The illusion of a flat market: what 4.1 per cent inflation means for housing

The new fiscal year opened with the Reserve Bank on the move. It lifted the Official Cash Rate 25 basis points to 2.50 per cent on 8 July, the first step of a new hiking cycle, acting ahead of the inflation figures rather than waiting for them. Those figures are now in, and they came in above even the Bank's own forecast. Annual inflation rose to 4.1 per cent in the year to June, up from 3.1 per cent in March.

The good news is almost two-thirds of the quarterly rise came from petrol and diesel, pushed up by the Middle East oil shock. Strip fuel out and inflation ran at 2.9 per cent over the year, back inside the Reserve Bank's target band. This is not broad, sticky inflation embedded across the economy. Instead, it is a largely external, one-off shock that is concentrated and, with fuel prices already falling, probably temporary.

Throughout all of this, prices have barely moved, holding inside the $750,000 to $800,000 band they have occupied for three years. On the surface that looks straightforward, but accounting for inflation tells a different story, because the higher inflation runs, the further real house prices fall. The nominal price is the number on the listing whereas the real price is that same number converted into today's dollars. Measured this way, the real national median has fallen close to 31 per cent from its 2021 peak, against 17 per cent for the nominal price. In other words, while prices have stayed flat, real values have quietly been falling.