By Realty Times
If you’ve followed the news lately, you’ve probably seen quite a bit about inflation. In September, there was another surge in consumer prices, which matched a 13-year high. The price increase was the largest since 2008, up 5.4% from a year ago.
Some of the categories seeing the most significant increases included new cars, gas, food and restaurants meals. Core inflation was up 0.2% in September and there was a 4% increase from last year.
COVID-19 has contributed to some of the issues because for example, the pandemic continues to close factories in Asia and slow operations at U.S. ports. There are significant bottlenecks in the supply chain and high demand, meaning inflation will stay up for a while.
So, how does all of this affect the real estate market?
The Inventory Issue
Interest rates have been kept low for so long it’s created a bubble for everything and not just the housing market. There’s also inflationary pressure on the housing market because of limited inventory. Limited inventory stems from a myriad of problems in the industry.
First, many homeowners aren’t putting their houses on the market. This is due to factors like lockdowns, but also the fear they won’t be able to find a new one to buy.
There are construction delays due to supply chain bottlenecks as well.
Buyers are often having to put in bids well above ask to get properties, creating a frustrating situation, to say the least.
Other Inflationary Effects On Real Estate
Along with the situations above, there are some other ways inflation can influence how much you pay for a home.
First, inflation is a reference to a rise in the price of everyday goods. Those everyday goods are used to build homes. If the price of things like lumber and appliances go up, then the builder will pass those additional costs onto the buyer in the form of higher prices.
In some cases, however, inflation can have oppositional effects on real estate. If inflation rises, then theoretically, money should become more expensive to borrow. People borrow less of it, so there are fewer home purchases and that can lead to lower economic growth. Right now, that’s not happening however, because as mentioned, interest rates remain low.
When the Central Bank increases the money supply into the economy, which is a primary driver of inflation, home prices tend to automatically go up as a result.
Real Estate Can Protect You Against Inflation
While real estate can be negatively affected by inflation in the form of higher prices, it can also protect you from its effects.
As home prices go up over time, you’re lowering the loan-to-value of your debt. You’re simultaneously increasing your equity, but your fixed-rate mortgage payments will stay the same.
If you’re a real estate investor earning income from rental properties, then you’re likely going to be able to charge higher rent when inflation is up. You can adjust the rent while the mortgage stays the same.
Finally, in general, home prices do also tend to go up steadily over time. The homes that hit bottom prices during the real estate bubble burst of 2008 were back up to pre-crash prices in less than ten years in most cases.
The relationship between housing and inflation can go in both directions. If you’re a buyer right now, inflation isn’t good news, but if you own a home, it can be one of the best ways to protect yourself against rising prices.