The Future Impact of Inflation on Real Estate

Inflation has slowly escalated over the past years. With the COVID-19 pandemic, inflation has grown even faster. The economy has suffered much over the past years because of the safety measures taken. Many businesses closed or completely shut down, and travel was minimal. That, in addition to higher unemployment rates, has led many experts to believe that the inflation rates will remain high for the time being. Consequently, the housing market has not been left untouched either. So, how has inflation impacted real estate?

What is inflation?

Inflation is a rise in the price of goods and services in an economy over a certain period. In the United States, it is practically a progressive loss of the purchasing power that the dollar has over time. Over the past decade, inflation in the United States has grown around 1.8%. While this may seem insignificant to an average consumer, consider that cost increase for everything you purchase. The groceries, the bills, gas, coffee, bus tickets, etc., all of this adds up little by little until you start to feel the impact of inflation.

a team of analysts determining the state of inflation
inflation impacted real estate and many other businesses

How has inflation has impacted real estate?

Inflation can have a positive or a negative impact on it. Overall, real estate has always served as a hedge during inflation. With the rise in costs and expenses, so does the price in rent and house costs. That balances things out, allowing the real estate not to be as harshly impacted as other businesses. However, the impact on different economic aspects indirectly influences real estate. For example, the overall costs for gas and services rise, and with it, more people become reluctant to buy houses and move.

How landlords benefit during inflation

Rental property is probably benefiting the most during periods of high inflation. That is due to the indirect consequence inflation has on mortgage rates. It becomes more difficult for buyers to get a mortgage because their purchase power is diminished. That leads to many people preferring to rent instead of buy.

The experts at centennialmoving.ca suggest from their experience with their customers that this might be what is happening. More people who request their moving services are renters than buyers. This increase in demand for rental property is significant for landlords, hence why inflation is beneficial in this case.

a landlord calculating the profits from her rental property
rental property can be quite profitable during inflations

The effects on inflation on the housing market

With the rise in inflation, the housing market skyrockets with it. The prices of houses become much more significant, which negatively affects home sellers. That additionally pushes more people towards renting, as it becomes impossible to afford a house. Building new houses is an even bigger issue during high inflationary periods. The costs that come with the land to build on and the building costs can vastly outweigh the profits. That’s why real estate investors must be cautious and pay close attention to economic shifts.

However, one factor that inflation can never influence is that people need roofs over their heads. Owning a home has many financial advantages over renting, which is why there will always be buyers, although in lesser numbers.

Among the costs that come with house buying, the moving process is another element affected by inflation. With the increase in gas prices and costs overall, the costs of hiring a moving company have become more significant. That makes moving quite expensive, causing many people to postpone their home buying for the time being. It becomes challenging for a standard working family to keep up with the inflation and afford such expenses.

That, in turn, gives another plus to the rental property. Many rentable houses and apartments are sold already furnished. That makes for a much more convenient and affordable option in the current economy. Renters will only have to invest in rent and not worry about getting furniture for their rented homes.

a key inside of a lock
the limited supply and reduced home building lead to higher home prices

The effects on inflation are not globally equal

Inflation can be felt very differently in Europe compared to the United States. The property markets function independently of each other. Where one city may see a massive increase in costs and demand, another might only be slightly affected by inflation. Investors must keep up to date with various property markets and pay close attention to the shifts. 

Final Thoughts

The full scope of the pandemic’s effect on the economy is yet to be seen. For now, supply and demand are constantly changing. The housing market will increase with fewer houses being built due to inflation. Fewer homes listed for sale means lower competition and higher demand. Strong demand meets limited supply. That will lead to higher house prices. While the situation can be used to your benefit, many landlords overprice their homes, hurting their chances of selling during inflation.

Inflation can be good in the real estate business because more people will opt for renting over buying. Overall, vacancy rates are below average in the United States and Europe. The high demand for rental property allows landlords to raise their rents and earn profit.

What the future will bring is difficult to predict. All we can do is adapt to the economic shifts and try to make the best of the situation. Invest smart, and don’t get greedy with selling and renting.