There is not a single person who is not affected by inflation except for billionaires maybe. Inflation has affected all of us. All the prices have skyrocketed from food to gas prices, from house rent to bills, and even the house prices. When the House prices vs inflation are so relevant many of us wonder how the inflation rate affects house prices and the real estate market. How is it all connected? Is it a good thing for property owners? Is it the best time to buy a new house? Let’s discuss answers to all these questions.
The rate at which the prices of services or goods increase over a specific time period is termed inflation. That period is mostly calculated in terms of years. In the previous years, the prices have increased to 8.2% in the US. Another take on inflation is that dollar purchasing price decreases as compared to the rise in prices.
According to the Fed, the average decrease in the dollar purchasing price is $96.5 since 1913. That means over a century back, the $1 back then is equal to 3.5 cents nowadays. That is the reason why the prices increase and you have to pay more for house rent, car fuel, a simple carton of milk or a pack of eggs than it did a few years back.
House Prices Vs. Inflation: Is it Connected?
Yes, it is. An increase in inflation causes an increase in the prices of houses as well. There are several reasons behind inflation in the previous year. The most important one is Covid-19 and its impact on the economy. As a result, the prices of all the things increased. Despite the inflation, the prices increased and so many people were inclined to buy new houses.
Mortgage and inflation go hand in hand. As the prices go up, the mortgage interest rates also go up, resulting in lower demand and prices decreasing. Now when supply is less, demand increases and so do the interest rates. Various other factors affect the real estate market including global factors, zoning problems, supply chain, etc., making it a more liquid asset just like the stock market.
Besides inflation, the real estate market not only boomed during the past few years because of the lower interest rates. In order to stabilize the economy, the Feds reduced the interest rates. So, people borrowed more loans before the Fed Reserve increase it.
Now the pandemic is over, the interest rates have increased seven times and so is inflation. The construction material, labor charges, supply chain, and other costs have peaked and therefore increased house prices.
Real Estate is Your Hedge Against High Inflation Rate
Real estate makes up 60 to 65% of the total wealth of a country. Therefore, this sector must grow to boost the country’s economy.
According to financial experts, real estate is your safest and best investment option. That is especially true for people who are now saving a good amount from their monthly income and want to protect themselves from increasing inflation.
No matter what happens the real estate property price will never go down and will only increase in the future. It is your foolproof hedge against inflation. People have been doing it for centuries and earning profits. It is a long-term investment and you can’t expect to earn huge profits in months. However, if you wait for some years, your profit will double.
There is another benefit to buying real estate. You buy it, you rent it out, and you sell it after a few years, and boom you will shoot two birds with one stone. You will get a passive income in the form of rent and profit after you sell. Also, as the inflation rate increases the rent increases and so does your property value.
Increase in House Prices Vs. Inflation: Is it good news for you?
If it’s a blessing or a curse, it depends on your situation. If you already own a house or a property you are so lucky as it is going to be your hedge against the increased inflation rate. If your mortgage is fixed then it is also good news. That means your monthly loan amount is fixed and as the inflation and your home prices increases, that means you are getting more profit.
For example, if your house price has increased by 1.5 times, and the interest rates have increased 5 times, but still you are paying the mortgage according to your old home price, it is a win-win situation for you.
If you want to sell your house, try selling it in a low-supply market and ask for an increased price. You will find buyers fighting for your home and you will get a handsome profit out of it.
Now, if you are a buyer then things can get tricky for you. When it comes to buying a house timing is very important and no one is sure about it. Making a hasty decision to buy a house may result in overpaying for a house that has an actual low price. You didn’t have other options, you thought that is the best house I can buy and it was the perfect price.
On some notes, you made the best decision because interest rates are continuously increasing, and waiting to find the best house can result in paying very high interest. But increased interest rates will also result in a reduction in housing prices.
Final Thoughts on House Prices Vs Inflation
With House prices vs inflation we all know we would be scratching our heads right now and it will all sound very confusing. But buying a house is such a huge decision and impacts your whole life and your future as well. It’s very important, you do it right. Research the real estate market, check mortgage rates, talk to professionals and decide what’s best for you. Good Luck.
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