How does Inflation Affect Real Estate Market?June 8th, 2021 by Administrator
Real estate markets, housing prices, mortgage bonds, and home loan rates are driven by a number of factors. Consumer inflation is one of those factors that have a direct correlation with property investment. House prices tend to move in line with the inflation rate because a real estate property is a good asset during inflation. With the increase of cash flow or money supply in an economy, the inflation rate rises, and so does the value of real estate properties.
The economy during the COVID pandemic has witnessed historic highs in consumer and wholesale inflation, which is not seen in decades. These factors are critical to monitor because any change in the inflation rate can have a big impact on home loan rates and purchasing power of consumers in the real estate market.
Current status of Consumer Inflation in the USA Economy
The reports in April show that the selling prices have increased to their highest level in the last four decades. The Consumer Price Index (CPI) rose by 0.8% in April, which is a direct measurement of consumer-level inflation. It is a much larger jump in 13 years that no one had expected. Core CPI, another factor that has an impact on consumer inflation, increased from 1.6% to 3.0%, the highest jump ever seen in 39 years. The wholesale inflation rate also rose by 0.6% in April this year, which is also more than expected.
Inflation and Real Estate Market
The inflation rate is directly related to goods price at both the consumer and wholesale level. In relation to the real estate market, reports show that there is a significant growth in prices of the things that directly affect housing prices. The steel price increased by 18%, furnishings wholesale prices increased by 3.1%, flooring material prices increased by 3%, and household appliances have seen a price rise around 0.6%. These materials go into building a house and an increase in their prices will directly affect the housing prices.
Any increase in the inflation rate also sees a significant increase in home loan interest rates. Interest rates are adjusted by banks in order to meet their inflation targets. Higher interest rates make housing loans costlier, so people tend to look borrow less money to purchase a house. It reduces the demand in the market, and so the house prices go down. Similarly, with lower interest rates, customer spending increases, and so property prices increases.
Also, housing is a good asset that provides protection during inflation. Any increase in the inflation rate doesn’t go in line with savings, while an investment made in property guarantees a good return during inflation. In addition, the rental price of any property also rises in line with inflation, and investors receive more income by renting out a property. No one can predict inflation but can understand how it affects housing prices and when is the right time to invest in the real estate market. It’s better to consult with professional real estate agents to make the right decisions at the right time for property investment.