The Reserve Bank of Australia is expected to raise official interest rates today, by another quarter per cent to 4 per cent.One of its major concerns is a possible outbreak of inflation – a general rise in the price of goods and services – as the Australian economy continues to recover.

Higher-than-expected inflation can destroy wealth as it makes the money we have worth less. Many financial experts recommend taking out some protection against inflation. Assets such as gold have traditionally been seen as hedges – as has property.

Conventional wisdom is that house prices will always go up more than inflation – providing an inbuilt hedge. But is that true?

Saul Eslake, an independent economist and Program Director at the Grattan Institute, says in general terms it is. “Housing in Australia has historically been a reasonably good hedge against inflation over the last 25 years,” he said. “Though in some instances, including in the mid 1970s, early 1990s and in Sydney between 2003 and 2006, house prices actually fell in real terms – ie houses rose by less than the inflation rate.”

Eslake says houses will never be a perfect hedge against inflation, because house prices and inflation don’t move exactly together. He also notes that just because houses have been a good hedge against inflation in the past, doesn’t guarantee they will in the future. But “for most Australians over the last quarter of a century house prices have gone up in real terms (more than inflation).”

So should people dive into the property market to hedge against inflation? Eslake cautions against such a move. Rising inflation also means rising interest rates, as the RBA tries to slow the economy to dampen price rises. “If interest rates go up enough, enough people who borrowed money to get into housing may find they have to get out of it, it could put downward pressure on house prices,” he said. It’s difficult to tell whether that will happen in the current cycle. But “people ought to be pretty careful at the levels where they (house prices) are now.”

Angie Zigomanis, Senior Analyst – Residential Property at BIS Shrapnel, says that ultimately house prices are driven by demand and supply. “In the current environment things are a bit tighter and most people are working on the assumption that prices won’t go backwards,” he said. But he notes there can be periods where house prices go backwards and don’t track upwards with inflation. He says that Sydney from 2004 to 2009 is a prime example when median house prices in real terms (after the effects of inflation) dropped by around 15 per cent.

Craig James, the Chief Economist at Commsec, says there is there’s no consistent evidence that house prices rise when inflation increases. “Each circumstance is always different,” he said. But he’s not worried about inflation at the moment. “We don’t think consumers are out there spending like there’s no tomorrow,” he said. “That means retailers will continue to have to keep prices lower. The bottom line is we wouldn’t be expecting inflation to accelerate.” James says the headline rate still remains very much inside the RBA’s target band of 2 to 3 per cent. “We think more than likely that’s where it’s going to be over the year – around two to three per cent,” he said. “Any concerns about inflation are unjustified.”

In the last quarter of 2009 the consumer price index (CPI) – a key measure of inflation – rose by a higher-than-expected of 0.5 per cent, giving an annualised rate of 2.1 per cent. The underlying CPI rose 0.65 per cent in the quarter, for an annualised rate of 3.4 per cent. Both figures show the pace of inflation is quickening.

James expects the current strong level of house price growth is going to dissipate somewhat in 2010, with growth of between 8 to 10 per cent. He said Australia had the ‘perfect storm’ of factors driving up house prices in 2009 – supply wasn’t keeping up with demand; interest rates were at 49-year lows; and the first home buyers grant boost increased demand.

James notes that house prices began softening in December. “More than likely we will see further softening in the early months of 2010,” he said. “The outlook is still quite positive with the population rising and construction not lifting to the extent that population is increasing. The RBA will also be cautious about lifting interest rates.”

Do your research! 

onthehouse.com.au offers property sales data for you to do your property research.

• Check out Listings and Latest Sales Prices in your area for FREE!
• Sign up for our Premium Reports to do some in-depth research on historical property sales.

Share This Page: