Impact of Inflation on First-Time Buyers

Out of Reach: How Housing Inflation is Impacting Australia's First-Time Buyers

For many Australians, home ownership has long been a marker of stability and financial success. However, this dream has been slipping further out of reach for a growing number of first-time buyers in recent years. Housing inflation, driven by rising property prices, interest rate hikes, and supply shortages, has become a formidable obstacle, reshaping the property market and altering the financial future of an entire generation.

As house prices soar faster than wage growth and mortgage rates climb, first-time buyers are finding it increasingly difficult to break into the market. While government schemes have been introduced to alleviate the burden, they often fall short in the face of these larger systemic issues. The result? For many, the prospect of homeownership is no longer a short-term goal but a distant and uncertain aspiration.

2025 update: House prices fell 0.1% accross Australia according to Core Logic.
It's the first monthly drop in prices in almost 2 years.

2025 update: For the first time in 4 years interest rates have been cut by ¼% 18th Feb 2025. The prospect of further cuts have been 'dampened' by the reserve bank (RBA) governor Michelle Bullock. The ABC described "Inflation as the root cause of the cost of living crisis". Some commentators are quoting McKinsey report Dec 24: "Australia's productivity so bad it is a national emergency".
Lucy Ellis Westpac's chief economist suggested the RBA were worried about worried tightness of the labour market, assuming less competition for jobs relates to a lack of productivity.

An Overview of CPI Expenditure on Housing

The Housing group weight decreased by 0.50 percentage points (pp), mainly because of a drop in the weight for new dwellings purchased by owner-occupiers (-0.55pp). In 2023, fewer new homes were being built due to economic uncertainty and higher interest rates, leading to reduced approvals for construction and fewer new loan commitments for purchasing or building homes.

The weight for Rents increased by 0.28pp because vacancy rates were at historic lows. This caused rental prices to rise by 7.3% in 2023, which was higher than the overall CPI increase of 4.1%.

Additionally, electricity prices rose by 6.9% in 2023, which caused the weight for Electricity to increase by 0.14pp.

This reflects shifts in spending priorities due to economic conditions, with a reduced focus on home purchases but increased pressure on rent and utility costs.

How Does CPI Affect First-Time Buyers?

The Consumer Price Index (CPI) affects buyers, especially first-time homebuyers, in several key ways:

1. Rising Prices and Affordability:

CPI measures inflation by tracking the average price increase of a basket of goods and services, including housing. When the CPI increases, it indicates rising costs, including housing.

A high housing CPI for homebuyers means property prices are rising faster than income levels, making it harder to afford a home. This widening gap forces buyers to either delay purchasing or settle for less favorable options, such as smaller homes or properties in less desirable areas.

2. Higher Mortgage Rates:

Central banks often raise interest rates to curb inflation when CPI is high. For buyers, this results in more expensive mortgages, as higher interest rates increase monthly repayments. Borrowing is more expensive, and many buyers find themselves unable to afford homes that were previously within their reach.

3. Rising Rent Costs:

If buyers are unable to purchase a home due to high property prices, they often turn to renting. However, a high CPI can also drive up rent costs. As rental demand increases, vacancy rates drop, causing landlords to raise rents, which further limits buyers' ability to save for a down payment.

4. Increased Living Expenses:

A high CPI affects housing and drives up the cost of everyday goods and services, such as food, transportation, and utilities. Potential buyers' living costs increase alongside housing inflation, making it harder for them to save money for a deposit or manage monthly mortgage payments.

5. Impact on Government Policies:

A rising CPI often influences government housing policies and grants for first-time buyers. While governments may introduce incentives, such as tax breaks or subsidies, these often fail to fully offset the impact of inflation, leaving many buyers still struggling.

The Social and Economic Consequences

Housing inflation is not just about rising property prices—it is reshaping the social and economic landscape of Australia. The widening gap between those who can afford to buy homes and those who cannot is creating long-term consequences for wealth distribution, family planning, and overall well-being. Without effective solutions, the dream of homeownership for first-time buyers risks becoming a distant, unattainable goal, deepening inequality and economic strain in the years to come.

• Housing Insecurity and Long-Term Renting: As housing prices continue to rise, many first-time buyers are forced to rent for longer periods. The dream of homeownership is becoming less achievable, and this delay in purchasing a home can create a sense of housing insecurity.
• Widening Socio-Economic Inequality: Housing inflation is more severe in metropolitan areas like Sydney and Melbourne, where property prices are significantly higher. This forces first-time buyers to either stay in unaffordable markets or move to more remote regions. As a result, regional disparities grow, with urban dwellers gaining more wealth while those in rural areas face stagnation.
• Decreased Mobility and Workforce Flexibility: Housing inflation ties people to certain locations, reducing their ability to move for better job opportunities. High property prices in major cities make it harder for workers to relocate for career growth, which can limit workforce flexibility and economic productivity.

Housing inflation is not just about rising property prices - it is reshaping the social and economic landscape of Australia. The widening gap between those who can afford to buy homes and those who cannot is creating long-term consequences for wealth distribution, family planning, and overall well-being.

The Future for First-Time Buyers

As housing inflation reshapes the Australian dream of homeownership, the stakes for first-time buyers have never been higher. The growing divide between those who can afford to buy and those left behind is not just a financial issue—it's a social crisis that risks creating a generation locked out of the prosperity that property ownership brings. If meaningful change is not pursued, Australia's first-time buyers may find themselves permanently priced out of a system that should offer opportunity, not exclusion.

Some useful definitions

In Australia the inflation target is expressed in terms of the average rate of increase in the consumer price index (CPI).

These figures can be volatile as they take into account, disasters or seasonal events or short-term volatility,  like wars or one off financial volatility. An event the Reserve Bank refer to as an indication is Cyclone Larry 2006. source: https://www.rba.gov.au/publications/bulletin/2010/mar/pdf/bu-0310-2.pdf

Underlying Inflation

Central banks attempt to assess the 'underlying' rate of consumer price inflation, to better understand the current trend. This does lead to interpretations from politicians.

2025 update: "Headline inflation is now in the mid-twos and underlying inflation is in the low threes." - source: https://alp.org.au/news/underlying-inflation-falls-to-three-year-low/