect house prices?

Former Reserve Bank chief, Ian Macfarlane, wisely observed that in the US, easy money ends up inflating bubbles on Wall Street, but in Australia it ends up inflating house prices. This time last year, The Australian Financial Review was running stories like the following trumpeting double-digit growth in house prices across the country, driven by ultra-low interest rates and the generous Covid stimulus hand-outs.

The party is over

One year later, the stimulus party has finished, interest rates are rising, and house prices have started to give back some of those windfall gains. How far will interest rates rise, and how will they impact house prices?

Here is an update on our regular chart of house prices, cash rates, mortgage rates and inflation over the past few cycles. Here we use real house prices (i.e., after CPI inflation), to highlight the inflation protection in housing.

There have been regular price booms once or twice per decade, including during periods of high inflation and interest rates, like the early 1970s, late 1970s and late 1980s. These booms were followed by periods of static or falling prices, usually during economic slowdowns when interest rates were being cut.

Yes, house prices do fall in real terms. Regularly.

We have just enjoyed a tremendous house price boom. In the three years to December 2021, median house prices surged by +43% in Sydney, Brisbane and Canberra, +41% in Melbourne, +62% in Hobart, +35% in Adelaide, but Perth was more subdued with +15% growth. Prices are falling now as there are fewer buyers with less loan money, and more sellers, including recent buyers with big mortgages.

Prices depend on interest rates this time

How far prices fall will depend mainly on how high interest rates rise, and for how long. 

A neutral (non-inflationary) cash rate for Australia is around 3-4%, but if inflation does not quickly come back down to target range of 2-3%, then cash rates would probably need to be raised to well above ‘neutral’ first.

Central banks have a lousy record of controlling inflation without triggering economic slowdowns and recessions. There is no reason to think they will do any better this time.

It is unlikely house prices will give up all their 40% gains from the 2019-2021 boom. However, this might occur if aggressive rate hikes trigger a broad economic slowdown that brings high unemployment and widespread corporate and personal bankruptcies. We have had these before, in the mid-1970s, early 1980s, early 1990s, and the 2008-2009 GFC. The GFC was caused mainly by a global systemic banking crisis, but the Fed hiking rates from 1% to 5.25% was a major contributor to the housing collapse that triggered the banking crisis.

Despite these setbacks, housing is a long-term investment, and housing markets in Australia’s large cities have enjoyed a long upward march driven by:

  • Population growth, mainly due to immigration
  • Favourable demographics, with progressively smaller numbers of people per household
  • ‘NIMBY’ supply constraints, and
  • Tax advantages, such as exemptions from capital gains taxes and social security means tests.

These long-term fundamentals are likely to remain strong.

What lies ahead?

Although Russia is still waging war on Ukraine, and the Covid pandemic is still morphing into new strains, the main game affecting all types of investment markets is monetary policy. Can central banks contain inflation by unwinding their ultra-loose and ultra-expansionary monetary policies that created the inflation in the first place?

Political leaders, governments and central bankers have been quick to shift the blame for inflation to Russia, which is a convenient scape-goat. The problem is that, even before Russia’s February 2022 invasion of Ukraine, inflation was already running at 7.5% in the US, 5.2% in the UK, 5.1% in the Eurozone (including 5.3% in Germany), and 3.5% in Australia. In 2021, central banks dismissed this inflation as ‘transitory’, and then in 2022 they jumped on the opportunity to shift the blame to Russia. The Russian invasion certainly added to supply restrictions (severely affecting poorer countries much more than the west), but the main problem was the trillions of dollars of stimulus money from governments and their central banks, sloshing around the market pushing up prices everywhere.

We are not in the blame game here. Inflation was caused by too much money chasing the supply of goods, services, labour, commodities, housing, shares and other assets. This excess money came from governments (loose fiscal policy) and their central banks (loose monetary policy). On the fiscal side, cutting spending and raising taxes to end the deficits, and even run surpluses to pay off debts, is going to be political suicide for elected governments, especially with fractured politics since the GFC in the US, Europe and even in Australia.

