A measure of the rise in average prices of goods and services in the economy over a certain period of time, inflation can be seen as a decrease in the purchasing power of the US dollar. Inflation can significantly impact the real estate market, causing potential investors to be cautious. However, inflationary times present potential investment opportunities in the property market; despite the risks, real estate remains a prime investment option to generate passive income. This article will explain how inflation affects real estate and a summary of the typical ramifications.
Increased cost of borrowing.
When inflation is present, it often results in higher costs for borrowing money. To protect their profits, banks will respond by raising the interest rates that borrowers must pay and becoming stricter with lending criteria, which means fewer loans are given out in order to reduce risk.
New build plans can suffer.
In addition to increased borrowing costs, inflation has caused the costs of construction materials, labor, and machinery to rise, making new construction investment difficult.
Increased rental property rates.
High inflation makes it difficult for people to secure affordable mortgages, causing more people to rent and increasing demand for rental properties. This, in turn, leads to a decrease in inventory and an increase in rent prices. For landlords, this can be a good time if their borrowing costs and financial circumstances are favorable.
Property values typically appreciate.
Inflationary times lead to a decrease in new builds, resulting in fewer property inventory levels and higher demand ratios. This increases prices, potentially pricing out potential buyers and causing affordability migration.
Real estate as a hedge against inflation.
Investors purchase real estate as a way to protect against inflation, whereas other investments usually decline in value. Real estate tends to appreciate in value as inflation increases, providing a financial benefit for those with a low interest rate on their property.
The relative cost of historical debt is reduced by inflation.
Inflation can be beneficial for borrowers with pre-existing debt, as wages increase in line with inflation allowing more money to be paid off. This means the same dollar amount is owed, but the currency is now worth less than when it was originally borrowed. Overall, the results of inflation aren’t all negative
The bottom line.
Rising inflation can have both negative and positive effects on the real estate sector; while it can be difficult to enter the market and difficult for renters to find affordable options, landlords with no borrowing costs will be in a good position.
Interest rates are leading to affordability issues in booming markets, which is causing a decrease in demand. However, the lack of property inventory is limiting the extent to which values will drop. Investors often favor real estate due to its resiliency in the face of inflation; it is able to withstand market pressure and usually increases in value.