How does adjusting for inflation affect property prices?

After analysing the latest CPI data released by the Australian Bureau of Statistics (ABS) and how inflation affects property capital, the results can be significantly different.

Across all capital cities values remain lower than at their previous peaks. At a combined capital city level, inflation adjusted values are now -6.5% lower than their previous peaks compared to being 0.7% higher if unadjusted.

According to the RP Data-Rismark Home Value Index, capital city home values were 0.7% higher than their previous highs in September however, when you adjust for inflation, RP Data’s capital city index remains -6.5% lower than the previous peak.

The RP Data-Rismark results show that cities such as Sydney and Canberra are higher than their previous peaks in non-adjusted terms, whereas they remain -3.3% and -6.6% lower when adjusted for inflation. This fact highlights exactly why the impact of inflation on home values is important and often overlooked.

Over recent years, the housing market has been characterised by higher levels of volatility and subsequently lower levels of home value growth. Conversely, inflation has continued to occur at a time when home value growth in most cities has failed to maintain pace. As a result, the cost of most other goods and services in the economy has risen at a faster pace than home values.

At a combined capital city level, inflation adjusted values peaked at the end of the September 2010 quarter, which is at a similar time to the non-adjusted figures. The major difference was that inflation-adjusted figures saw a turnaround in value growth over the past couple of quarters whereas the non-adjusted figures have been increasing since June 2012. 

The quarter in which inflation adjusted values peaked across each capital city, the quarter in which they reached a recent trough, the peak to trough value falls and the increase in values from the respective market troughs. Most confronting figure is how long it has been since there has been any ‘real’ value growth in some of these cities.

Sydney values peaked all the way back in the first quarter of 2004, Brisbane values peaked in the first quarter of 2008, Perth values peaked in the third quarter of 2007 and Hobart values peaked in the final quarter of 2007. In Melbourne, Adelaide, Darwin and Canberra the value peaks have been much more recent.

In addition, the ABS data also highlights that the costs associated with most goods and services has increased at a faster rate than the increase in home values over recent years. Housing is relatively more affordable especially considering how low mortgage rates are currently.

It is no surprise that home values have grown off the back of low interest rates although, it has been mainly contained to Sydney, Melbourne and Perth. Over the coming months, it will be interesting to see if value growth in these cities can be maintained as we foresee some potential affordability constraints entering these markets given the rapid rate of value growth. Conversely, it will be interesting to see whether some of the markets that have seen larger value corrections such as Brisbane, Adelaide and Hobart start to see an improvement in value growth conditions.