1. Inflation has fallen for the fourth consecutive quarter, with the December result below forecasts. This reflects softer demand in the economy, including in retail trade and job vacancies.
2. Falling inflation strengthens the case for interest rates remaining on hold next week and potentially decreasing later this year. Lower interest rates are expected to boost housing demand.
3. Housing makes up a significant portion of the CPI basket used to calculate inflation. The cost of newly constructed dwellings and major renovations, as well as rents paid to landlords, are the main components of the housing measure.
4. The rate of increase in the cost of new homes is easing, but residential construction remains a significant contributor to overall inflation. High labor and material costs continue to put pressure on prices.
5. Rent inflation is showing signs of easing, with the annual growth in the rent component of CPI reducing. However, annual growth is still well above the pre-COVID average.
The regional market has seen a more significant decline in rent growth compared to the capital cities market.
CoreLogic’s Eliza Owen Analyzes the Latest Inflation Data and Its Implications
Eliza Owen, Head of Research at CoreLogic, provides a detailed breakdown of the latest inflation data and its significance for the housing market in 2024. The December quarter’s Consumer Price Index (CPI) results show a continued decline in inflation, falling from 5.4% in September to 4.1%. This marks the fourth consecutive quarter of annual inflation decline, with the December result falling below the Reserve Bank of Australia’s (RBA) forecast of 4.5%.
Inflation Trends and Monetary Policy
- Declining Inflation: The consistent decrease in inflation reflects softer demand in the economy, evident in retail trade, a slight fall in job vacancies, and a gradual rise in unemployment from late 2022 lows.
- Monetary Policy Implications: The falling inflation strengthens the case for interest rates to remain on hold in the next week and potentially decrease later in the year.
Impact on the Housing Market
- Boost in Housing Demand: A reduction in interest rates is likely to stimulate housing demand, which has been dampened by high interest costs and limited borrowing capacity.
- Housing Market Dynamics: While a more exuberant housing market may not be ideal if interest rates decrease, established dwelling purchases do not directly feed into inflation measures. Macroprudential tools can ensure prudent housing lending.
Housing Measures in the CPI
- New Home Construction Costs: The CPI measure for new home purchases eased to 5.1%, down from 5.2% in the previous quarter, indicating a slowing rate of increase in residential construction costs.
- Rent Component Growth: Annual growth in the rent component of CPI was 7.3% in the December quarter, showing the first signs of rent inflation easing in two-and-a-half years.
Overall Market Outlook
- Direction of Inflation: Inflation remains above the RBA’s target range of 2-3%, but it is moving in the right direction and falling faster than anticipated.
- Rental Market Trends: The slowing rate of rent increase suggests potential relief for tenants, with the rental market possibly turning a corner in 2024.
The latest inflation data indicates a positive shift for the housing market in 2024. With inflation declining and the potential for interest rate reductions, the housing market could see a resurgence in demand and activity. This analysis by CoreLogic’s Eliza Owen offers valuable insights for understanding the evolving housing market dynamics.