When there’s inflation, a wide range of sectors are affected. The markets that feel the most heat are the finance, utility, and energy markets. In the housing market, inflation affects housing prices. From the naked eye, it may look like the housing market thrives because prices rise with inflation. The value of homes may seem to appreciate but, in reality, remain relatively the same if you consider the inflation levels.¹
Here’s a Look at the Effect of Inflation on Property Value
There are a few specific ways inflation impacts the housing market. Look at some of them discussed below.
Rising Interest Rates
When there’s high inflation, the general cost of buying a house goes up as borrowers increase mortgage interest rates to try and subdue the inflation. As money loses its purchasing power, the money you have at hand or savings also loses value. If you are to buy a home when the inflation is high, you are likely to buy it at a higher purchase price and interest rate as well. This means that the general cost of borrowing will be increased.
The Supply and Demand Effect
At times, the federal reserve lowers the rates of the federal fund interest rates to make it cheaper for borrowers to get lending. This is affecting a loose monetary policy, and it’s usually a way for the federal reserve to help citizens access lensing and increase money in circulation. When most people can afford to purchase homes, the demand increases, resulting in high house prices.
Effects on New Constructions
New housing constructions usually are a good measure of a country’s state of the economy. However, a rise in inflation raises the cost of constructing a new house. This is because the cost of raw materials increases, and the cost of labor as well. Low numbers of new constructions reduce the supply of homes in the market. This causes the value of the ready houses in the market to go up.²
Effect of Inflation on Rent
During inflation, landlords consider inflation levels in determining the rent for a house. This is similar to how lenders factor in inflation in the interest rates when lending money. Landlords will increase rent to cover the effects of inflation. High rents cause the prices of houses to increase. Therefore, because the assessment of the value of a property includes its income potential, that’s the reason high rent may cause an increase in the value of a home.
Effect of Inflation on Property Value
Generally, what inflation means is that your money will buy less today than you could buy previously. This means that there is more money in circulation, empowering people to buy more. The increase in demand causes prices to go higher. Inflation in the housing market affects everything from interest rates, rent, cost of construction, and supply and demand of houses. However, the issue of supply and demand carries the most weight in dealing with inflation. The reason is real estate is a finite resource.
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Links to External Sources:
- Why Inflation Concerns Will Drive Money Into Property Investment https://www.forbes.com/sites/forbesrealestatecouncil/2021/06/24/why-inflation-concerns-will-drive-money-into-property-investment/?ss=real-estate&sh=d01418727883
- Widespread Commodity Shortages Raise Inflation Fears https://www.nytimes.com/2021/05/03/business/economy/commodity-shortages-inflation.html