The cities where house prices rose six times faster than inflation

New data has uncovered just how much house prices outpaced inflation, revealing the real gain driving Australians’ wealth.

House prices have outpaced inflation in the major capitals for decades, but some property markets have risen much faster than others, delivering capital gains well above broader price increases in the economy.

PropTrack data comparing home price movements with the consumer price index (CPI) over the past few decades shows that values have grown at between three and six times faster than inflation.

The data compares capital city home prices in 1990 with what prices would be today if growth had kept pace with inflation, as measured by the CPI for each capital. Home prices from 2000 were used for Hobart.

This figure is then compared with current median prices to show just how much more home prices have risen above the rate of inflation.

How house price growth compares with inflation

The research reveals the real wealth gains homeowners have made in the past few decades. 

Inflation steadily erodes the value of money over time, but real estate has grown wealth because the rise in values has massively outpaced the rate of inflation.

The data also shows the extent to which proposed changes to the capital gains discount could affect investors in the future, given how much faster than inflation property values have grown.

Even accounting for inflation, the value of a median-priced Sydney house purchased for $187,000 in 1990 would have risen in value by more than $1 million. Picture: Getty

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Tax reforms unveiled in the federal budget last month and currently before parliament have proposed replacing the capital gains discount with an indexation model. 

From 1999 onwards, investors who sold assets that were held for more than 12 months were eligible for a 50% capital gains discount, meaning only half of the capital gain was subject to capital gains tax.

The new model proposes indexing the cost base (the purchase price plus any purchase costs such as stamp duty) to inflation for the period over which the asset was held.

How unit price growth compares with inflation

This means investors would be taxed only on how much the property has grown above the rate of inflation, with no further discounts on top.

The data shows that, depending on the city and property type, inflation represented between 16% and 31% of the property price growth since 1990.

Under the new rules, only the portion of property price growth that is due to inflation would be deducted when calculating capital gains tax.

REA Group senior economist Angus Moore said most new investors would likely face higher taxes as a result of the reforms, which are expected to come into effect on July 1 next year.

“On average investors will pay more tax under this approach than the 50% discount,” he said. 

“But it’s not true for everyone. About a quarter of investors over the past decade would have actually paid less tax under inflation indexing.”

Where home price growth outpaced inflation the most

The data shows that Brisbane and Perth have delivered the strongest house price growth above the rate of inflation, with values growing 6.3 times faster than inflation in Brisbane and 6.2 times faster in Perth.

House prices rose 5.5 times faster in Adelaide, 4.9 times faster in Sydney and 4 times faster in Melbourne than the rate of inflation since 1990.

Brisbane values grew at 6.3 times the rate of inflation since 1990 – faster than all the other capitals. Picture: Getty

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Even though inflation-adjusted movements in house prices in Hobart were tracked to 2000, the city's median house price still grew 5.7 times faster than inflation in the shorter timeframe.

Mr Moore said the variance in outperformance was largely due to the prices growing at very different rates across the capitals recently.

“Melbourne has largely been flat in the past three years while Brisbane, Perth and Adelaide have doubled in the past six years, so that accounts for a lot of the recent divergence,” he said.

Suburbs where unit price growth outpaced inflation the most

In a handful of suburbs, mostly within Brisbane and Perth, home prices have risen between 15 and 20 times the rate of inflation.

Kensington Grove - between Ipswich and Toowoomba - had the highest growth rate above inflation, with median values surging from $27,500 in 1990 to $1,065,000 today – more than 23 times the rate of inflation.

House prices in Clovelly grew 16 times as fast as inflation since 1990. Picture: realestate.com.au/sold

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Of the top 30 suburbs where house prices outpaced inflation, Clovelly was the only suburb in Sydney, with median prices rising from $259,500 in 1990 to $6,325,000 today, growing at almost 16 times the rate of inflation.

Although units grew in value slower than houses during the past few decades, price appreciation for units still rapidly outpaced inflation in every capital.

Suburbs where unit price growth outpaced inflation the most

Hobart units grew 5.2 times faster than inflation since 2000, while unit prices in Brisbane, Adelaide and Perth grew at between 4.3 and 4.8 times faster than inflation since 1990.

Sydney and Melbourne unit prices both rose about 3.3 times faster than inflation since 1990.

On a suburb level, units in North Perth grew in value at almost 11 times the rate of inflation, while unit prices in Findon in Adelaide's west grew about 9 times as fast and Bondi Beach apartment values rose 7 times faster.

Why have home values grown so much faster than inflation?

While favourable tax settings in the past decades have encouraged property investment and helped support home value growth, that’s only part of the reason house prices have outpaced inflation.

Constrained land supply and strong population growth relative to the rate of home construction has also fuelled property price growth.

But easier access to housing credit since the late 1990s has had the biggest contribution to higher prices, Mr Moore said.

“The big change over that period has been the shift from high and variable interest rates to low and stable interest rates,” he said.

“What that means is that for any given income, with lower rates people could afford to borrow more and pay more, and that’s why home prices are structurally higher relative to incomes, and therefore to inflation, than they used to be.”

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Owner-occupiers borrowing money in 1990 paid interest rates ranging between 15% and 17%, RBA data shows, but rates haven’t been that high in the decades since then. 

Home loan interest rates drifted lower to about 7% by the end of the 1990s, before spiking to 9% in 2008 during the GFC, then easing to sub-4% during the pandemic. The average owner occupier rate is now about 6%, according to the RBA.

Despite recent interest rate rises and higher taxes for many investors, home prices are still expected to grow well above the rate of inflation, Mr Moore said.

“You would expect at a minimum home values to follow incomes, which typically grow faster than inflation, and you would expect home values to do the same structurally.”