Inflation is a word that gets thrown around often, but many don’t understand what it means. Inflation is when the prices of goods and services in general rise over time. This phenomenon can be seen in the housing market as well; real estate values are based on supply and demand, so if there’s an increase in demand for homes, then you’re going to see a rise in the price of those homes accordingly. So how does inflation affect homebuyers? Read below to find out!
What does inflation have to do with home prices?
As Research Analyst Joseph Nguyen indicates, there is a correlation between inflation and house prices. In fact, there are correlations between inflation and any good with a limited supply. To illustrate, consider an economy that has a money supply of only $10 and five identical houses in the whole economy.Each house would be priced at $2 (assuming no other goods in the economy).
Now, suppose the central bank decides to print more money and the money supply expands to $20. Now each house would be priced at $4. In this simplistic example, increasing the money supply causes inflation and house prices to increase.
In the real economy, there are a lot more factors that affect house prices and the correlation is not as prominent as in our example. One of the other major factors causing house prices to increase is interest rates. When interest rates are low, buying homes can be more affordable and increase the demand for homes. If the supply of homes remains constant and the demand increases, then the prices of homes will increase. In large cities where land availability is often limited, you can see a more pronounced effect of inflation
The Rising of Real Estate prices
In a shock to the global economy, an increase in inflation has been recorded for the first time since 2008. One of many contributing factors is that housing prices are rising too fast and this may be affecting how government statisticians track price increases on consumer goods.
It seems the cost of shelter isn’t going anywhere but up, with a 0.5% increase from May to June and an overall 2.6% rise compared to last year’s statistics! Experts are urging for more affordable housing options as rents continue to get higher on average each month – it’s becoming increasingly difficult for some citizens in America today just trying to feed their families or keep themselves sheltered at night; those living paycheck-to-paycheck have most likely experienced this first hand already.
Altogether, the rise in housing prices accounted for roughly a fifth of the overall increase in inflation last month. This reflects how heavily government economists weigh this spending category and also shows just how much the american people are relying on it to keep up with their demands such as mortgages, car payments and grocery bills.
Not Just housing but Shelter is more expensive
Much of that increase was actually driven by the rising cost of hotels and motel stays, which are factored into the overall shelter figure. Between May and June, the cost of a hotel room increased nearly 8%. Comparatively, housing costs for renters and homeowners rose 0.2% and 0.3%, respectively per government’s inflation measure in this time period.
It’s not a surprise that there is disagreement about the rate of home-price growth. The latest edition of the Consumer Price Index indicated housing prices have risen 2.6% over the past year, while other reports suggest home prices are up more than 13%.
Another set of data suggested a much faster pace for house price appreciation and rental growth–well in excess of what was reported by mainstream media outlets such as CNBC or Bloomberg News. “It’s just crazy,” Fleming said
The reason home prices are rising so fast is fairly simple. After the Great Recession, home-building activity all but drew to a standstill as the construction industry worked to recover.
‘Deflation has turned into inflation, not because interest rates have gone up — they’ve only gone up a little bit — but because house prices are just crazy.’— Mark Fleming, chief economist at First American Financial Services.
As a result, the construction of new homes did not keep pace with population growth and the formation of new households.
That left the housing market with a serious shortage of homes, just as millennials have begun getting married and having kids — traditional hallmarks of home-buying interest.
With the pandemic, the shift to remote working and low interest rates have only exacerbated things.
The primary solution to address runaway inflation in housing will be to build more homes — something that’s easier said than done. “Some of the challenges that we face on the supply side of the residential construction industry are going to persist well into 2022” industry experts claim.
Those challenges run the gamut from the high cost of lumber to the lack of skilled workers to complete construction projects. Another factor: Zoning regulations across the country prevent the construction of more dense housing in many cities, effectively driving up home prices and rents in the process.
Finally, new-home construction alone won’t make matters easier for all Americans. Because of the high costs, it’s easier for builders to construct more expensive homes, even though the demand and competition is strongest for entry-level properties.
Over time, that increased concentration in the bottom-tier of the housing market is driving up prices for those who can least afford it.
Three Direct Consequences of Inflation on Real Estate Investments
Construction prices jump to the roof
Remembering that inflation refers to a rising cost in the price of everyday goods, think about all the materials it takes to build a new home: from concrete and bricks to drywall and stucco, this list is quite long. Inflation means that these required materials just became more expensive for builders – especially those who use them most often.
Home prices to the moon!
As inflation increases, the average cost of housing construction rises. This means that homebuilders have to charge more for newly-built homes in order to make up their losses arising from higher costs. On top of this problem is also a lack of affordable properties as they are being bought so quickly by buyers and flipping them at immense profit margins due to increased demand pressure thanks largely (but not exclusively) because people need somewhere to live!
A cut on loans
When inflation is too high, people are wary of borrowing money because they know it will be worth less the longer they have to repay. Because many families rely on a mortgage to purchase homes and invest in property, this can cause problems for those who had been relying on an influx of cash from investing; as properties go more scarce or sold at higher prices than what was anticipated due to high demand there’s not enough available capital with which other investors might choose profitably reinvest into new ventures that would generate greater returns – meaning financial growth slows dramatically.
Thinking Ahead of Inflation
With inflation slowly rising, now is a great time to invest in an asset class that can provide some protection against it. By doing so, you’re getting your portfolio prepared for the future while also investing in something more than what interest rates offer with other options such as low-quality investments and cash equivalents.
Residential real estate even tends to increase when inflated periods last longer due its ability of maintaining or increasing values over extended periods of time – no matter how uncertain they may be!
On Voyager Pacific Capital we have Funds designed to protect your wealth from inflation while generating revenue and increasing the value of your portfolio. If you’re interested in safeguarding your assets, make sure to get in touch with us to assess opportunities in the market right now.
2021 The Year for Investing in Rentals!
At the beginning of 2021, it was a great idea to invest in real estate because there was high demand and low supply coupled with a low interest rate. As such, identifying top places where you should look into investing can be difficult but not impossible.
As the demand for homes increased, property prices also rose. Inflation expectations caused by rising prices are often met with a country’s central bank introducing a higher interest rate to slow growth and protect currency purchasing power from inflation; this can prevent both high levels of inflation as well as hyperinflation when there is deflation (banks usually have lower rates).
Banks may institute their own means of increasing home loan rates in order to increase profits since they provide mortgages that allow people access expensive properties at more reasonable costs–thus allowing them to build equity or sell the house if needed without adverse consequences.
The rental market is getting hotter! As the economy continues to grow, competition for homes will continue. This leaves many people in a difficult situation of either not being able to afford their monthly mortgage payments or opting out of buying at all and renting instead. If there’s an increased demand for rentals as more individuals find it challenging to buy a home, then vacancy rates are likely going down which means investors may see higher profits because they can charge per square foot with less room available on the open-market place; this also applies if you’re charging by apartment/room within your building.
Inflation has been great news for those looking into investing in real estate that needs fixing up but new construction doesn’t
With greater cash flow, you can scale your investment property portfolio. And Voyager Pacific Capital is here to help with this process! If you’re worried about high inflation, investing in real assets like real estate can protect from market fluctuations by offering a more stable return over time. Investing in geographically diverse properties also helps an investor avoid risk and guarantees they’ll always have something that pays them for their efforts.