How does inflation affect real estate? Here's what you need to know.
The opinions expressed by entrepreneurs contributors are their own.
With so much speculation surrounding the outlook for the US economy and the evolution of inflation rates, real estate market participants need to be aware of how inflation may affect the real estate sector.
Of course, passive income from an investment is always the goal, and the real estate market has always been known to be a market of choice for investors. Yet recent inflation spurts have many would-be real estate investors questioning their next move.
The good news is that, overall, periods of inflation can present excellent real estate investment opportunities, as this article will reveal. So what exactly is inflation, how can it affect real estate, and should it deter investors?
What is Inflation?Inflation refers to an increase in the average prices of goods and services in a particular economy over a period of time. Another way to view inflation is as a reflection of the declining purchasing power of the dollar (or other currency unit).
To illustrate the impact of inflation on goods and services (with an average inflation rate of 2%), the $600 refrigerator bought last year would now cost $12 more if it were bought new today. It might not seem like a significant difference, but when you factor in an increase in inflation for all purchases made, the extra expenses start to add up.
From a real estate perspective, inflation can impact the real estate market in a variety of ways, which we will discuss throughout this article. Yet, for the purposes of defining inflation as a core concept, the same would apply. A property that might have cost $400,000 a year ago may now cost $450,000, even if no value-added changes were made.
Is inflation the same as appreciation?No. A rate of appreciation, as in the case of real estate, refers to the increase in value of a property over time. When the value of a property appreciates, it increases in response to market demand, not the strength of the dollar.
Therefore, real estate can sometimes appreciate more than the rate of inflation, and sometimes it can depreciate despite an inflationary economy.
Federal Reserve prioritizes cooling inflationOn July 27, Federal Reserve Chairman Jerome Powell raised short-term rates by 75 basis points. This is the second consecutive hike of 75 basis points in an effort to calm inflation, which exceeded 9% in June, its highest level in 40 years.
This increase will mainly affect the cost of borrowing when it comes to financing, such as car loans, credit cards and adjustable rate mortgages. Mortgage rates have risen in line with inflation. A 30-year fixed rate mortgage is now in the region of 5-6%.
Related: Mortgage rates above 6% for the first time since 2008
How does inflation affect real estate?How inflation affects the real estate sector is mixed. Here's a breakdown of what to generally expect:
Increase in cost of borrowingPeriods of inflation inevitably lead to increased costs of borrowing funds. To protect their profits, banks will raise interest rates for borrowers and tighten their underwriting, offering fewer loans to mitigate risk.
New build plans can sufferIn addition to higher borrowing costs, inflation is pushing up the costs of building materials, labor and machinery, making it a tough time for new construction investment.
In...
The opinions expressed by entrepreneurs contributors are their own.
With so much speculation surrounding the outlook for the US economy and the evolution of inflation rates, real estate market participants need to be aware of how inflation may affect the real estate sector.
Of course, passive income from an investment is always the goal, and the real estate market has always been known to be a market of choice for investors. Yet recent inflation spurts have many would-be real estate investors questioning their next move.
The good news is that, overall, periods of inflation can present excellent real estate investment opportunities, as this article will reveal. So what exactly is inflation, how can it affect real estate, and should it deter investors?
What is Inflation?Inflation refers to an increase in the average prices of goods and services in a particular economy over a period of time. Another way to view inflation is as a reflection of the declining purchasing power of the dollar (or other currency unit).
To illustrate the impact of inflation on goods and services (with an average inflation rate of 2%), the $600 refrigerator bought last year would now cost $12 more if it were bought new today. It might not seem like a significant difference, but when you factor in an increase in inflation for all purchases made, the extra expenses start to add up.
From a real estate perspective, inflation can impact the real estate market in a variety of ways, which we will discuss throughout this article. Yet, for the purposes of defining inflation as a core concept, the same would apply. A property that might have cost $400,000 a year ago may now cost $450,000, even if no value-added changes were made.
Is inflation the same as appreciation?No. A rate of appreciation, as in the case of real estate, refers to the increase in value of a property over time. When the value of a property appreciates, it increases in response to market demand, not the strength of the dollar.
Therefore, real estate can sometimes appreciate more than the rate of inflation, and sometimes it can depreciate despite an inflationary economy.
Federal Reserve prioritizes cooling inflationOn July 27, Federal Reserve Chairman Jerome Powell raised short-term rates by 75 basis points. This is the second consecutive hike of 75 basis points in an effort to calm inflation, which exceeded 9% in June, its highest level in 40 years.
This increase will mainly affect the cost of borrowing when it comes to financing, such as car loans, credit cards and adjustable rate mortgages. Mortgage rates have risen in line with inflation. A 30-year fixed rate mortgage is now in the region of 5-6%.
Related: Mortgage rates above 6% for the first time since 2008
How does inflation affect real estate?How inflation affects the real estate sector is mixed. Here's a breakdown of what to generally expect:
Increase in cost of borrowingPeriods of inflation inevitably lead to increased costs of borrowing funds. To protect their profits, banks will raise interest rates for borrowers and tighten their underwriting, offering fewer loans to mitigate risk.
New build plans can sufferIn addition to higher borrowing costs, inflation is pushing up the costs of building materials, labor and machinery, making it a tough time for new construction investment.
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