Australia’s inflation rate is on the decline, dropping from 5.2% in October to 3.4% in February 2024 according to the Australian Bureau of Statistics.
Other than having an impact on the everyday cost of living, why is inflation important for homebuyers?
Well, for one thing, the Reserve Bank of Australia (RBA) considers inflation alongside other factors like unemployment and wage growth when setting the country’s official interest rate.
Lower inflation allows the RBA to potentially keep interest rates steady or even cut them, which will have an impact on mortgage affordability.
Hedging against inflation
For property investors, inflation presents the potential for hedging. This is an investment strategy that aims to protect your money from losing value as inflation increases. You do this by investing in something that tends to hold its value or even increase with inflation. Real estate can appreciate in value over time, potentially outpacing inflation. It also holds value over longer periods than other forms of investment.
This means an investment property could offer a shield against inflation’s negative effects. Inflation can also lead to increased rental rates which means landlords can generate higher returns on their investments.
Potential for increased costs
However, investors should be aware that inflation can also negatively impact the property market. Increased inflation often raises construction costs, which, in turn, will impact new property development. This can restrict market supply, potentially driving home prices higher.
Interest rates, which are influenced by inflation, affect a buyer’s borrowing capacity. As inflation rises, so can interest rates, reducing the amount you can borrow, and impacting your home-buying budget.
Conversely, when inflation falls, the RBA may reduce interest rates. This could mean you can borrow more money to buy a more expensive property/
Investors and inflation
The property market is closely linked to the inflation rate, due to its influence on the cost of living and interest rates. Investors should be aware of how inflation can impact their investment decisions, as it brings both opportunities and challenges.
Ultimately, the decision to invest should be based on your financial circumstances, taking into consideration factors such as your risk tolerance, investment goals and overall portfolio strategy.