A Middle East conflict might seem far from Australia, but rising oil prices can drive inflation and interest rates, which can eventually impact housing.
A war in the Middle East might feel a long way from Australia’s housing market… but newsflash: the global economy doesn’t work in isolation.
Think of it like a domino chain:
Political conflict → oil prices → inflation → interest rates → housing.
And chances are, you’ve already felt the first domino wobble. 😬
Let’s break it down.
When tensions rise in the Middle East, global oil markets react almost instantly.
The conflict in the Middle East has led to a blockage of the Strait of Hormuz, which handles 20% of the world’s daily oil supply. And people around the world are freaking out because many day to day luxuries (like transportation, cooling/heating homes, and producing electricity) rely on oil.
In the first week of March, Australia’s national average price of petrol rose by 17% while diesel increased by 15.6%.
Despite fears of the country running out of oil, the energy minister says Australia has a decent oil reserve that can be used if international supply is disrupted. So the recent price surges are actually not a reflection of low oil supply, but actually, an increased demand caused by Aussies panic buying fuel.
The problem is, oil prices aren’t just affecting everyday Aussies - it affects businesses too. So suddenly, everything gets more expensive because businesses are also paying more for shipping, logistics, and energy bills.
And that leads us to…
Here’s where the domino effect really starts to build.
Energy is a core input across the economy, so when oil costs rise, the cost of transporting goods to businesses increases, and businesses often pass those costs on to consumers.
That can mean:
And when people spend more because goods are more expensive, inflation starts to creep up.
This matters a lot because one of the most important jobs of the Reserve Bank of Australia (RBA) is to keep inflation under control.
So you can start to see why if inflation stays stubbornly high the RBA may have to increase interest rates to cool things down.
Anddd that’s where the housing market comes in.
Interest rates are one of the biggest drivers of property prices in Australia.
Lower rates make mortgages cheaper and increase borrowing power, which tends to push property prices higher.
Higher rates do the opposite.
In fact, history gives us some pretty clear examples.
During the pandemic, the RBA slashed the cash rate to 0.1%, which helped fuel one of the fastest housing booms in Australia. National home values rose roughly 23.7% in 2021 alone.
But when the RBA began aggressively raising rates in 2022 to fight inflation, the housing market quickly cooled. Between May 2022 and January 2023, national house prices fell about 8.4%.
Here’s where things get a lil complicated.
Even if the RBA hikes up the interest, Australian house prices don’t immediately drop.
Why? Because the country also has housing shortages and strong population growth, which continue to support demand.
That means higher interest rates might slow down the Australian housing market, but it won’t necessarily cause prices to collapse.
Geopolitical tensions, oil prices and inflation can all influence the decisions the RBA makes about interest rates.
So in a global economy, even faraway conflicts can end up surprisingly close to home - sometimes in your fuel bill, and sometimes in your mortgage and house prices.
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