This will mean the heavy lifting will have to be done by central banks. Their primary tool is very blunt – increasing interest rates to reduce spending, by reducing peoples’ surplus spending money after paying the mortgage, and by taking away their jobs. There are early signs that some of the temporary supply constraints are easing, and that inflation numbers are starting to ease in the US, but is probably still rising in Japan, UK, Canada, most of Europe, and in Australia.

If central banks can manage to pull off a miracle and bring inflation back to target ranges without triggering economic slowdowns and big reductions in jobs, spending, and corporate profits, then the share prices of most companies are probably already over-sold at current levels. On the other hand, if the rate hikes do result in economic slowdowns that materially hurt profits and dividends, then share prices probably have further to fall. And so do residential property prices.


Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.


Andrew Smith
July 21, 2022

Yes and no, when one can present inflation adjusted value vs 'real value' including inflation & all costs in holding an asset over long term; eg 7% can be used as an avge benchmark but varies over time with inflation, interest rates & holding costs.

Par Moi
July 18, 2022

I think we often forget the link between inflation and wages, especially in an inflationary environment. They work in synch. But there is also a link between wages and property inflation. Many young people caught up in FOMO, commit to the limit of their wage, knowing wage inflation will ease the burden of mortgage repayments and do so even while interest rates are increasing to arrest Inflation. Inflation will push property prices up after the mortgage stressed have moved out of the market.

July 14, 2022

Referring to this paragraph “ Inflation was caused by too much money chasing the supply of goods, services, labour, commodities, housing, shares and other assets.”, pre-covid, if I remember it correctly, the overwhelming concern was about the excess capacity. What caused this sudden reversal? Decoupling from China? Deglobalisation?

Warren Bird
July 14, 2022

It was easy monetary policy that got turned into credit creation by bank lending, encouraged by fiscal measures to mitigate the economic impact of the pandemic. That's how money supply growth is generated - banks create money by writing loans. It was obvious by late 2020 that money supply was growing excessively and inflation would follow. But central banks had forgotten monetary economics 1.01 and didn't see it as a signal to pull back on their extraordinary monetary policy support for economies that didn't need it.

July 16, 2022

Hi Warren, thanks. The monetary and fiscal policies have been easy since 2008. RBA has been continuously reducing rates since after 2010. How do you explain that the inflation for the same period hasn’t responded correspondingly until now? Why have the economists’ overwhelming concerns been excess capacity and deflation since 2008?

Warren Bird
July 18, 2022

C(wen), the gist of the answer is that monetary policy is always only like leading a horse to water. It can't make it drink the water. So, easy monetary policy provides the economy with the opportunity to fund activity more cheaply, but the economy has to take up that opportunity. One of the clear signs of whether that is happening or not is growth in the broad measures of money supply, because money growth happens when the banking system creates credit by writing loans. This happens when you get both strong demand for borrowing as well as bank confidence in the credit risk of doing so.
There isn't a simple relationship between the level of cash interest rates and the level of desire to create credit. It would be quite a long essay to explain the trends and interactions between rates and the economy and money supply growth from 2010 onwards, but my take on what happened in 2020 is essentially that the fiscal measures such as job keeper did enough to keep employment from falling off a cliff when the pandemic hit and the increase in the budget deficit thus meant that easy monetary policy was being recycled into the economy. House prices, which had fallen in 2018 and 2019, thus looked cheap when mortgage rates were as low as they were and there was a strong recovery in credit growth. The fears about the pandemic and the economy thus were allayed by fiscal and monetary policy, resulting in broad money growing by over 10% in 2020. The horse was drinking!
To me, that should have been the signal that inflation was going to become an issue, as it had in 2006-07 when broad money last expanded at that sort of rate. I said so in my professional contexts at the time. The corollary is that the RBA should have concluded that it was time to withdraw their stimulus during 2021. That they didn't is a complex story that needs to consider what might have happened to the A$ since central banks in other countries (Fed, BoE, ECB) were ignoring money supply growth as well! But the fact that they didn't is the core reason we have an inflation problem now. It's perhaps been made worse by other things like supply chain disruption and energy prices due to the Ukraine situation, but at the core is that monetary policy around the world was kept easy for too long.

