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You’ve probably been hearing over the news recently that we’re at all-time high inflation in the US. High inflation means a lax monetary policy, and the price of goods ends up going up.
So there’s a good chance you have seen your grocery bill go up from even the previous months, and you haven’t changed your grocery shopping list at all. So what is the correlation between inflation and real estate prices? Does the same thing happen?
Inflation and real estate prices
In the short term, yes, real estate prices will end up hitting record highs. So why does inflation this high happen in the first place? The first significant reason comes from the fact that money is cheap.
That means the cost to borrow money and the interest rates have been at all-time lows for the better part of a decade. This has led inflation and real estate prices to grow consistently and soar unexpectedly.
Then, more homes are being purchased because interest rates are low. As a result, the supply of the current housing market starts to shrink even more. This shock converts a traditional buyer’s market (healthy set of buyers with plenty of supply) to a seller’s market (few sellers, few available homes, many buyers). That continues to push the prices of homes even higher and helps to increase the inflation rates as well.
Inflation will also make real estate investments more valuable. The price of the property itself will go up, but the rental fees that they can charge will also go up. Real estate investments are additionally considered a more stable option. Until other more stable options, such as US treasuries, increase their returns, more investors will join in, increasing inflation and real estate prices.
How to proceed?
For those that are considering entering the real estate market, whether as a homeowner or as an investment, look to the long term. Inflation will come and go, and monetary policies are becoming stricter as the interest rates are already on the rise.
That rise will continue throughout the year into 2023 and effectively make the cost of borrowing money more expensive. This will have home prices start to drop, or at the least stabilize and level out as the economy cools off in general.
Yet it is imperative to always remember to look long term. If you’re going to get financing for your home, then the rates are still relatively low. Even if the prices drop down with interest rates going up, just a couple of percentage points increase can lead to an extra $100,000 in additional interest payments over the next 30 years.
Regardless property ownership works well even during periods of lower inflation and higher interest rates if you own the property or finance it at a good rate. This is because it’s always a longer-term investment strategy, and items such as interest rate hikes and inflationary issues are always a shorter-term economic situation.
