Published 6 September 2023
It’s well-known that the pandemic triggered an inflation event in Australia and many other parts of the world. Demand for many goods and services increased, and petrol production slowed down, which put pressure on costs across the board.
One of the worst affected industries was construction, which saw prices rise astronomically thanks to a squeeze on supply chains, materials, labour and interest rates. Sadly, this saw a number of companies become insolvent because they were ill-equipped to manage increased costs.
The good news for anyone who wants to build a home, develop property or buy off the plan is that there appears to be light at the end of the tunnel.
Here is some information about inflation and interest rates as they stand in Australia right now, and what this means for the property market.
News on inflation and construction costs
The Australian Bureau of Statistics (ABS) reported that annual consumer price index inflation was 6% in the June quarter. In comparison, 7% was recorded in the March quarter and inflation peaked at 7.8% in the December quarter of last year.
The ABS’s latest figures also place the price growth of new dwellings at 7.8%, well down from the high in September 2022 of 20.7%. Researchers credit the easing of growth to levelling material costs and improved availability of goods and labour.
Meanwhile, CoreLogic’s Cordell Construction Cost Index (CCCI) reported that construction cost growth slowed to 0.7% in the June quarter; a big improvement on the 4.7% increase seen in the September quarter last year.
So while prices are still rising, the trajectory is levelling out. This brings more certainty to builders and homebuyers.
Interest rates and construction
Interest rates have now been on hold for two consecutive months. The Reserve Bank stated at the start of August that smaller-than-expected consumer price increases over the last quarter and a drop in retail sales during June meant they did not feel an additional increase was warranted.
Interest rates are still reasonably high and while it’s not confirmed that they won’t rise again, Deloitte Access Economics Partner Stephen Smith was quoted as saying that the Australian economy has softened dramatically, the pace of inflation has peaked and medium-term inflation expectations are not rising. He says that in this context, there shouldn’t be further interest rate increases in Australia.
A steadying of interest rates and the hope of decreases in the not-too-distant future is good news for the construction industry. It means projects will be easier to plan for and budgets easier to stick to. What’s more, borrowing costs will be steadier and more predictable.
What this means for the property market
As Michael Yardney recently explained on his Property Update website, high inflation doesn’t necessarily mean property prices will drop or the property market will crash. Yes, values may settle, but historically inflation doesn’t result in them falling.
Some sources predict that inflation won’t drop into the 2-3 per cent range that the Reserve Bank of Australia aims for until 2025, while others predict a drop to 2.9% in 2024. If past trends are anything to go by, this is when people will become more active again, and prices will begin to shoot up once more.
As Michael Yarndey also points out, “Investors should recognise that times like this create tremendous opportunities, a window of opportunity is currently available that smart property buyers are taking advantage of.” His advice to investors is that now is a good time to purchase quality assets; A-grade properties in locations where value is likely to hold steady.
It all comes down to understanding how property markets work, choosing wisely and having a clear plan. With inflation and interest rates still relatively high, this may be the perfect time to invest. You can take advantage of a slower period in the market and enjoy returns when buying activity ramps up in the future.
If you do decide to go ahead with investing, here are two quick pieces of advice:
- Work with an experienced broker to secure a loan that will work for you, even if interest rates increase again.
- If you’re buying off the plan, make sure the developer and builder have a great track record and robust measures in place to protect your investment.
If you’d like to explore property investment options for 2023, visit Landen’s Estates, or get in touch with us today.