Inflation is always a tricky devil that haunts all business sectors and commodities worldwide. Economists have studied this phenomenon for many years and many theories to explain its impact on our lives.
When you reach that stage in life when you are ready to invest in real estate, it must be remembered that inflation can not be ignored. Any real estate investment should be made with caution. Let's see how inflation affects real estate sector.
There is a long explanation for inflation, than a simple dictionary definition for a more complex explanation in economic textbooks. In a nutshell, inflation determines how your currency purchasing power decreases with changes in demand or supply of basic goods to be serviced. So, when you hear about rising commodity prices everywhere, it is regarded as inflation.
More specifically, the price increase is due to two things: increased demand or supply is reduced. But what about inflation play into your equation with real estate? Let's look at it from three different perspectives:
If the buyer decides to buy a house, he seems to strike a good chord between money in hand and the price offered for the property. Usually, if there is a rise in real estate prices, you as a buyer would be willing to invest in one. What you need to understand here is that during inflation, not only in property prices, but also your salary increases. The only difference is that the salary is increasing at a rate that has not been determined.
Buyers usually do not deal with inflationary action by themselves. They go through a lender, bank, or financial agent. The terms and conditions of the lender will affect your buying decision more than inflation itself.
A lender, in this case, is the mediator in the real estate business. Bank A is an example of the lender. During inflation, the borrower increases one factor they have complete control over - the interest rate. For example, if the lender knows that inflation will be 10% next year (based on current market trends), they will raise interest rates to reap the benefits. This leads to a dilemma for buyers. Buyers usually end up not taking a loan, and thus creating a loss for the lender. But where is the real estate agent to adapt all this?
Sellers have a hard time when inflation because prices are rising. Of course the buyer will withdraw. If a seller who wants to run a profitable business, they have to reduce prices. Which explains how real estate prices remain stagnant or fall, but never rise during inflationary one.
Therefore, you can see that inflation has an impact on the property market cycles. Are you still planning to buy a house? Wise. Assess how banks will play you, and make the right buying moves.