Inflation 101: What does it really mean for my property?

Property buyers and sellers are no doubt wondering how inflation will impact the market this year.

Measuring inflation and its impact on everyday life and the price of our biggest asset – our home - is important to understand. After all, its an indication of our net worth.

Here’s an explainer that breaks it down for you.

What is inflation?

The Reserve Bank of Australia (RBA) explains that inflation is an increase in the price we pay for the goods and services that households purchase.

Inflation is measured as the rate of change in those prices. The best known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage of change in the price of a basket of goods and services. CPI is calculated by the Australian Bureau of Statistics.

Put simply, low and stable inflation signifies a strong economy.

The RBA has an inflation target, which aims to keep consumer price inflation between two and three per cent. That means that the prices we have to pay for goods and services don’t rise too quickly.

'The RBA and the cash rate': youtube.com/mortgagechoice

But if inflation looks set to rise beyond 3%, the RBA sets monetary policy that can contain inflation. And while it’s often described as a blunt instrument, the quickest way to keep inflation under control is to raise interest rates.

What this means for home loans

When raising interest rates, the RBA effectively raises the cost of home ownership. For Australians with a large mortgage, it can be particularly painful, because the cost of your monthly mortgage repayments will rise if you are on a variable rate.

While most people are on a variable rate, even fixed rate mortgagees will have to pay the newly raised rates once the variable rates are introduced.

Buyers circling the market may also be impacted by inflation, and therefore a change in interest rates. Some buyers have paused their search due to higher interest rates because the of the additional costs involved.

What this means for house prices

The impact of interest rates on house prices can be nuanced across states and cities, particularly given that a number of other factors in local areas collide to impact prices.

For example, the value of property is impacted by supply and demand in a specific area.

For sellers, low interest rates mean that borrowing becomes more affordable, leading to increased demand for properties. On the flip side, higher interest rates can deter potential buyers, reducing demand and pushing the price of your home lower than you might have expected.

Fluctuations in property markets

There’s no doubt that a reduction in interest rates will boost the housing market this year. Lower rates mean that buyers can borrow more and spend more when purchasing a property.

'How interest rate cuts affect the property market': youtube.com/mortgagechoice

Some neighbourhoods will see a bigger boost from rate reductions than others, which will be impacted by price point, location and investor interest.

It’s all good news for property owners. PropTrack data shows that home prices in most suburbs across Australia have in fact increased since interest rates started to rise in 2022.

Most recently in February, national home prices lifted 0.4%, with the median value of a home in Australia now 46.7% more expensive than it was at the beginning of COVID-19 in March 2020.

“Market sentiment has improved now that interest rates have started to move lower. The prospect of rate cuts had already buoyed sentiment, with clearance rates strengthening in every capital city in early February compared to the final months of 2024,” REA Group senior economist Eleanor Creagh said.

“February’s rate cut boosted borrowing capacities while improved affordability and buyer confidence have driven renewed demand and price growth, reversing the falls of recent months.”

The Reserve Bank of Australia cut the cash rate last month for the first time in four years. Picture: Getty

Who will be impacted

If you’re not in the market to sell your property, the impact on you is simply that the value of your home could be set to rise.

Regions where all suburbs have experienced media house price growth include Greater Perth and Regional WA. Brisbane Regional QLD, Regional SA are also nearing a 100 per cent success rate.

If you’re circling the market looking to purchase a property, the home loan rate being offered by your lender might look a little healthier over the course of this year, reducing the cost of getting into the market.

Meanwhile, there could be some more affordable options in the market. Affordable suburbs that have been recording negative growth include Oakville, Smythes Creek and South Lismore, PropTrack data shows.

No matter what position you’re in, 2025 will no doubt be an interesting year, though it looks like there will be bit more good news than last year.