Inflation surges again as building costs climb, and Melbourne tops the auction markets | Property Insiders

Australia’s latest property market signals give buyers plenty to think about, with inflation rising again just as many households were hoping for greater certainty about interest rates.

Meanwhile, building costs remain elevated, making it harder to deliver new housing, and the weekend’s auction results reveal considerable differences between our capital cities.

In this week’s Property Insiders, Dr Andrew Wilson and I examined the latest inflation figures, his house building costs analysis and the auction results for the week ending Saturday, October 31.

As always, we've tried to cut through the noise and focus on what these numbers really mean for you as a long-term property investor.

My view is that these figures reinforce the need to balance today’s financial pressures with a longer-term understanding of our housing markets.

Higher borrowing costs and cautious buyers can keep property prices under pressure, while expensive construction can constrain the supply of homes available when demand strengthens.

Inflation has surged again

Watch this week's Property Insider chat as we explain how the latest monthly figures from the Australian Bureau of Statistics show annual headline inflation jumped from 4.0% to 4.3% over September.

That's a big move in a single month, and it comes after the Reserve Bank has already lifted the cash rate four times this year to 4.60%, the highest level since late 2011.

When Andrew and I looked under the bonnet, it became clear that energy is doing most of the heavy lifting in the headline number.

Electricity prices are up 12.8% over the year, only slightly below the 13.2% annual rise recorded in August, while fuel prices are up 9.4%, which is actually an improvement on the 13.5% rise the month before.

The number the RBA watches most closely is underlying inflation, and that sits at 3.6%, which is the highest reading since July 2024.

As Andrew pointed out, the underlying measure strips out the most volatile items, so it doesn't capture the surge in electricity and fuel prices, and that tells us price pressures have spread more broadly through the economy.

In other words, even if energy prices settle down, inflation is still sitting well outside the RBA's 2-3% target range, and that's what will keep the board on edge.

There was some better news for housing within the figures.

Rental inflation held steady at 3.6%, which is a far cry from the double-digit rent increases tenants were facing a couple of years ago, and growth in new dwelling prices eased from 5.4% to 4.7%.

My view is that the RBA is in a genuinely difficult position, because much of this inflation is coming from energy costs that higher interest rates can do little to fix, yet the board can't ignore underlying inflation that refuses to come down.

Whatever the board decides, I think we should all be planning on interest rates staying higher for longer than most people expected at the start of the year.

House building costs are climbing again

Watch this week's Property Insider chat as we break down My Housing Market’s National House Building Costs Index, which is derived from ABS building approvals data and set at 100 in January 2018, rose to 166.8 in August.

To put that into perspective, the index was sitting at 101.5 in early 2021, which means the cost of building a house has risen by around 64% in a little over five years.

The annual growth rate peaked at a staggering 23.2% in 2022, when pandemic stimulus, supply chain problems and a shortage of tradies all collided at once.

Growth then slowed to below 3% earlier this year, which gave many people hope that the worst was behind us, but it has now climbed back to 5.7%, almost exactly where it was a year ago.

One thing worth keeping in mind is that because this index is based on the value of building approvals, it also reflects changes in the size and quality of the homes being approved, so it's best read as a measure of the direction and pace of costs rather than a precise price tag.

Even so, the trend is clear and it has real consequences for the property market.

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When it costs this much more to build a home, many projects simply don't stack up, and builders and developers hold back, which makes it much harder to reach the government's target of 1.2 million new homes over five years.

Fewer new homes means more competition for the existing housing stock, which puts upward pressure on rents and on the value of established properties.

This is one of the reasons I keep saying that rising construction costs effectively put a floor under the value of well-located established homes, because the replacement cost of those properties keeps rising every year.

Auction markets are subdued, but Melbourne still tops the nation

Auction markets around the country remain much softer than they were a year ago, but the weekend results once again showed Melbourne leading the pack.

Melbourne recorded a 60.0% clearance rate from 574 auctions, up from 58.5% the week before, while Sydney improved to 56.5% from 985 auctions.

It's worth noting that Melbourne's auction numbers dropped sharply from 838 the week before, because many vendors avoid auctioning on Derby Day weekend at the start of the Spring Racing Carnival.

Lighter volumes can flatter a result, so I wouldn't read too much into one weekend, but the monthly figures tell a consistent story.

Across October, Melbourne averaged a 59.0% clearance rate, ahead of Sydney on 55.8% and well above the national average of 44.8%.

What stands out to me is that Melbourne has been the most resilient auction market through a year of rising interest rates, holding up far better than the other capitals.

Canberra was the only other city to improve over the month, edging up to 51.6%.

Adelaide has seen the biggest fall, with clearance rates dropping from 74.8% in October last year to 37.3%, after being one of the strongest markets in the country for several years.

Brisbane's monthly clearance rate of 20.4% is the weakest result of any capital over the past year, although auctions only account for a small share of Brisbane sales, so most homes there are still selling by private treaty and the auction figures exaggerate the weakness.

Even so, the message is that the markets that ran hardest over recent years are now the ones losing the most momentum, as affordability catches up with buyers and rising rates take their toll.

What this means for property investors

I understand why many investors are feeling cautious right now, with inflation rising, interest rates at their highest level in 15 years, and auction markets well below last year's levels.

But I've been investing for long enough to know that periods like this are when strategic investors lay the foundations for their next wave of wealth, while others sit on the sidelines waiting for a certainty that never arrives.

The first lesson from this week's data is that you need to plan for interest rates staying higher for longer, so make sure your finances can comfortably absorb another rate rise and that you have a decent cash buffer in an offset account.

If you can hold your properties through the tough times, time and capital growth will do the heavy lifting for you.

The second lesson comes from the building costs data, because when it keeps getting more expensive to build new homes, we won't build enough of them, and well-located established properties become scarcer and more valuable over time.

That's why I continue to favour investment-grade established homes and townhouses in inner and middle-ring suburbs with strong owner-occupier appeal, rather than new properties in outer suburbs or regional locations where supply can be added easily.

The third lesson comes from the auction results, which show that our capital city markets are moving at very different speeds.

Melbourne has underperformed the other capitals for years, yet it is now showing more resilience than the markets that boomed, and I believe that patient investors buying quality properties in Melbourne today will look back on this period as a great opportunity.

At the same time, markets like Brisbane and Adelaide are losing momentum after very strong runs, which is a timely reminder that chasing last year's hotspots is rarely a good strategy.

As always, the investors who do best through times like these are the ones who follow a long-term strategic plan, buy the right property in the right location, and don't let the headlines push them into short-term decisions.

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