“The challenging part for the Reserve Bank is the slowing economy. Despite the employment market holding strong, unemployment is on the rise,” says Shane Petros, CEO of Australian Finance Hub.

Understanding the latest inflation trends and their impact on the Australian property market

The latest inflation data reveals a rise in the cost of living in Australia, primarily driven by increased housing and food prices. “Retail and construction sectors have slowed down significantly, and insolvencies hit a record high last financial year,” Petros continues.

Housing costs, food and fuel prices have contributed to inflation.

Rents: Rent prices increased by 2.0% this quarter due to a tight rental market and low vacancy rates. Over the year, rents have surged by 7.3%, though this is a slight decrease from the earlier annual rise of 7.8%.

New Homes: The cost of purchasing new homes rose by 1.1% this quarter, mainly driven by higher labour and material costs, continuing an annual upward trend of 5.1%.

Electricity: Prices have jumped by 6.0% as the effects of previous rebates have diminished.

Food: Food costs saw a 1.2% increase this quarter. This was driven by a 6.3% rise in fruit and vegetable prices, impacted by adverse weather conditions. Over the past year, food prices overall have grown by 3.3%, with fruit prices particularly rising by 4.7%.

Fuel Prices: Transport expenses have increased by 4.6% annually, with a notable 7.7% rise in fuel prices. For more detailed statistics and insights, visit the Australian Bureau of Statistics

These inflationary pressures have implications for the Australian property market:

Housing Affordability: As housing costs continue to climb, both buying and renting homes become more expensive. This trend makes it increasingly difficult for potential buyers to enter the property market and for renters to find affordable options. It’s worth exploring your borrowing power at today’s rates.

Consumer Spending Power: With higher food and transport prices, households face reduced disposable income, leaving less financial flexibility for housing-related expenses. This can further complicate the financial planning for those looking to purchase property or refinance existing mortgages.

“Australia’s housing market is experiencing an unprecedented level of undersupply, creating a supply-demand inflection point that requires significant attention,” Petros continues.

“The Reserve Bank does not want to push the economy into a recession; therefore, interest rates are likely to decline eventually, probably by late this year or early next year to assist in boosting the property market and in time, consumer confidence will rebound, and the market will resume its upward trajectory.”

While this may add some financial strain in the short term, there is a silver lining

By holding interest rates, the RBA continues to offer consistency and provides some relief for mortgage holders who have been struggling with high-interest rates, with the potential for rates to decline in the near future. This would make mortgages more affordable and potentially boost the property market.

Why watching overseas interest rates is a good idea

With the news that the Fed in the US could be cutting rates as soon as next month, analysts predict a possible interest rate cut here in Australia by 2025, which could ease the burden on homeowners and buyers.

It’s crucial to watch global interest rate decisions, especially from the US, as they often influence Australia’s financial landscape. If the US decides to cut rates in September, Australia might follow suit. A rate cut could mean lower mortgage rates, making it easier and more affordable to buy a home or refinance an existing mortgage.

“Inflation and interest rates are key determinants of exchange rates because they influence the relative value, and demand of currencies,” says a spokesperson for TorFX, Homely’s preferred currency transfer partner.

“High interest rates attract foreign investment, strengthening the currency, while low interest rates can lead to capital outflows and a weaker currency. The RBA adjusts interest rates to manage inflation within Australia, thus having a direct impact on exchange rates.”

The latest inflation trends highlight the rising cost of living in Australia, driven by increased housing, food, and transport expenses. While these factors pose challenges, especially in the property market, monitoring interest rate developments remains crucial. Importantly, Aussies need to keep a pragmatic mindset: while the RBA has kept rates on hold, inflation is still moving in the wrong direction.

A potential rate cut next year could alleviate some of these financial pressures, making homeownership more attainable and easing the overall cost burden on households but any flurry of activity now can see those inflation figures spike.