You’ve probably seen the forces of inflation in work if you’ve recently bought, sold, invested, or otherwise engaged in the economy.
But, in plain English, what does inflation entail, and how will it affect the already overcrowded housing market? Here are some things to think about to see if you’re doing everything you can to protect yourself against inflation:
What is inflation?
Inflation is defined as a loss of money’s buying power, which is represented by a rise in the cost of goods and services in the economy. As a result, as inflation rises, every dollar you make loses value, affecting your capacity to spend.
While there was already a shortage of homes and strong demand in the housing market before 2020, it is reasonable to conclude that the pandemic’s arrival worsened these tendencies. Many renters entered the property market in quest of their own house, while many homeowners looked for ways to trade up and expand their living space. As the demand for homes grew, many current homeowners chose to stay put, restricting the number of available properties.
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The consequent housing market inflation is a simple instance of supply and demand at action, adding gasoline to a fire that was already roaring.
How does inflation affect the real estate market?
For homeowners
Inflation is really beneficial to property owners for a variety of reasons. The most obvious advantage is that your home’s value grows in tandem with inflation. With little supply and great demand, sellers may set their asking prices as high as they like and, in many circumstances, receive bids that are equal to or even more than their asking price. This makes it an excellent moment to sell, but a very tough one to purchase.
For investors
If you invest in a property as a leveraged asset, especially at today’s low financing rates, you’ll find yourself paying the same fixed rate even while the value of your home progressively grows. We are not yet seeing financing rates climb in lockstep with inflation in an inflationary environment, and as a result, your return on investment (ROI) may be predicted to skyrocket.
Real estate as a hedge
For a variety of reasons, real estate is also on the list. First, let’s look at the impact of inflation on debt. As the value of a house improves over time, if the loan-to-value ratio of any mortgage debt falls, creating a natural discount. As a consequence, your home’s equity grows, but your fixed-rate mortgage payments stay the same.
Inflation favors real estate investors like changing trends in industry who make revenue from their rental properties, particularly those in property sectors with short-term lease agreements such as multi-family buildings because increased housing prices generally translate into higher rent. If you can increase your rent while keeping your mortgage the same, you’ll have more money in your pocket.
Finally, because property values tend to continue on an upward trajectory over time, real estate may be a useful inflation hedge. In less than a decade, most of the properties that struck rock bottom when the real estate bubble burst in 2008 were back to their pre-crash values. Real estate investments may also offer investors with a source of regular income and can keep up with or outperform inflation in terms of value.