July 14, 2022

Yes, interest rates are a blunt weapon to control inflation and can cause all the economic harm mentioned in the article, along with great hardship for families paying off a mortgage. Many/most families have taken out loans at historically low interest rates, which potentially could rise to 10, 15 or even 17% as they did very quickly in 1989. Imagine the distress and defaults if that happened. But raising interest rates is not the only way to control demand and prices. A small rise in the GST would also be anti inflationary and can be more targeted and subtle in its application. So should GST be raised to mitigate and avoid the impact of spiralling interest rates?

July 15, 2022

Hi Alan

Most mortgaged households did not take out their mortgage in the last two years and many are largely mortgage free. Those people will benefit, or at least not be too badly hit, by inflation.

Unfortunately Frydenberg, APRA and the RBA gave banks the blessing to irresponsibly lend again after COVid struck. Those new borrowers may suffer, or take a second job or sell their kidneys to stay afloat.

As usual, the working poor saw little benefit from COVID interest rate cuts and will only see their rent and basic living costs go through the roof. They will be looking for third jobs.

July 13, 2022

Interesting graph and interesting article.

A few comments if I may.

What would be interesting too, is the development of the median and mean income over the same period of time as well as a) the growth in average size of the houses and b) the changes of fit out and quality. Will say the unit I lived in, in Bayswater/Melbourne in 1985/1986 had one gas heater in the living room - no heating in the bed rooms at all - and Melbourne can get pretty chilly in Winter. And of course there was no air conditioning either. Compare this to ducted heating and Aircon in the houses of today.

My first work assignment abroad was for two years in Munich and in 1976 a colleague had just bought one of these Reihenhauser (compares to units or terraces) in a newly developed are around Munich. They did cost DM 125,000.- back then. Fast forward to 1987 when I returned to Munich again the very same houses were DM 400,000.-. But what had happened in-between was inflation (oil-price shocks) and salary increases. So the people taking the plunge in 1976 were well off. Consider this if you mortgage repayments are 33.3% of you income and we have 10 years of inflation and salary increases of say 5% per annum, then in ten years it is only 20.5% of your income. The rest is for discretionary spending and to keep the economy going. Bad?

July 14, 2022

I always took the view that mid 1980s a house in Perth cost 3.5 to 4 times my income. A house and land package was exactly that,a house built on sand.No fences,crossover,,extra costs for painting of walls etc,and concrete floors.After that you slowly improved it with fences,gardens,curtains.Interest rates fixed at 12.5% for some,and floating for others,I don't recall the date Hawke/ Keating did that. Today that house is probably worth 4 to 5 years average income,at much lower interest rates. Today smaller block of land,larger house,landscaped,fences and everything included,the ' free' fridges,air conditioning etc seem to have been cut back. 

Andrew Smith
July 13, 2022

Interesting but unsure as to what it actually means and how 'real median house prices' were derived?

Nonetheless, if one calculates real value on the basis of potential long term rental income for a 2.5, 5, 7 or 10% return, then prices are well beyond 'real value'?

On the latter hopefully slow easing of prices, can include nominal increases, but a medium long term return to value is on the cards, why?

Australia's peak personal/household spending, investment and contributors are the working age cohort but this passed the 'demographic sweet spot' pre Covid, according to OECD trends and comparisons with other nations:

SMSF Trustee
July 15, 2022

Andrew, 'real' in this context simply means that the value is adjusted for inflation.

Something starts at $100 and goes up by 10% to $110. But if inflation was 5% in that period then the 'real' value has only increased by 5%. So you'd say that it's real value is $105.

Median house prices come from various surveys of actual transactions in the real estate market. So it's not valuing houses at any point in time the way an analyst might value an asset, it's just taking what happened in the market.

Andrew Smith
August 08, 2022

I do understand the time value of money and impact of inflation, but if applying investment prism then 'real value' would be based on potential long term rental income less inflation, financing & all other costs; prices are well beyond real &/or fair value (if like shares, evaluated in good analysis)


Leave a Comment:



Is 'The Great Australian Dream' a sham?

Australia’s housing battle: Interest rates versus supply and demand

Valuations still stretched in Australia’s housing market


Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Latest Updates

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.


New research shows diverging economic impacts of climate change

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.


Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.


This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.



© 2024 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.