Inflation is causing consternation in countries around the world, but what does rising inflation mean for the property market in Australia? KR Peters Director Peter Nicolls shares his thoughts on what will happen with inflation, interest rates and property prices as we head into 2022.



Inflation affects consumers every day. Noticed the price of petrol creeping up at the bowser? Are the fruit and vegetables at your local supermarket more expensive this week than last? Does your household budget not stretch as far as it used to? That is the painful hip pocket reality of rising inflation.



In Australia inflation is currently sitting at 3.5%. In the US it has shot up to more than 7% causing President Biden all manner of economic headaches.



In a statement following its monthly meeting on Tuesday 1 February, the Reserve Bank of Australia Board admitted that inflation had picked up more quickly than expected but "remains lower than in many other countries".



According to the RBA the headline CPI inflation rate is being affected by higher petrol prices, higher prices for newly constructed homes and disruptions to global supply chains.



"One source of uncertainty is the persistence of the disruptions to supply chains and distribution networks and their ongoing effects on prices. It is also uncertain how consumption patterns will evolve and how this will affect the balance of supply and demand, and hence prices," said the RBA Board.



Mr Nicolls agrees saying inflation is also being pushed up because of a shortage of skilled workers and materials.



"We do not see this situation changing in the foreseeable future. If anything, we see it getting worse," he predicted.



"The end result is that the cost of wages, living, house prices and everyday commodities will cost more.  Eye fillet steak has gone up 20% in the past 2 months!"



Mr Nicolls said even though the RBA kept interest rates at historic lows at its February meeting, rising inflation will put upward pressure on interest rates in coming months.



Some economists predict rates could move up as soon as the second half of 2022. The RBA Governor Philip Lowe had original said that rates would not move until 2023.



"Fixed interest rates have risen three times in the past 6 months and it is inevitable that the Reserve Bank will increase interest rates in the near future," Mr Nicolls predicted.



"The Reserve Bank has indicated that it will cease printing money which has been used as a leverage to prop up the economy. This will see interest rates rise, which will dampen house prices."



In its February statement the RBA board signalled that mortgage holders should not start to panic about rising interest rates just yet saying that it was prepared to be "patient as it monitors how the various factors affecting inflation in Australia evolve".



"Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates," said the Board in its statement.



"As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target band. There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved. Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target."



Despite this, Mr Nicolls warned new buyers in particular to be prudent when considering how much they can borrow.



"Factor in at least a 3 to 4 per cent interest rate rise. If you can still comfortably meet the mortgage repayments then you are in a great position to buy," he advised.



"Rising rates are bad for mortgage holders, but the flip side is that a dampening of house prices will make it easier for first home buyers to enter the market.



"It will be very interesting to see what the Reserve Bank does over the course of 2022."