Housing a bright spot in otherwise grim inflation print as downturn on track to be largest on record

Australia’s high inflation rate has many fathers.

There’s Donald Trump, whose war on Iran, alongside Israeli prime minister Benjamin Netanyahu, pushed up fuel prices almost 24 per cent over the 12 months to September.

Then there’s the tech titans, such as Dario Amodei and Elon Musk, who are throwing hundreds of billions of dollars at the artificial intelligence investment race and pushing up prices for tech components, driving a 15.5 per cent surge in games consoles and other leisure items.

And then there’s Treasurer Jim Chalmers, who is contributing to domestic inflation through the highest levels of government spending in 40 years, excluding COVID-19, according to his political opponents.

The consumer price index climbed from four per cent to 4.3 per cent in September, the Australian Bureau of Statistics reported on Wednesday.

Reserve Bank governor Michele Bullock said while the Middle East oil shock and the AI boom were compounding the inflation problem, “we still see inflation arising from domestic capacity pressures”.

Dr Chalmers acknowledged the government had a role to play in bringing down inflation, but insisted growth in private demand was having a much greater impact on the break-out in inflation.

But the Treasurer has also made a positive impact on inflation, through his contentious curbs to property investor tax breaks in the May budget.

Australia’s deepening housing downturn, which is on track to be the largest on record, has been exacerbated by the changes to negative gearing and the capital gains discount on established homes.

While higher interest rates were the main contributor to the housing slump, the tax changes were structurally lowering investor demand for housing and adding to the cyclical factors at play, Treasury department secretary Jenny Wilkinson told a Senate estimates hearing.

House prices are not tracked by the ABS in its inflation read, but the cost of new dwellings is one of the largest components of the consumer price bucket.

Because of lower demand for housing, builders have had to increase discounts and promotional offers, leading new dwelling prices to remain unchanged in September despite rising construction costs.

Housing was “pretty well behaved”, NAB chief economist Sally Auld told AAP.

Rents were up a modest 0.2 per cent in the month, broadly consistent with their recent run rate, she said.

“So it doesn’t feel like we’re getting adverse inflationary effects from what’s going on in housing.”

Together, rents and new dwelling prices amount to about one-sixth of the total consumer price basket.

Falling dwelling prices were providing Australian homebuyers a rare improvement in housing affordability, said Housing Industry Association senior economist Tom Devitt.

The HIA’s Affordability Report, released on Wednesday, showed a 3.6 per cent increase in affordability in the September quarter.

But affordability was still 5.4 per cent worse than a year earlier and would likely worsen once the cyclical downturn ended, given Australia’s chronic supply shortfall remained unresolved, Mr Devitt said.