What is Inflation and What are its Effects
What is Inflation?
In simple terms, inflation is the overall rise in prices for goods and services. This price rise means that purchasing power has declined over a specified period. Essentially, the same currency unit now holds less value than it did in the past. Or in other words, one unit of currency can buy less of a good or service than it could in the past.
Effect of Inflation on Housing
As inflation rises, so do housing prices. During an inflated market, housing prices often follow suit and adjacently react to the rising market prices. That’s not the only effect inflation has on the real estate market. During an inflated market, people are less likely to purchase a home. Because of the lack of demand, the surplus of homes can actually bring home prices down.
While inflation can bring prices up, supply and demand can lower the value of homes. Interest rates and rental costs, however, tend to increase with inflation.
Another impact of inflation on the housing market is the effect on mortgages. Often mortgage rates increase during an inflated market. If these rates go up too high, people become less likely to take out a loan on their homes. Fewer loans mean less demand which ultimately means falling home prices.
Inflation doesn’t last forever, and just because inflation is happening does not necessarily result in dropping or growing home prices. There are correlations between inflation and the value of homes; At the same time, we can’t predict the market’s future. Finding correlations like this help proactively prepare for a changing market.
Investing During Inflation
When the market is inflated, certain types of real estate investments are particularly attractive. While certain investments may be risky during a period of inflation, other assets can be more sought out during a period of inflation.
The first investment type is residential rentals. The rent and values of residential rental properties tend to follow inflation over time, and the nature of these properties makes them more recession-resistant. People will always need somewhere to live, and rental properties such as these will always have demand, and during a period of inflation, this could work very well for investors.
Another type of investment sought out during inflationary times is industrial properties. The downside to industrial properties is that tenants often sign long-term leases; that being said, demand for industrial properties is among the highest of all asset types. This demand gives investors more pricing power and maneuverability when leasing.