Ways inflation affects house prices
Impact of Inflation on Home Prices
To understand the impact of inflation let’s first get straight about what inflation is. The term stands for the persistent increase in the average cost of services and goods. The annual percentage rate it is measured in shows most apparently how much less the dollar will buy the current year, compared to the previous one. Among the variety of theories and books, describing the causes of inflation, there are two theories, most widely agreed upon:
• Demand-pull inflation, characterized by abundance of money (otherwise demand) opposed by insufficient amount of products or services
• Cost-push inflation, characterized by companies’ increasing the prices of their production as a way to keep their levels of profit.
The way inflation affects real estate
The subject of inflation is a very complicated one and takes years of study and analysis to understand all the conditions that make it happen. But one thing is known for certain – that inflation brings about a rise in prices. This rise affects housing industry as well. In fact, real estate is one of the first fields to react to falling or growing economy. We often wonder how much higher prices can go. The answer is apparent: the prices will rise until the overwhelming majority of people can no longer afford to buy a house. From this point on, the housing prices will start coming down.
The increase of inflation will force the prices of houses down. More people will be forced to sell their homes, with inflation affecting badly their lives. This supply will be met by very scarce demand, since even investors will be hesitant to buy, because it will take too long for them to sell a house. Buying a home during this period of low prices is very good, if you have the money to hold an investment property for about a year. As soon as economy starts getting better, the prices will go up again. Having in view this trend, try to secure a fixed-rate mortgage, in order to protect you from possible growth of interest rates.
