INFLATION AND REAL ESTATE: WHAT EVERY INVESTOR NEED TO KNOW


In most economies, inflation is a common occurrence. Indeed, it is frequently regarded as a precursor to the conclusion of an economic cycle. Naturally, a rapid increase in inflation can have a huge impact on a variety of industries and investment portfolios, and investors who don’t know how to navigate it will be wiped out.

⏺️But how does real estate investment fair in the face of inflation?
⏺️What happens to real estate when prices rise?
⏺️Is inflation beneficial to real estate?

Inflation has a number of real estate-related consequences, including higher mortgage rates, rising asset prices, depreciation of long-term debt, increased building costs, and so on.

Let’s look at how inflation affects real estate assets and mortgages, as well as how investors might position themselves in a high-inflation climate.

When interest rates rise, which usually happens during periods of economic expansion, different asset classes react differently. Rising interest rates erode bond principal, affect the value of stocks and other financial assets, and have an impact on debt interest payments.

Real estate investments, on the other hand, have the ability to perform well in a rising rate environment.
Income-generating real estate and multifamily, in particular, have historically — and as an investor and developer — demonstrated a stronger propensity to produce net income during expansionary periods than equities and other assets.

There are many more elements that influence real estate values in the actual economy. Interest rates is another key element for real estate prices to rise.

When borrowing rates are low, purchasing a property is more affordable, which increases demand. If the supply of homes remains constant but demand rises, housing prices will rise as well.

�What Exactly Is Inflation?
Before I can answer the aforementioned questions, i must first define inflation.

It is, in simple terms, an increase in the price of products and services over a period of time.

There are various reasons why a market experiences inflation.

⏺️Excess aggregate demand and cost-push variables are the most important.

A rise in demand for specific products and services is an excellent illustration of the former. In the case of the latter, increases in wages, production costs, and the cost of raw materials will almost always result in a high rate of inflation.

�Effects of Inflation on the real estate market

⏺️1. Mortgage rates may rise as a result of inflation
In general, interest rates rise in lockstep with inflation. When inflation rises, central banks often boost short-term interest rates to reduce inflationary pressures.

When interest rates are low, customers are more likely to borrow, resulting in more money to spend. This causes inflation to rise. Consumers will save more rather than spend as central banks boost interest rates to combat inflation because higher interest rates offer better returns. With reduced consumer spending, inflation is expected to fall.

Advisors and investors should be mindful, however, that as mortgage rates rise during inflationary periods, demand for real estate tends to fall as debt becomes more expensive. The consequent drop in demand may have a detrimental influence on asset prices.

⏺️2. Rents will skyrocket
Inflation raises everything prices, including rentals. Occupancy rates often climb when home production slows and demand for existing units rises. In such circumstances, landlords boost rents, resulting in increased revenue (and increases property value)

One of the most visible effects of inflation is a rise in rental rates. Because mortgages are so expensive, most people will choose to rent rather than own. Landlords will boost their rental rates as a result of the high demand for rental homes and the influx of tenants. In this economic situation, owning a rental property puts you in a great position because tenants are more ready to pay higher rents rather than take on an unaffordable mortgage.

⏺️3. Inflation causes property values to rise
When the economy experiences a high rate of inflation, real estate values will rise as well. The reasons behind this are straightforward,because construction materials will be more expensive, developers will spend more on new properties. As a result, the cost of new real estate properties would inevitably rise.

Real estate prices rise in tandem with inflation as the cost of living rises. In general, when inflation rises, housing and other real estate asset prices rise with it. However, as mortgage rates rise, demand for real estate tends to fall since debt becomes more expensive.

⏺️4. Construction expenses rise as a result of inflation
Because inflation raises the cost of everything, the cost of construction materials will rise as well. There’s a lot that goes into real estate construction, and if inflation rises, all of those prices will rise as well.

Inflation raises wages, machinery costs, and construction supplies, as we all know. Developers and investors are also put in a situation where cost overruns are far more likely. If you planned a construction project several years ago in an inflationary climate, you’ll need to factor in the cost of all building materials and labor.

Because an inflationary environment usually results in increased rents and asset prices, real estate is thought to be a good inflation hedge. This is due to some major factors:

⏺️Rents rise in tandem with inflation.
⏺️Inflation raises the property’s value.
As the value of the debt declines, the debt on your asset devalues.
With that stated, high-inflation situations should be avoided by investors, partly because borrowing costs will rise, placing downward pressure on cash flows and real estate demand if you wish to sell. It also raises the expense of new real estate development.

�Bottom Line
Given the current economic position, inflation appears to be unavoidable. Understanding the reasons behind this occurrence is critical for successfully navigating a market that will soon be affected by rising costs.

In a turbulent global economy, privately owned, high-quality real estate with predictable income streams can be a good investment. Real estate has long been praised by advisors and investors for its capacity to weather inflationary pressures while keeping and growing value, in addition to its comparatively high yields, moderate volatility, and various portfolio diversification benefit.

For more updates relating to Real Estate/Landed Properties/Real Estate Investment

Follow my Facebook Page �www.facebook.com/realtorjonathanc
Follow my Instagram Page � www.instagram.com/realtorjonathan_