When inflation is low, its impact on house price developments is small. Nominal changes such as demand and supply pressures are the main influences.
But when inflation is high, it masks the “real” rise in property prices. Mortgages are always nominal and are always repaid in nominal terms, but asset prices are set according to inflation levels.
The community discussion of changes in house prices has avoided referring to “real” changes adjusted for inflation, instead focusing on “nominal” prices which are not adjusted for seasonality, inflation or other modifiers such as interest rates.
From 1995 to 2020, a period of a quarter of a century, inflation averaged only 2.0%, peaking only very briefly during this period at 5.3%.
But inflation suddenly rose well above that level. It reached 7.3% in the quarter of June 2022 and it could rise in the current September quarter when those levels are reported in about three weeks.
For almost all of those 25 years, house prices have been rising, at least in nominal terms. Sure, they flattened out, they even dipped slightly in 2008, but that didn’t turn out to be a big correction. Admittedly, at that time, inflation remained modest.
But recently, we have a unique situation: house prices are falling and inflation is exploding. The combination is rapidly eating away at “real” real estate prices.
The following two tables paint the picture. We set January 2012 as the base, which is a period of 10 years.
Nationally, nominal home prices fell 5.9% in August from levels a year ago. But on an inflation-adjusted basis, the decline is 16.5% from a year ago.
Over the past decade, after inflation, median prices have fallen from $355,000 to just $595,100 in 2012 dollars. We see $800,000 as the median price if we ignore inflation.
Most of this impact has occurred since the start of 2022. Not only have house prices fallen since then, but inflation has jumped to levels not seen in a generation or more.
The impact in Auckland is even more pronounced.
The 8.3% drop in house prices in August compared to August 2021 is not something we have seen for many generations. Since the peak in November 2021, the decline through August has been 15%.
But when you adjust for inflation, those changes are much bigger. On an annual basis, house prices in Auckland have fallen by 18.6%, and since the peak in November they have fallen by 23.1%.
By conventional definitions, Auckland housing is in a fast-building bear market.