Understanding Inflation: What Every Homebuyer Needs to Know

Inflation. It’s the word on everyone’s lips lately, especially as prices across the board continue to rise, leaving many Australians feeling the pinch. In this insightful episode of the Home Buyers Australia podcast, hosts Jack Corbett and Damien Walker break down what inflation really is, why it exists, and—most importantly—how it impacts the housing market and the everyday homebuyer. Watch the full episode here.

What Is Inflation?

At its core, inflation refers to the gradual increase in the price of goods and services. It’s measured through the Consumer Price Index (CPI), which tracks the overall cost of a basket of goods over time. While inflation is a natural part of economic growth, the last few years have seen it climb to levels that most Australians hadn’t anticipated. In 2022, inflation hit a staggering 7.8%, a sharp rise from the Reserve Bank’s usual target of 2-3%.

Damien explains that inflation became a significant concern when people noticed their usual spending habits were getting more expensive. A Big Mac that once cost $5 suddenly costs $7, and those incremental changes add up over time. “Inflation impacts everyone, but especially homeowners,” says Damien. “When your grocery bill, energy costs, and other expenses rise, you feel it. And when inflation gets out of control, the Reserve Bank has to step in to stabilise the situation.”

Why Does Inflation Exist?

You might ask, “Why does inflation even exist? Wouldn’t it be easier if prices just stayed the same?” Damien tackles this by breaking inflation down into two key drivers: supply and demand and monetary policy.

  1. Supply and Demand: During the COVID-19 pandemic, supply chains around the world were severely disrupted. Australia, like many other countries, experienced a shortage of materials due to reduced imports. This scarcity created an imbalance—high demand for goods, but not enough supply to meet it. Naturally, prices surged as a result. “It wasn’t just limited to groceries or building materials,” Damien explains. “Nearly every product and service felt the impact.”
  2. Monetary Policy: Governments often adjust the money supply to stimulate or control economic growth. During the pandemic, Australia, like many other countries, pumped large amounts of money into the economy through stimulus payments and other initiatives. While this helped keep people afloat during lockdowns, it also contributed to inflation, as more money in the system often leads to higher prices.

How Does Inflation Affect Wages?

One of the most frustrating aspects of inflation is that while prices go up, wages don’t necessarily follow at the same rate. As Jack points out, most people haven’t seen their salaries rise by 7.8%, even though inflation hit that mark. “You’re working just as hard, if not harder, but your dollar doesn’t stretch as far,” says Jack.

Damien agrees and adds that while wages do grow over time, they often lag behind inflation, especially during periods of rapid price increases. “In Australia, we have the Wage Price Index (WPI) that tracks wage growth, but when inflation is at 7%, wages can’t keep up. You’re essentially getting less for your money, which is why the Reserve Bank is so keen to bring inflation down to its target range.”

The Sweet Spot: What Does Healthy Inflation Look Like?

While high inflation can be detrimental, Damien reminds us that some inflation is a good thing. “The Reserve Bank aims for 2-3% inflation because it signals a growing economy. At that level, wages can keep up, and the economy can expand without becoming overheated.”

In this sweet spot, consumers feel confident. They know their purchasing power is stable, interest rates are manageable, and big-ticket items like homes and cars are within reach. According to Damien, we’re inching closer to that balance again. “We’re starting to see inflation drop back into the 3% range, which is a positive sign. When inflation is under control, borrowing becomes easier, and that benefits the entire housing market.”

The Link Between Inflation and House Prices

So, what does inflation mean for house prices? The answer depends largely on supply and demand dynamics in the property market.

Damien explains that in cities like Perth, Adelaide, and Brisbane, there’s a notable supply shortage, and even in this high-interest rate environment, house prices have continued to rise. “When demand is high, and supply is low, prices are going to climb. That’s just basic economics,” says Damien. In contrast, Sydney and Melbourne are seeing price stabilization due to a slight increase in listings.

But there’s another factor at play: interest rates. As inflation comes down, so will interest rates, allowing buyers to borrow more money. “If the cash rate drops, people can afford bigger loans, which means they can spend more on homes,” says Jack. “And let’s be honest—people will often borrow as much as the bank lets them. We’re likely to see house prices go up again when this happens.”

Inflation and Debt: How Inflation Helps You Manage Debt

If there’s one thing homebuyers should take away from this episode, it’s that inflation can actually help you manage your mortgage debt in the long run. Damien shares an important insight: “When you take out a mortgage today, it may feel overwhelming, especially if you’re using 40-50% of your income to make repayments. But over time, inflation works to your advantage.”

Here’s how: as inflation increases, wages tend to rise as well, even if they lag behind a bit. Meanwhile, your mortgage debt stays the same. “After a few years, that massive loan payment that felt impossible will become more manageable because your income will likely have gone up,” Damien explains. “You’re essentially paying off your debt with money that’s worth less than it was when you took out the loan.”

Jack adds that this is why so many of our parents and grandparents were able to pay off their homes despite initially feeling overwhelmed. “They stuck with it, and over time, inflation helped them reduce the real value of their debt.”

How Should Homebuyers Prepare for the Future?

Looking ahead, Damien believes we’re approaching a more balanced market. Inflation is trending downward, and we may soon see interest rates drop as well, creating a favorable environment for buyers. However, he also warns that now is not the time to overspend. “We’ve been through a period of tightening our belts, and even when things improve, it’s important not to go back to overspending.”

He advises first-home buyers and investors alike to remember the lessons learned from this period of high inflation. “Avoid lifestyle creep—don’t immediately upgrade your car or take on more debt just because you can. Stick to your budget and continue making smart financial decisions.”

As the episode concludes, Jack and Damien leave listeners with an important message: inflation, while challenging, is a natural part of the economic cycle. By understanding how it works and how it affects wages, debt, and house prices, homebuyers can make informed decisions that will benefit them in the long run.

While inflation may feel overwhelming at times, it’s crucial to remember that it’s also a mechanism that helps reduce the real value of debt over time. And as we move toward more stable economic conditions, those who understand and plan for inflation will be in the best position to thrive in the property market.

Get in Touch

Ready to take the next step? Contact Corbett Property Buyers for expert guidance in navigating the property market, and reach out to Atelier Wealth for tailored mortgage solutions that suit your financial goals. Your journey to homeownership starts here!

For more tips and insights, tune in to the Home Buyers Australia Podcast on Spotify and Apple Podcasts.