Australia’s headline inflation eased to 3.8 per cent in June, offering a modest reprieve for the broader economy.
However, housing inflation surged in the opposite direction, accelerating to 6.8 per cent and cementing its role as the single largest contributor to the Australian Bureau of Statistics Consumer Price Index.
Nerida Conisbee, Ray White Group’s chief economist, warns that the sharp divergence between softening house prices and escalating living costs stems from a fundamental disconnect in how inflation is measured, and how policy is responding to it.
Ms Conisbee points out that established house prices are not included in the CPI at all. Instead, official housing metrics track operational and shelter expenses, including rents, new dwelling construction, and utilities.
Consequently, established house prices can fall while the specific housing costs captured by inflation keep rising.
“The RBA is using higher interest rates to slow demand and bring inflation down. But higher rates do little to address many of the pressures currently driving housing inflation.
“They do not reduce construction costs or create more homes. Instead, they increase financing costs for developers and make some new projects less viable,” she said.
Electricity was a major driver of the latest increase, up 22.4 per cent over the year as government rebates ended. The pressure spans across the entire sector: new dwelling costs rose 5.8 per cent as builders continued to pass on higher labor and materials costs, while rents increased by 3.6 per cent amid nationwide rental vacancy rates remaining near historic lows below 1.5 per cent.
For real estate agents fielding questions from vendors and buyers about why “falling prices” don’t seem to be translating into cheaper housing, this structural gap explains the disconnect.
The ongoing pressure comes as underlying trimmed mean inflation remains near 3.9 per cent, keeping broader cost-of-living concerns firm and placing the Reserve Bank in a difficult position as Australia falls behind its homebuilding targets relative to population growth.
Federal Budget changes are adding another layer of complexity; Ms Conisbee says these changes appear to be weakening investor demand, which may contribute to lower property prices but also means less potential rental supply.
She said the impact isn’t yet substantially visible in the CPI, as it takes time for changes in investor activity to flow through to the rental market, but expects this to become more apparent over coming months.
The net effect, according to Ms Conisbee, is an unusual divergence: house prices are already falling, but that doesn’t necessarily mean housing is becoming cheaper, with construction costs elevated, rents rising and the cost of adding new housing remaining high.
“This is where housing policy and monetary policy are working against each other,” she said.
“The RBA is using higher interest rates to reduce demand and bring inflation down, but those same higher rates make new housing development more expensive and less viable. At the same time, Federal Budget changes risk reducing investor participation, which could further constrain rental supply and put upward pressure on rents.
“Monetary policy is therefore trying to suppress housing-related inflation while housing policy risks adding to the supply pressures that are helping to keep it elevated.”
