The Inflation Effect On Property Prices
- Staircase Financial
- 12 minutes ago
- 4 min read
The old adage “property is inflation proof” remains valid although inflations true impact on property prices isn’t always immediate or straightforward.
While the past few years have seen consumer prices surge, property values have fallen, leaving many wondering “I thought house prices were inflation proof and increased by the rate of inflation so how can inflation be high while house prices drop?”
The answer lies in timing, interest rates, and how the property cycle responds to economic pressure.
Inflation and the Property Cycle
Property cycle research reveals that inflation interacts with housing in three distinct stages:
Shock phase:
Inflation spikes, and central banks respond by hiking interest rates to cool spending. This stage, as seen from 2021 to 2023, caused mortgage rates to surge from around 2.6% (Aug 2021) to roughly 7.1% at the 2023 peak, as the Official Cash Rate surged from 0.25% (Oct 2021) to 5.5% (May 2023).
That was the most aggressive tightening cycle in modern NZ history.
Adjustment phase:
As inflation begins to ease interest rates plateau for a time and then fall. Confidence starts to stabilise, and affordability improves.
We are experiencing this stage now in 2025 with mortgage rates falling and affordability better than it has been in years.
Catch up phase:
Once rates fall again, house prices begin to catch up to inflation, typically rising above the inflation rate over the following few years.
We can expect this stage to occur over the next few years.
This lag explains why high inflation doesn’t always coincide with rising property values. It’s the policy response (the interest rate shock) that dictates the short term outcome.
Past cycles show that once rates begin to ease, property prices typically rebound within 12 to 24 months, often outpacing inflation.
Indications are this current stage (late 2025) of the property cycle is, the Floor → Early Recovery phase, where falling mortgage rates, improving confidence, and lagged inflation pressures combine to start pushing values higher.
Why Inflation Drives Long-Term Growth
Inflation erodes the purchasing power of money and debt, but also inflates incomes, rents and asset values over time.
Higher incomes improve affordability whilst higher house prices reduce affordability.
Inflation’s “Catch Up” Effect on Property Values and Rents
Historically, New Zealand property prices have grown 1.5 to 2 times faster than CPI over multi year periods following inflationary spikes.
Once interest rates normalise, three key forces re-emerge:
Replacement cost inflation:
Building materials, labour, and land costs rose sharply through 2022–24 and remain elevated, lifting the replacement cost floor for new builds.
Nominal adjustment:
Enough sellers/upgraders eventually demand higher prices to preserve their real wealth.
Wealth transfer effect:
Savers shift toward inflation hedging assets such as property, equities, and gold.
So while inflation initially hurts housing through rate hikes, it later becomes a powerful upward driver once monetary brakes are released.
The KiwiSaver Parallel
A recent Stuff article on “outrunning inflation” noted that investment returns need to exceed roughly 3 to 4 percent per year simply to maintain purchasing power.
The same logic applies to property investors, unless your property’s combined rent yield and capital growth outpace inflation, your real wealth declines.
As inflation moderates and borrowing costs drop, property is again positioned as one of New Zealand’s strongest long term inflation hedges particularly in supply constrained markets.
The Good News
Inflation and property prices don’t move in perfect sync, they dance to the rhythm of the property cycle.
High inflation can trigger a temporary price correction via rate hikes, but over the medium term, property values rise to reflect higher nominal costs and replacement values.
The current environment of easing rates, stabilising prices, and lingering inflationary pressure suggests the catch up phase is now underway.
History and property cycle research both point to the same conclusion:
When inflation persists but rates fall, property prices eventually play catch up with the previous year’s rate of inflation so often surge beyond inflation itself.
Frequently Asked Questions (FAQ)
1. Is property a good hedge against inflation?
Yes, property often outpaces inflation over time. While high inflation may initially hurt prices due to interest rate hikes, real estate typically recovers and grows faster than inflation once rates drop.
2. Why did house prices fall during high inflation?
Because central banks raised interest rates to combat inflation, making borrowing more expensive and reducing demand. This cooling effect temporarily outweighed inflation’s upward pressure on prices.
3. What are the three phases of the property cycle during inflation?
Shock Phase: Interest rates rise sharply.
Adjustment Phase: Rates plateau or fall, and affordability improves.
Catch-Up Phase: Property prices rise again, often outpacing inflation.
4. How long does it take for house prices to recover after rate hikes?
Historically, property prices rebound within 12 to 24 months after rates start to fall.
5. What factors drive property prices in inflationary periods?
Key drivers include rising replacement costs, a shift in investor behaviour (toward inflation-hedged assets), and seller expectations adjusting for real wealth preservation.
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