How does inflation affect house prices?

Written by dale devries
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How does inflation affect house prices?
Effect of inflation on home prices (house image by Ian Holland from Fotolia.com)

Inflation is the sustained increase in the average cost of goods and services. It is measured in an annual percentage rate that shows you how much less your dollar will buy this year as opposed to previous years. People have written books and got into lifelong debates about the causes of inflation, but there are two theories that are most agreed upon. Demand-pull inflation happens when there is an abundance of money and not enough products or services to meet the demand of that money. Cost-push inflation happens when companies' costs go up and they can't keep their level of profit so they increase their prices and pass it on to the consumer.

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Inflation And Real Estate

This is a very complicated subject and can take years to learn what exactly happens and when it happens to bring about higher prices. We don't know when the inflation starts to happen, but we know that prices go up. This is true in the housing industry too. How far will the prices go? When inflation gets to the point that the general public can no longer afford to buy a house or anything else they need to survive, then the housing prices start to come down.

Buying a House During Inflation

If you can see inflation happening, then buying a house could be an excellent move. If inflation is at an all-time high in real estate, you should wait to buy a house. As inflation affects lives and people need to sell their homes, they will be forced to sell for less than it was previously worth. As fewer homes are put on the market, the competition for the buyer goes up and the prices are reduced. Since there are not as many buyers who can afford to buy a reduced-price house during an inflationary period, the housing market slows down quite a bit. If you have to buy a house during this time, make sure you get a fixed-rate mortgage to protect you from higher interest rates.

Investors and Real Estate During Inflation

As inflation increases and forces the prices of real estate down, even investors are hesitant to buy. This is because it take too long to sell the homes. If you have the money to hold an investment property for a year or so, than buying during this time is good because prices are low. Real estate is one of the first products to react to a growing economy, so as soon as things start to get better, the prices will start to go up again.

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